5 Moves That Young Investors Need to Make

by Richard Band | August 20, 2013 2:02 pm

[1]My Profitable Investing[2] subscribers often ask me, “Richard, how do I know whether I’m making the right financial decisions for this stage of my life?”

Obviously, I can’t counsel each person as intimately as if we were sitting in my kitchen. However, I can share with you the storehouse of experience I’ve gained through the decades in accumulating and preserving wealth.

To that end, I’ve put together the following checklist to help you evaluate how you’re doing.

Bear in mind, this list is far from exhaustive. It’s intended merely as a jumping-off point to get you thinking about where stand and where you’re headed. Don’t be alarmed, moreover, if it seems that only a couple of the steps I recommend might work in your situation. That’s OK. If I spur you to take just one action today that will improve your financial future, I’ve accomplished my goal.

5 Moves to Make in Your 20s and 30s

You’ve finished your formal education (or most of it). You’re out in the work force, or you’re married to someone who is. Here are some of the tasks you’ll want to get done during these exciting years as a young investor, when your career and finances are bolting away from the starting line:

• Pay off student loans and high-interest credit card debt.
• Begin a regular savings plan (at least 10% of your take-home pay). Build a rainy-day fund equal to at least six months’ worth of living expenses in a money market account. Barclays Bank Delaware[3] offers a 0.9% yield with no minimum deposit and no fees.
• Open a Roth IRA with a well-managed no-load stock fund such as Oakmark Global (OAKWX[4]). With a Roth IRA, you don’t receive a tax deduction for your contributions. However, your investment earnings from the account are never taxed, as long as you follow the withdrawal rules. One handy Roth provision enables you to take as much as $10,000 out of the account tax-free to pay for your first home purchase (as long as the account is existence at least five years). You can also withdraw your contributions — not earnings — anytime, in any amount, without penalty. Thus, a Roth IRA can give you a significant boost if you’re saving for a down payment on a house. Most wage and salary earners are allowed to contribute up to $5,000 annually to a Roth. Eligibility ends or phases out if your family income, as defined by the IRS, exceeds $173,000 a year.
• Enroll in your employer’s 401k plan. Yes, even in your 20s, you should start thinking (a little) about retirement. Why? Because the earlier you begin salting away cash for that far-off goal, the more time you’ve got for the “miracle of compounding” to work. Typically, employers match part or all of your 401k contributions, so your investment grows much faster than it would in an ordinary taxable account of your own. Furthermore, your 401k contribution comes “off the top” of your salary, reducing your current taxable income.
• Sign up for disability insurance. At age 30, your odds of becoming disabled are four times greater than your chances of death. While I don’t discount the importance of life insurance for young families with only one breadwinner, disability coverage is, in my view, a more urgent priority. If your employer offers a low-cost plan, be sure to sign up for it. Otherwise, take out an individual policy with a reputable carrier like Guardian Life[5], MassMutual[6], MetLife[7] or Principal Life[8].

Advice for Any Age

My last piece of advice, for investors of all ages: Work up an asset-allocation plan you can live with. One simple method is to earmark 110% of your portfolio, minus your age, to stocks, and the rest to fixed income. Another technique is to aim for a specified cash yield on your investments as a whole. You could shoot for 1%-2% during the “off to the races” phase above, 2%-3% during the “full stride” phase of middle age and 3%-4% during the home stretch.

If you stick with a sensible allocation plan and reinforce it by carrying out the action items I’ve provided in this list, you’re going to build some real wealth.

I know, because that’s exactly how I’ve done it.

Richard Band’s Profitable Investing[9] advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.

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Source URL: https://investorplace.com/2013/08/5-moves-young-investors-need-to-make/

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