The first thing to ask yourself is what you and your family need now and in the long term. What financial moves can you make now to give yourself better choices down the road?
If you don't have an emergency fund yet, put enough money to cover a few months of living expenses into a bank savings or money market account that's highly liquid and easily accessible. That money is your safety net in case of job loss or other unforeseen disasters.
Now you're ready to use the remaining cash to purchase assets with growth potential. What kind of growth are we talking about?
Let’s say you earn a return of 6% a year, which is realistic based on historical averages. At this rate, your money would double every 12 years. If you start investing 36 years before you retire, that first dollar invested would double eight times—not three—thanks to the power of compounding. Compounding means that you’re earning interest on the interest you’ve already earned.
Saving Cash Versus Investing: Which Is Riskier?
If investing feels risky and your inclination is to keep a piggy bank of cash, consider that history repeats itself… and historically, staying in cash is a great way to lose money. With inflation, the value of cash declines with time. Your cash may not shrink much in any given year, but over years, keeping your accounts cash-heavy is likely to cause the value of your savings to plunge. In 30 years, your cash could decrease in value by half.
No one knows with any certainty what the market will do on any given day, but over time, the market tends to rise. If you give the stock market ten years, you’ll experience an overall increase in value more than nine times out of ten.
Tips On Diversifying Your Portfolio
FutureAdvisor helps you to spread risk by investing across 12 different asset classes and geographies. For instance, holding both stocks and bonds helps balance your portfolio, because when stocks go down, bonds often rise in value.
Are you curious to see how starting early and diversifying your risk will affect your investment performance? FutureAdvisor can show you how to invest with inexpensive Exchange Traded Funds (ETFs). With ETFs, you own hundreds of different investments without having to buy and sell them all individually. Not sure how to build the best portfolio? FutureAdvisor can recommend an ETF-based portfolio with recommendations for your specific situation. Best of all, our advice is free!
The government promotes saving by offering tax breaks for certain types of investments, like 401(k) accounts. Here are a few suggestions for tax-savvy saving:
- If your employer offers a 401(k), it’s wise to invest until you get every dollar of matching funds, which function as a 100% return. (That’s a great deal!)
- Once you've exhausted the matching funds, maximize your contributions to a Roth IRA.
- After you max out your Roth, go back to your employer-sponsored 401(k) and invest any extra dollars you have.
Opening a traditional brokerage account is a great way to get started. At FutureAdvisor, we can show you how to invest with maximum tax efficiency. The most important factors we consider are the price funds charge you to invest in them, and the price of transaction fees (what you pay to buy and sell them). Our free service will guide you to the best investment options, and you can buy and sell them yourself. If you don't want to make all those buy and sell decisions yourself year after year, our premium service will execute all the trades for you.
Whatever you choose, don't wait. The earlier you start investing, the more you can benefit from the power of compounding returns.