Just because you didn’t get an A in finance class doesn’t mean your financial future is doomed. After all, you’ve probably heard some of those old wives’ tales over the years – “save 10% of what you make, no matter what” or “keep all your spare change in a piggy bank for the future.” Although these strategies certainly don’t hurt, there is also a difference between simply saving money and actually building wealth. We need to answer the question--what do you do with the money you save in order to maximize its growth potential?
To get started, here are 5 critical steps you should take to set yourself (and your financial future) up for a successful road ahead (2):
- Learn: although finance class is important, you can and should learn personal finance strategies outside of the classroom. Even just the basics – whether you buy a book, listen to a podcast or subscribe to a blog – will not only round out your education on the topic, but can also help you get ahead. It’s critical to get a grasp on terminology, hear success or failure stories from your peers and chart your course of action early on so you can avoid costly mistakes and allow your money the best opportunity to grow over time.
- Save Early: begin saving early. Even a kid making a weekly allowance learns to save up to buy that new toy or game. Same is true as an adult. You should get in a routine of saving for an emergency fund and your financial goals (home, car, school, vacation, etc). These large purchases or investments don’t happen overnight, so it’s important to map out your plan ahead of time. Having a safety net for the future is key as both expected and unexpected life events will happen.
- Start Investing: a common misunderstanding is that you need a large lump sum of money to begin investing. In reality, $500 (or even less!) can get you started. Investing just means you distribute money in the expectation of some benefit in the future. It can include saving for retirement, investing in the stock market or even buying real estate. In fact, there is a wide range of what you can invest in, but the key is to map out your strategy against your financial goals to ensure you’re putting your money in the most optimal places. Here are some examples of investment instruments you may consider utilizing (1):
• Stocks: a share of ownership in a company, also known as ‘equities’. Stock prices move up or down depending on that company’s performance. These are typically bought, traded or sold on stock exchanges.
• Bonds: a loan to a company or government entity, which agrees to pay you back over a certain number of years. These are usually less risky than stocks because you know when and how much your return will be.
• Mutual Funds: a mix of investments managed by a company. Instead of choosing an individual stock to invest in, the mutual fund bundles it for you. Mutual funds are also generally less risky than individual stocks.
• Exchange-Traded Funds (ETFs): includes a compilation of stocks, bonds, commodities, or some combination thereof. You can buy or sell ETFs through a broker. Note, this is not an exhaustive list, but rather a sample of some of the common areas in which to start investing.
So which do you choose? Every investment strategy should be unique to the individual and that person’s financial situation and future goals. It should take into account savings goals and length of time of investment. As a general rule of thumb, the longer the time frame, the more stocks you should have, but you should also factor in diversification.
Diversification blends different investments in a portfolio to reduce the exposure of one singular asset or risk. Have you heard the phrase, “don’t put all your eggs in the same basket?” That’s the general idea with your portfolio too. Instead of putting all your money in stocks or bonds, you should diversify. Instead of putting all your money into one stock, you should put it in a variety of stocks (even across different categories).
- Seek Advice: which leads us to the next step – consult with a professional. A financial planner can help you understand all your options and map out a strategy for your specific
and unique situation. A financial planner has taken numerous finance classes and doesn’t just know the available products to invest in, but he or she also has the experience that can help you.
- Keep on Track: as you get your finances set up and on the right track, maintain the course. It takes discipline and hard work to build wealth, and keep it. Write down your financial goals and reference those when you need an extra push for motivation or a reminder of your future money goals.
Check out our Banzai Direct online financial literacy platform for budgeting simulations and resources to help you through all life stages.
It’s no surprise that finances can get complicated and feel complex. That’s why personal finance should be a priority in everyone’s life and why you should start saving early. You can approach it little by little, but the fundamental concepts should keep consistent throughout your life. Leverage your resources and take advantage of the support available to position yourself for success, both now and in the future. Because as we all know, life doesn’t slow down or stop to let us catch up. We need to stay in front of it.