When you draft your financial plan, it’s important for you to have flexibility. Just like there’s no one investment that’s right for every person, there’s no single investment that will serve you the best way for your entire life. As you grow and reach milestones in your life, both your investment objectives and your risk tolerance are likely to change. Although there’s nothing wrong with buying a long-term winner like Apple and holding it forever, it’s important to supplement these types of investments with those that can serve your changing needs as well.
- Savings account
When you graduate college, the world is your oyster. Whether your objective in life is to save the world or to earn as much money as possible, you’re likely to find a career that suits your needs. But before you start drawing that paycheck, you probably don’t have a lot of money saved. This is the time to build your emergency fund. Whether you receive gifts from friends and family for graduating or you have tucked away some of your own money from a college or summer job, the best first investment is your savings account. You’ll have time to start investing as you reach your next life milestone, but for now, it’s best to have a cushion so that you can avoid going into debt for both everyday and unexpected expenses.
Getting Your First ‘Real’ Job
- 401(k) plan
When you start your first job, you’ll finally be filling up your bank account with paychecks rather than spending what you may not even have in college. This is the time to take advantage of your youth and start squirreling away whatever you can in your company’s 401(k) plan. In addition to the huge benefits a 401(k) offers, such as an employer match and a tax deduction, starting early allows you to harness the power of compound interest. Saving even a little bit every month in a tax-advantaged account like a 401(k) or an IRA will give you a huge head start on your retirement savings goals.
- Real estate
Getting married is often associated with “settling down,” and indeed many newlyweds make purchasing a house one of their first priorities. As a couple, it’s easier to put up a down payment, as you’ll be combining your savings, and in many cases your mortgage will cost less than the rent you were paying as individuals. In addition to giving your new family “roots,” buying a house can also make a great investment, as it comes with great tax writeoffs and the potential for appreciation.
- Growth stocks
Having kids can bring a lifetime of joy, but it’s also a major financial commitment. With the estimated cost to raise a child to age 18 being over $270,000 — and the average cost of a degree at a four-year private institution topping $200,000 — you’ll need your money to grow if you’re looking to cover those costs without going into debt. Over the 18-25 year time span that you’ll need that money, growth stocks are a solid investment choice, as they offer the best chance to reach your goals. As volatile as the stock market may seem over the short run, there has never been a 20-year period in which the S&P 500 has posted a negative return.
- Income-generating investments
Once you retire, your main source of income will be eliminated. At this point, you’ll need your investments to cast off income that you can live off, especially if you want to avoid draining down your principal rapidly. Retirees often live 30 years or more and still need at least a portion of their portfolios dedicated to growth instruments like stocks; however, moving some of your money into bonds, preferred stocks and other income-generating investments is generally the strategy that advisors recommend.
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