Unfortunately, waiting can make a world of difference.
This is the magic of compound interest, a phenomenon Albert Einstein once lauded as the eighth wonder of the world. Compound interest is the type of interest you accrue when the interest you earn on your savings or investments begins to compound on itself.
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But, it's important to note that it's power comes with time - time you'll squander if you don't start investing when you're young. If you want to be financially free in the future, then you have to harness this power and put it to work. As Seattle Financial Advisor Josh Brein notes, the best thing any young person can do is consider all aspects of their financial health. Do you have student loans you need to pay off?
Credit cards that just keep growing? A spending habit you just can't contain? If you're spread too thin financially, and especially if you have a habit of overspending, investing may not be the best choice, notes Brein.
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This is why Brein says his best advice for young new clients is to spend less time worrying about the next hot stock and more time worrying about fundamental spending habits, debt, savings, and budgeting. The bottom line: A fully-funded retirement account won't set you up for life if you're drowning in debt and don't have your spending under control. Jansen of AspenCross Wealth Management.
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Instead of thinking of the money you earn as the solution to your problems, think of it as a tool you can use to create the life and lifestyle you want via smart choices regarding spending, savings and investing. With the money you earn as your tool and guide, Jansen suggests dividing your goals into short-term and long-term buckets and choosing investments that will help you reach them.
Tracking your spending and setting up a budget are good ways to keep on top of your money. Investigate retirement vehicles such as IRAs, ks, and other investment options to help fund your future. Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
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With a little work upfront, you can mimic that process with your IRA: Link your bank account to your IRA account and set up regularly scheduled transfers. Some companies let employees automatically send money to their IRA from each paycheck. An added benefit to auto-saving plans is that you get to think less about your retirement account.
Why is ignoring your account a good thing, you ask?
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Investing in stocks means riding out the tough times — and putting your savings on autopilot can make that easier. Incidentally, stock market crashes are a great time to distract yourself with a puppy video or two. Seriously not kidding here. Since bonds are a more conservative investment than stocks — they have less potential for growth, and less potential to plunge in value — your investment account would be riskier now compared with when you first created your retirement portfolio. To reduce that risk, you need to rebalance, which means getting your investments back to the percentages you chose originally.
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And the same goes for many robo-advisors, which automatically rebalance your portfolio. There are other ways to rebalance, too: We describe four methods in our guide to how to rebalance your retirement investments. Financial experts have different opinions on how often you should rebalance. Generally, once a year is fine for a well-diversified investment portfolio. Pick a date and make it your rebalancing holiday, celebrated each year by spending a few minutes getting your investments back into balance.
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