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Learning when and where to invest at different life stages can be important for financial security. This article clarifies the different priorities and related investment strategies through various life phases, from starting out in the workforce to approaching retirement.
At each stage of life, you’re likely to have different financial needs. Therefore, saving and investing strategies that are right at one point in life, may not suit another time. You can learn to capitalize on strategies appropriate for each phase of your life and this in turn can help you build a more secure financial future.
When just starting out, it’s the right time to begin building a savings cushion for protection, in case of an emergency. It is also not too soon to begin investing for the future.
If money is tied up in a traditional savings account, paying a low rate of interest, try shifting a portion of it into a higher yielding investment. There are many options to choose from, including money market accounts, certificates of deposit (CDs), stocks, bonds, mutual funds and exchange-traded funds (ETFs).
Aim to accumulate three to six months of after-tax income for an emergency fund in an FDIC-insured savings account. Once that “security blanket” is in place, it might be a good time to take some measured risks and begin investing. Dollar cost averaging—i.e., putting aside a fixed amount monthly in a chosen investment vehicle, such as a fund targeted for growth—is a sensible approach. Be aware however, that investment returns and principal values of various funds will fluctuate due to market conditions. When shares are redeemed, they may be worth more or less than their original cost.
Another option for long-term growth is a real estate investment trust (REIT). Such trusts invest in buildings, land, and mortgages, and they may be viewed as mutual funds of real estate. They trade just as stocks do and pay dividends. Remember to exercise caution when choosing a real estate investment trust.
Financially speaking, a dual income married couple is more than the sum of its parts. With only each other to consider, there may be an advantage over singles and parents. One spouse can bring in a steady paycheck while the other studies for a college degree or launches a new business. Or, if both partners hold jobs, they can try to live on one paycheck and save or invest the other paycheck.
Although there may be more investment opportunities, there may also be more complex choices and risk. Keep in mind that high-risk investments can crash. In order to reduce risk, diversifying the portfolio is key, that is, avoid relying too heavily on any one investment. Note that diversification does not assure a profit or protect against loss in a declining market.
Here are a few general financial suggestions for married couples without children:
Financial planning for parenthood is a bit like preparing for a long siege. As parents, the budget may need to stretch to accommodate orthodontic bills, piano lessons, and summer camp. Raising a child is an expensive proposition. In addition to high childcare costs, there are also the ever-rising college expenses.
When traveling the road from diapers to diplomas, the first financial target is to establish an emergency cash reserve. The next long-term goal is to build capital. Consider investing in steadily performing growth funds and, for diversification, growth-oriented real estate. Bear in mind that money or investments held in a child’s name may impact financial aid for college, more so, than if the investments are listed under the parents’ names.
When children are grown and fly the nest, it can be a great lifting of financial pressure and responsibility. The immediate temptation may be to splurge on the comforts of life that weren’t available while raising the family. However, newly independent adults sometimes need financial assistance, so keep that in mind. It’s also a good time to allocate as much as possible to savings and investment plans earmarked for retirement. Calculate how much the tuition bills and other child rearing expenses have cost, then aim to save and invest that same amount for at least the next several years.
During prime earning years, it’s also wise to assess whether there are any opportunities to reduce taxes. Examine additional deduction opportunities with a tax professional. There may be other deductions available to replace children who can no longer be claimed. Each stage of life presents different investment opportunities and challenges. Discipline and perseverance play a key role in maintaining a sound financial strategy. Be sure to consult a qualified financial professional about your unique circumstances. A good financial advisor can help you create a plan and consistency to help you meet your long-term goals and objectives.
