My daughter starts her job in a few weeks, and we are helping her set up her apartment. After years of schooling, she is ready to begin her career, and assisting a child in launching her career takes years of planning and patience. It’s bittersweet because she is leaving the nest to create a new life in a new state, but she is ready to soar.
As a parent, I give my daughter unsolicited financial advice regularly, and sometimes she welcomes it, so here are a few more tidbits for her as she begins a new chapter.
- Create an emergency fund because unexpected expenses occur often. As your income rolls in, allocate a few dollars monthly to a savings account or money market fund so you can access it quickly. Do not invest your emergency fund in stocks, bonds, or cryptocurrency.
- Contribute at least ten percent of income to your 401(k) plan. If your company offers a Roth option, choose it because your money can grow tax-free for decades. Initially, allocate 100% of your funds to stocks, and do not buy bonds.
- Donate ten percent of your income to groups, charities, or organizations you support. Cheerful givers are also successful investors.
- Open a brokerage account to buy stocks. Investing in a taxable account gives you flexibility if you want to retire early, buy a house, or travel the world.
- Buy and hold stocks. Don’t worry if the stock market rises or falls because it will do so regularly, and the market will experience corrections of 20% or more every few years. The odds of a 50% stock market crash during your working career is 100%. Down days in the market are opportunities to buy great stocks at lower prices. Don’t fear corrections.
- Avoid buying gold, silver, or other commodities. It’s okay to buy gold or silver coins as collectibles but not as investments. Historically, commodity investments perform poorly relative to stocks.
- Buy insurance to protect your car, home, valuables, and loved ones. Do not buy life insurance as an investment, and avoid whole-life insurance.
- Avoid credit card debt at all costs. Debt is a four-letter word; if it grows, it can lead to delayed gratification or financial ruin.
- Spend freely. If you’re contributing to an emergency fund, a 401(k) plan, and an investment account, then it’s okay to spend the rest of your paycheck on anything you want without guilt.
I’ve seen thousands of financial plans and investment accounts during my career, and the most successful investors I’ve met own stocks, start investing early, save money, and control spending. Individuals who fail to save or invest in their twenties or thirties struggle to make ends meet later in life.
Let’s run a few numbers as to why it’s essential to start investing sooner rather than later if your goal is to retire with a million dollars at age sixty-five.
- At age 25, you need to save $380 per month.
- At age 35, you need to save $820 per month.
- At age 45, you need to save $1,920 per month.
- At age 55, you need to save $5,777 per month.
If you start investing early, your money can grow through the power of compounding and time. If you started your career forty years ago, in 1982, you enjoyed close to 10% returns as the S&P 500 rose 3,888%; for every $10,000 you invested, it’s now worth $398,000!
Investing takes time and patience. If you start early and save often, the stock market can grow your wealth, even if you make a few bad investments along the way.
Good luck, Little Bird!
You can be young without money, but you can’t be old without it. ~ Tennessee Williams.
August 9, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so you can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. My first investment was the Franklin Utility Fund when I was 24.
 I used a 7% annual return, and I know $1 million dollars in forty years will not be sufficient to retire.