5 Ways to Secure Your Financial Future

| October 15, 2017

You’ve perhaps heard about the best way to make a small fortune. The answer? Start with a large one. Ahem. Yes, that’s an old and hoary joke. But even if you don’t have a fortune as you begin your financial journey, you can certainly create one by starting to invest at a young age. Because as a young investor, time is your biggest asset. It’s true that you are confronted with a sometimes bewildering array of choices, everything from mutual funds to bonds to stocks to cryptocurrency and precious metals. All offer a risk/reward benefit, and some swing wildly in price.  Time-honored financial studies have shown that real estate and stock are the only assets that will grow faster than the rate of inflation over time. Of course, cryptocurrencies like Bitcoin, Ethereum, and Litecoin are new to the financial planning game, so no long-term data is available. But basically, studies indicate that you should have a solid grounding in equities, either through individual stocks or mutual funds, and some money in real estate, whether through your owning your own home or having shares in a fund that invests in commercial or residential real estate holdings.

Savings is easy when you have an employer who establishes a 401(k) plan and incentivizes you by matching some of your contributions. That can give a tremendous boost to your savings initiatives, but it shouldn’t be your only plan. When you are young, you are able to compensate if some of your investments go awry. You can always work harder, choose a higher paying job, or marry rich. But you should always keep an eye on the calendar, because illness, family circumstances, or other misfortune may someday dictate that work will not solve your problems. That’s when you will need income from your investments and via liquidation of your assets.

Here are a few considerations to make when deciding on your investment choices.

1) What is the money for?  This may seem like a basic question, but it may have more than one answer. Some people save so they can buy a house. Others understand the best retirement plans are started early and grow. Still others may want to achieve independence or invest in something that will potentially provide a solid future returns, like a business or rental property. No matter what you decide, it is best to fix an amount that you will automatically invest on a weekly, semi-weekly, or monthly basis. If you are working for someone else or have dividends that can be reinvested, it is often wise to set up automatic investment system so you’re not tempted to touch the funds.

2)  How much appetite for risk do you have? When you are young, you can take risks that someone with more responsibilities, such as a mortgage and/or family, may not be able to stomach. This is the time where savvy speculation in stocks, businesses, or cryptocurrencies may help you realize a windfall. If you have an eye for real estate, you may consider investing in up-and-coming neighborhoods that could someday greatly appreciate. Just keep in mind that investments in volatile things isn’t like a baseball game – you can’t watch the inning by inning dips and turns or get too high when things are going your way. It’s a sure-fire formula to drive yourself crazy. Another consideration is whether you will always want to work for someone else or will you want to work for yourself.
In this day and age as companies downsize and automate many functions, it’s a good time to think about ways to diversify your income and job skills.

3)  Are you aware of the fees and capital gains issues? This is something that many people don’t consider. Managed funds are great, but they all have different fee structures, and if you have a stock broker, you have to be careful they’re not just making trades to score a commission. If you have a stock that appreciates drastically, you may owe a substantial amount of capital gains taxes on it. Although it is often a tedious and unpleasant task, you have to read the fine print, understand your commitment, and ask questions about your investments. Also – get any promises in writing. Memorialize any telephone conversations in email or a written notice.

4)  Are you going to be an active or a passive investor? This is the flipside of your appetite for risk. Stock and cryptocurrency day traders often make a killing with their deep understanding of market swings and their ability to react instantly to trends. More people are taking more risk thanks to financial bots that can automatically execute trades. But if you are immersed in a job or just life, and want someone else to handle the burden, that’s when a financial advisor, broker, or manager can be an asset. They can provide advice, insights, and suggestions on trades, but they come at a cost – namely a commission – and remember, you want to make sure they are looking out for your best interest.

5)  How much liquidity do you require in your investments? Stocks, cryptocurrency, and some other investments are liquid, meaning you can turn them into cash quickly. Things like real estate or businesses are largely illiquid and require a long turnover time to cash out, particularly if there are other people invested with you. This can be particularly important if you are moving into a phase of life when you may require a cash infusion at some point.

No matter which way you go, it is important to have a financial plan. Most things in life happen in five-year increments. It is wise to take some time to sit down and plan out what you want to accomplish within certain time spans. Of course, you may not achieve all of your goals and dreams in the plan. But at least you will have a plan, which puts you ahead of so many others who do not take the time to consider their actions.