I had a great dad. He was born in 1927 and lived through some tough times, including the Great Depression.
As a result, he was very careful with his money, and he tried to impart some valuable insights to me about how to save and invest. The problem was — and is — that I was too stubborn to listen.
As a professional who has worked in the financial services industry for more than 35 years, I look back at my youth and remember the advice my father tried to give me, and I wish I had listened to him more.
Here are five key tips that my dad gave me. These tips are useful for all of us, but they are especially important if you are a young adult just starting to earn money.
Don’t Delay
While it’s never too late to start investing, the earlier you start, the more time your savings and investments have to grow.
There is a concept called “compounding” that, in simple terms, is earning a return on previous returns.
If you invest $100 for a year and receive a 10% return, at the end of that first year you will have $110, or a profit of $10. If you receive the same 10% return in Year 2, that 10% I calculated on the $110, so at the end of Year 2 you would have $121, or a profit of $11.
That extra $1 in Year 2 is the result of compounding — it is the 10% return you would have earned on the $10 profit from Year 1.
Over the long term, compounding can result in a significant increase in the value of your portfolio, so the earlier you start to save and invest, the more time you have for compounding to help you.
Don’t Panic
There are times when current events like wars, recessions, inflation, pandemics and the like can shake our confidence. It can be difficult to stay the course with investments during these uncertain times.
However, if you are young, you have plenty of time for investments to rebound.
If I look back at some of the scariest times in the financial markets, like the crash of 1987, the tech bubble bursting in 2000, and the 2008 financial crisis, in every instance, the market has rebounded and risen to new all-time highs.
A Little Adds Up
Save a little — as much as you can afford — out of every paycheck. As noted in the compounding discussion, over the long term, compounding can make a big difference in the growth of your portfolio.
Saving at least something each time you receive any money can really add up over time.
There is another concept called “dollar-cost averaging,” which simply means you are investing into something periodically, so those individual investments average out over time.
If you get into the habit of saving something from each paycheck, you will become accustomed to the deduction and you won’t really notice it.
I recommend setting up auto deposits from your paycheck.
Diversify
Diversification is the process of investing in enough different investments to spread your risk.
When you are young, it can be tempting to put everything into one investment in the hopes of making a big return. A lot of young people have done this with cryptocurrencies and meme stocks.
Sometimes this can pay off, but often these investments are highly risky and losses can be substantial.
Buy a Home
Real estate, especially in California, is expensive, and it is unlikely that it will ever become more affordable.
Although it is getting harder and harder to purchase a house, I believe that owning a home is the most important financial decision anyone will ever make.
Most people will be in a position to purchase a home at some point in their life. When that opportunity arises, if you can make it happen, even if it is a stretch financially, in my opinion it is the right decision to purchase a home.
I hope you find these five insights helpful. For me, if I had listened to my father when I was young, I would be in a much better financial position today.
As much as I would like to go back in time, I can’t, but if I could I would definitely listen to everything he tried to tell me, and I would certainly follow his advice regarding saving and investing.
Maybe this will help you avoid some of the mistakes I made. I certainly hope so!
