ANALYSIS: Sometimes millennials get a bad rap when it comes to their finances. But young investors increasingly face the big question of where and how does someone who’s just starting out begin investing for the future?
Certified financial planner Jordan Niefeld suggests that new investors set their plans in motion by first answering these basic questions:
- What specific financial goals are most important to you?
- Do you face short-term financial pressures?
- What are you most passionate about?
The answers will be the foundation of a young investor’s financial future. Niefeld adds that millennials should take what he calls a “four bucket approach,” where each bucket represents its own account.
- The operating bucket: This represents the cash you need for monthly expenses.
- The reserve bucket: An investor should set aside cash reserves in case of an emergency (Niefeld says this should equal about three to six months of your income).
- The retirement bucket: Don’t forget to invest early and often. The cost of delaying can mean the difference in retiring as a millionaire – or not.
- The investment bucket: Set up preauthorized purchase plans so that small amounts come out of your account on a regular basis. It is not the amount that matters but the practice of developing discipline to consistently save.
Before they begin investing, every millennial should follow and understand these tips:
- Power of reinvesting: Reinvest your dividends and coupons to maximize the growth of your portfolio.
- Power of compounding: The quickest way to kill your plan is to do nothing. Procrastination destroys your chance of earning income on income over time.
- Importance of rebalancing: Stay true to your asset allocation plan, which is your road map on how you will align your investments in cash, stocks and bonds. Make sure to rebalance 10 per cent variances.
- Beware of market timing: If you try to time the market you have to get it right twice going in and coming out of an investment. Even the experts have a hard time doing that.
- Inflation and taxes: Don’t let inflation concerns or taxes influence your investment decisions. Both should be serious considerations, so always look at returns before and after inflation and in after-tax dollars when making long term investment decisions.
It is so easy to stick to a plan when things are going well and it can be challenge when it is not.
One big thing millennials have going for them is that they have time on their side. And that’s a true gift when it comes to investing.
As the Chief Financial Commentator for CTV News, Pattie Lovett-Reid gives viewers an informed opinion of the Canadian financial climate. Follow her on Twitter @PattieCTV