There’s plenty of financial advice out there for investors and advisors, but the how and when of using it matters. An investor’s goals and personality impact their approach to building wealth. As such, here are three tips for young investors setting out to build wealth but not sure where to start.
Determine How Much Risk You Want to Take
Building wealth doesn’t happen overnight. It’s a task of a lifetime, requiring discipline and diligence. Rather than rush quickly into wealth building like a New Year’s resolution, given up in weeks or even days, it’s important to be intentional. That starts with self knowledge. What is the goal level of wealth accumulation, and when is the target date?
In other words, what is your risk profile? Those who are comfortable with near term losses for longer term gains may be more willing to allocate resources towards that goal. A hyper aggressive portfolio could have something like an 85% allocation to equities and a 15% allocation to fixed income — significantly more aggressive than the traditional 60/40 split.
One could even consider an ultra-aggressive approach of almost no bond exposure. That may work for younger investors either trying to catch up, or retire early. Of course, that also comes with risk for greater loss.
Understand Your Baseline
One of the common finance tips investors see is saving 10% of income each year towards retirement. While that may or may not be feasible, first, it helps to consider where one is starting from.
Recent analysis from MassMutual, for example, offers a useful chart that provides targets for four different income brackets. Someone earning $60,000 annually, for example, might want a range of $30,000 to $90,000 by age 30, and $60,000 to $120,000 by age 35.
Even without those targets, there’s a range. Setting a target range can lower the pressure of getting to that goal and give investors the discipline to make a plan to get there. Indeed, the blog by MassMutual emphasizes not comparing oneself to others and instead focusing on making progress.
“It is not a good idea to compare yourself against other people’s progress unless they are simply talking about what percentage of your income you’re saving,” said John Bergquist, managing member of Lift Financial in South Jordan, Utah, in the blog. “It’s likely that incomes are at a different level and therefore each person should be hitting a different total in saved dollars to reach their goals.”
Don’t Forget the “Utilities”
A financial plan doesn’t just mean a retirement plan, either. Many investors save for retirement but also save for emergencies, for children’s college plans, or invest in a life insurance policy. While not everyone has a child or wants a premium life insurance policy, it’s important to make an intentional decision.
Ideally, those considerations should not meaningfully alter a financial plan’s fundamental goals and pillars. However, it can mean tweaks. Timing may change to accommodate shifting funds around, but a core approach and plan should not. As ever, investors should think carefully about each “utility” investment.
Building wealth is a journey of a thousand miles, but it all starts with a single step. These tips can get the wheels turning for thinking about the future.
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