Advice for Young Investors from a Young Investor

By Hightower Westchester on November 1, 2022

During my time at Hightower, I’ve learned a lot about managing personal finances. Some of it through interacting with clients and some through studying for the CFP® Exam. I graduated from college two years ago and although the following suggestions are very important when you are just starting your financial journey, like I am, they’re equally as important to staying on course when things get more complicated as you progress through life. I would argue that two of the most important habits to properly build early in your financial journey, that will help set you up for financial success in the future, are saving and investing.

Saving is when you set aside cash into safe, liquid accounts, typically a checking account, savings account, or a money market fund. When it comes to saving, it’s important to first establish an emergency fund to offset any major unanticipated expenses from events like job loss, getting into a fender bender, or let’s face it – rampant inflation. The general population wasn’t prepared for how high prices have now become and it is forcing some people to dip into their emergency funds since their wages have yet to increase to keep up with the pace of inflation. If someone didn’t have an emergency fund, they could run into the possibility of completely running out of money (or coming very close to it) and having to either borrow money or accruing credit card debt, neither of which are positive options. With that being said, the general rule of thumb for the size of an emergency fund is roughly equal to three to six months of total expenses or even more depending on what you are comfortable with. Something that worked for me when saving for my emergency fund was setting up an automatic transfer to my savings account. Setting that up meant I never had to think about it.

Investing differs from saving because when you invest you are using cash to purchase assets that have the potential to increase or decrease in value. When it comes to investing, a common misconception among younger investors is that you need large sums of money to begin investing. That’s simply not true.  One of the most important concepts that I’ve learned is compound interest. Compound interest is the interest that is earned on both the initial principal (deposit) and the interest earned from previous periods (return). I think the following example will help explain this more clearly. Let’s say starting at age 21 you deposit as little as $50 per month into a brokerage account with a return of roughly 8.5% per year on average (historical average return of the S&P 500), by age 65 you will end up with about $286,212 having only invested a total of $26,400. This just shows how powerful compound interest could be, and in my opinion is one of the best tools anyone could utilize. There are still a few things to keep in mind when choosing how to invest your money to maximize the amount of interest (or return) you get while minimizing the downside. Start with determining your risk tolerance and time horizon (how long you expect to hold an investment to reach a goal). Typically, the younger you are, the more time you have until retirement (a goal) and the more risk you can tolerate. This is because you have more time to recuperate assets if losses occur. It’s important to stay invested and diversified across different asset classes to minimize the effects of those losses in the long term. Another thing you could do to take full advantage of compound interest is to start investing as early as you can. Using the same example from before, if you started investing at age 25 instead of age 21, you would end up with about $201,933. That’s $84,279 less at age 65 because you waited just an extra four years to get started. I don’t know about you, but I can live without that $2400 if it means having that much more down the road.     

To maximize the amount of money you can save and invest each month, it’s a good idea to develop some sort of budget. A budget will help you actively manage and monitor your income, expenses, and spending patterns so that you can determine how much left-over cash you have for saving, investing, or other goals you have. It’s important to start by identifying your financial goals and what is required to meet them. Then determine your income and expenses. Your expenses will be grouped into two categories: Fixed expenses (car payments, rent/mortgage payment, etc.) and your variable expenses (food, shopping, etc.). Both these categories contain nondiscretionary expenses (must haves) and discretionary expenses (nice to haves). A key to budgeting your variable expenses is to set ranges rather than hard limits, so just in case you spend a little too much on eating out one month it doesn’t completely blow up the budget. Obviously, the downside to creating a budget is that it’s time consuming and it’s the opposite of fun. Through my personal experience, I’ve found that a good way to help reduce the amount of time it takes to create and maintain a budget is by utilizing a financial software with budgeting capabilities like our Client Portal by eMoney. If you haven’t already, be sure to check out our “Budgeting 101” guide for more details on how to budget.  

The bottom line is, start to take control of your personal finances as early as possible. The earlier you start the more time you have to change course if things aren’t going the way you’d like them to. I know retirement seems really far off right now, but the good financial habits you create now can positively or negatively impact your future.  As you get close to retiring you don’t want to find out that you can’t retire or must completely change your lifestyle because you didn’t take the correct steps when you were younger. It’s also important to educate yourself as much as you can – get to know the different types of retirement accounts and brokerage accounts that are out there, and the tax benefits associated with them. Having a financial advisor could also help tremendously with ensuring you’re on the right path towards the financial future you envision.  

Robert Palmieri – Operations and Research Associate – Hightower Westchester

914.825.8638 – rpalmieri@hightoweradvisors.com