Saving $150 a month might not seem like much, but over the long term those savings can really add up. In fact, if you invest $150 a month for 20 years and earn a 7 percent rate of return, your nest egg would grow to more than $78,000. Investing even a small amount of money can put you on the road to financial freedom, but it is important to invest your money wisely.
Move $150 a month to a savings or money market account until you accumulate at least three to six months of living expenses. Having an emergency fund in place is absolutely essential, especially when the economy hits a rough patch. Having money put aside in a safe place will help you ride out the loss of a job, a sudden unexpected expense or one of life's other unwanted surprises. Look for a high-yield money market or savings account, but do not put this money at risk. Safety is the key here. After you have your emergency fund in place you can start building an investment nest egg.
Look for investments that will give you long-term growth without taking undue risk. If you are a young worker just starting out, the stock market is probably your best bet. Even though the stock market is prone to wild swings, over the long term it can also produce some excellent returns. One of the best ways to capture that growth while spreading out your risk is to use a low-cost mutual fund that is widely diversified. Mutual funds hold many different stocks instead of just a few, which helps to reduce the risks inherent in the stock market.
Check the Morningstar guide to mutual funds and the quarterly roundup published in Barron's magazine. Both publications are excellent sources of mutual-fund information. Morningstar and Barron's both rate mutual funds based on a number of criteria, including performance, expenses and the expertise of the investment team.
Contact the mutual-fund companies based on the research you have done. Request prospectuses for each of the funds that interest you, then examine those prospectuses carefully to determine which one best meets your needs. Pay particular attention to how the fund has done compared to the unmanaged stock index. A fund that does not perform better than the Standard and Poors 500 or the Wilshire 5000 is probably not worth the extra cost.
Choose the mutual fund you want to invest in and complete the application. Enter the account number and routing number for your bank account and set up an automatic monthly investment of $150. This makes your investment automatic and ensures that you do not forget to make your investment every month. Just be sure to enter the debit in your checking account to keep your balance accurate.
- Keep copies of every purchase confirmation for your monthly investments. When you sell your mutual-fund shares you will need to compute your average cost per share, and your purchase confirmations can help you with that computation. Your mutual-fund company may keep track of your average cost, but it is good to have the backup documents anyway.
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