No matter how much or how little money you have to work with, the sooner you get started with saving and investing the better off you can be. The time value of money is enormous, and the value of compounding will allow your nest egg to grow through the years. Choosing your investments wisely, and investing in them consistently, is the best way to build wealth for the long term.
1.Divide your funds into short-term and long-term money. Short-term money is cash you will need within five years, while long-term money is cash you can afford to keep invested for five years or longer. The stock market can be extremely volatile in the short-term, and the last thing you want is to have to pull your money out at the bottom of a bear market.
2.Use safe investments for the short-term money in your portfolio. These investments include money market accounts, government bond funds and certificates of deposit. Shop around at local banks and credit unions, as well as Internet banks, to get the best rate on money market funds and CDs. Open an account with Treasury Direct (See Resources) to purchase government bonds for your portfolio. You can also purchase government bonds at many banks and credit unions.
3.Contact several low-cost no-load mutual funds and ask for prospectuses for their index funds. Index funds are an excellent way to invest, since the expenses tend to be much lower. Furthermore, a study reported by CNN Money.com found that the vast majority of actively managed mutual funds failed to beat their respective indexes, even though the expenses they incurred were much higher.
4.Review each prospectus carefully and compare the costs associated with each mutual fund. According to an analysis posted at the Motley Fool website, index funds have fees as low as 0.18 percent a year, so you can use that as your benchmark.
5.Set up an automatic monthly transfer from your bank account to the index fund you choose for your long-term money. This allows you to dollar cost average into your chosen fund, meaning that you automatically buy more shares when the market is down and fewer when it is up. According to Jonathan Burton of Market Watch, this approach also takes the emotions out of buying investments, certainly an important consideration in difficult market conditions.
6.Track how your investments are doing, but do not obsess over short-term results. The stock market is a long-term investing vehicle, and focusing on the short-term swings could cause you to panic and pull your money out at the wrong time. It is better to ride out the inevitable bumps and keep dollar cost averaging into the market month after month.