:: The Money Guide for Young Investors ::

On the face of it, growing wealthy may seem like a shallow goal. For many people, however, growing wealthy isn’t about accumulating things; it’s about becoming financially independent. After years of struggling, you may dream of not having to worry about money. Even if you get a great job, you still need to invest your earnings to reach that objective.

You can become wealthy, even if you don’t earn much. Here are a few lessons to learn while you’re young:

To curb impulse buying, analyze how many hours of work it will take you to buy a particular product. If a pair of shoes costs $100 and you make $10 per hour, you’ll spend ten hours at your job paying for them.

Automatic investment plans put your saving and investing on cruise control. Once you set the wheels in motion, a specific amount can be deducted from your checking account each month and invested automatically. You can usually get started for $50, as long as you agree to regular electronic investments.

All of these automatic investment programs can be set up to utilize the dollar-cost averaging strategy.

Dollar-cost averaging is a strategy that can help you to build wealth. You invest methodically, instead of putting all of your money into an investment at one time. You invest the same amount at regular intervals. Dollar-cost averaging works particularly well when you’re investing in stocks and mutual funds. Each investment buys more shares when prices are low and fewer shares when the price is high.

Let’s say you invest $100 per month in a stock that is currently selling for $20. Your investment buys five shares. If the price of that stock drops to $10, your $100 investment entitles you to ten shares. If the price of the stock escalates to $25, your investment only buys four shares. With dollar-cost averaging, you buy more shares when prices are low and less shares when the price is high.

The key to dollar-cost averaging is investing the same amount each month through good times and bad. The average price you pay per share winds up being lower than if you tried to pick the right moment to invest and guess wrong.

When you invest while you’re young, growing wealthy is much easier. Based on the age when you get started, here’s how much you need to invest to have $100,000 at age 65.

Age 25	$ 16 per month
Age 35	$ 44 per month
Age 45	$131 per month
Age 55	$484 per month

All of these projections presume that your rate of return will average 10 percent, which is not an unrealistic assumption if you invest in the stock market.

Even if your rate of return is less, starting young helps you to grow wealthy. If you put away $50 per month at age 25 and achieve an after-tax return that averages 5 percent, you’ll have almost $77,000 by age 65. At $100 per month, your nest egg will grow to over $153,000.

If you wait until age 55 to save $50 per month, you’ll have a little less than $8,000 at age 65. If you invest $100 per month, you’ll have less than $16,000 to show for your efforts.

Dividend reinvestment plans are a great way to build a stock portfolio with a small amount of money. They also force you to save money you might otherwise spend on a cup of coffee. Dividends are a portion of a company’s earnings that are paid out to shareholders.

As you evaluate which stocks to buy, you should look at a company’s dividend yield. To calculate the dividend yield, you divide the yearly dividend by the price of each share of stock.

A share of stock that costs $50 to buy and pays out $1 per year in dividends, has an annual dividend yield of two percent.

If you own ten shares of that company’s stock, you’ll make a grand total of $10 per year. Instead of spending that $10, you should sign up for the company’s dividend reinvestment plan. By signing up for a dividend reinvestment plan, you invest small dividend checks instead of frittering them away. Each share you accumulate pays more dividends and increases the amount of stock you own, much like compounded interest.

With dividend reinvestment, you need to own one or more shares to get started. You’ll need to make your initial purchase of stock through a broker. Some companies permit you, however, to enroll directly in the company’s dividend reinvestment plan, even if you don’t own any shares. Almost all plans allow you to send a small or large check to buy more shares.

As you reinvest dividends, make sure you keep thorough records. When you sell those shares someday, you’ll need to know what price you paid for each share. This is necessary to calculate your gains and losses for tax purposes.

Procrastination is the biggest barrier to getting wealthy. You can always find an excuse for not investing.

Your first investment should be in an emergency fund. This is a three to six-month cash reserve in case you need money to tide you over during a period of unemployment or disability.

Make investing a habit. If you can’t trust yourself to invest on your own each month, put your investments on auto-pilot by signing up for automatic deductions from your checking account or paycheck that are transferred to a mutual fund, brokerage account or employee-sponsored savings plan.

Invest systematically. If you have $5,000, invest $1,000 for five consecutive months, rather than taking the plunge all at once. Make sure you research the investments you’re making and you don’t put all of your eggs in one basket. Review your investments on a regular basis to see which ones are performing well and which ones aren’t.

There are many mistakes novice investors make. Here are a few common ones you should avoid:

Timing the stock market is almost always a bad idea. Even the so-called experts cannot give reliable predictions regarding the direction of the market. You are much better off investing with a long-term perspective, rather than trying to time the inevitable ups and downs of the market.

Investing automatically in a diversified mix of investments eliminates the need to time the market. The dollar cost averaging strategy also helps you avoid trying to time the market. You invest at regular intervals instead of investing all of your money at one time.

You’ll find proponents of active investing, passive investing or some combination of the two. Active investors pick and choose investments as economic conditions change. Passive investors gravitate toward investments that mirror the performance of the market or some investment index. Active investors believe that you settle for mediocre results if your only goal is to keep pace with the market.

In general, active investors buy and sell investments frequently. Passive investors tend to buy and hold investments.

Depending upon your preference, you can choose between actively managed mutual funds and passive investments like index funds and exchange-traded funds (ETFs). The professionals who run actively-managed funds buy and sell investments they think will outgain the market. That doesn’t always happen and sometimes they do worse.

Passive investments tend to have lower expenses, since fewer trades are made. Fewer trades mean you’re less likely to owe taxes on your capital gains.