The financial advantage of youth over an older adult is time. If you start investing at a young age and keep investing, by the time you are ready to retire, you should have built-up a comfortable amount in your retirement account, provided that you do not withdraw money from your retirement savings to pay down debt or to take vacations or to fund your lifestyle. If you let the money grow, the power of compound interest will make you wealthy.
If you are a teenager and you get a job, you can open an IRA (Individual Retirement Arrangement). Did you catch the word Arrangement? The word Arrangement is how the IRS defines an IRA. The financial institutions have shifted our thinking into calling an IRA an Individual Retirement Account. I just wanted you to be clear as to the proper name. As long as you are working and earning money, you can open an IRA and began saving. I caution you against opening an IRA at a bank. Instead, check out discount brokerage firms, such as Scottrade, TD Ameritrade, Charles Schwab, etc. Their fees are less than those of the bank. You don’t want the banks to take your money in fees.
Also, if you are investing in mutual funds. Make sure you do research. You want a fund with a no-load. A load is a sales charge or a commission on the fund. Investopedia explains:
The load is either paid up front at the time of purchase (front-end load), when the shares are sold (back-end load), or as long as the fund is held by the investor (level-load).
A no load mutual fund does not charge the commission or sales fee. Investopedia explains:
Investopedia explains ‘No-Load Fund’
Because there is no transaction cost to purchase a no-load fund, all of the money invested is working for the investor. For example, if you purchase $10,000 worth of a no-load mutual fund, all $10,000 will be invested into the fund. On the other hand, if you buy a load fund that charges a front-end load (sales commission) of 5%, the amount actually invested in the fund is only $9,500. If the load is back-ended, when shares of the fund are sold, the $500 sales commission comes out of the proceeds. If the level-load (12b-1 fee) is 1%, your fund balance will be charged $100 annually for as long as you own the fund.
The justification for a load fund is that investors are compensating a sales intermediary (broker, financial planner, investment advisor, etc.) for his or her time and expertise in selecting an appropriate fund.
It should be noted that research shows that load funds don’t outperform no-load funds.
Did you notice the last sentence? The load fund does not outperform the no-load fund. Don’t waste your money by buying a mutual fund with a load. Do your own research and you’ll be fine.
Another thing to watch out for is the expense ratio. Let’s see what Investopedia says on this:
Definition of ‘Expense Ratio’
A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund’s operating expenses are divided by the average dollar value of its assets under management. Operating expenses are taken out of a fund’s assets and lower the return to a fund’s investors.
Also known as “management expense ratio” (MER).
Investopedia explains ‘Expense Ratio’
Depending on the type of fund, operating expenses vary widely. The largest component of operating expenses is the fee paid to a fund’s investment manager/advisor. Other costs include recordkeeping, custodial services, taxes, legal expenses, and accounting and auditing fees. Some funds have a marketing cost referred to as a 12b-1 fee, which would also be included in operating expenses. A fund’s trading activity, the buying and selling of portfolio securities, is not included in the calculation of the expense ratio.
Costs associated with mutual funds but not included in operating expenses are loads and redemption fees, which, if they apply, are paid directly by fund investors.
The main thing to remember is start investing when you are young. Live below your means. Above all, avoid debt. Nothing robs you more than debt. You don’t want to be a slave to the lender.