Originally created 02/05/01

Staring early adds interest



You've probably already seen interest work against you (probably in the form of credit cards), now it's time to learn how interest can work for you by investing.

Investing is simply spending your money on something that will, over time, give you more money than you originally spent.

For example, if you bought $1,000 worth of shares in a mutual fund that maintained yearly returns of 10 percent, you would have nearly $4,000 in 20 years.

Here's another example: If a 23-year-old started saving $2,000 a year at a 10 percent rate of return, they would have $1.075 million by the time they retired at age 65. But if that person didn't start investing until age 30, they would end up with $542,000 - about half the amount.

Thus, the sooner you begin investing, the more time you have to grow a retirement nest egg. This is important for those in their 20s and 30s because of the unpredictability of the Social Security program that had been the main source of retirement income to previous generations.

One of the easiest and most effective ways to start investing is to participate in your employer's qualified retirement plan, which will most likely be a 401(k), said Charles B. Lanier Jr., a financial representative with Peachtree Planning Corp.

A 401(k) allows employees to deposit a portion of their pretax earnings into various investment vehicles within the 401(k) program. As a bonus, most employers match a certain percentage of their employers contribution.

Young consumers should also take advantage of the Roth IRA, an individual retirement account that is funded with after-tax earnings. Assets in the account are allowed to grow tax free over time and can be withdrawn without tax penalty.

The investments you choose to make within the accounts should be based on your risk tolerance and how quickly you need to liquidate the investment, that is, get your money out.

Younger consumers have a longer time, and therefore can afford to be in high-risk, high return investments.

Long-term investments consist of stocks and mutual funds, which are clusters of various individual stocks. They are sometimes referred to as "equities" because your investment in them constitutes partial ownership of a company or companies.

On the flip side are investments in bonds, which are essentially loans to corporations and government entities that are paid back with interest, and cash-equivalents such as certificates of deposit. Both types are conservative, shorter-term investments.

Mutual funds are particularly popular investments because they offer shareholders immediate diversification - because the fund consists of holdings in several dozen or several hundred companies - and because they are managed by professionals.

Many mutual funds carry a fee, known as a "load," that is paid by shareholders, but "no-load" mutual funds are also available.

For those who invest in individual stocks, most financial planners recommend they have at least 50 percent to 75 percent consisting of larger, established domestic companies. The rest can be in companies with big growth potential, such as technology-based start-ups or foreign companies.

"Most of your younger folks need to do more growth-oriented stuff," according to Michael Downes, investment representative with Edward Jones. "Everybody needs to have some international funds too."

However you choose to build your investment portfolio, it is most important to expect a realistic rate of return. The inflated returns of the recent past are not forecast to continue.

Investment insurance

With investments of any kind, naturally it's wise to insure them.

Larry Colet, an area agent for State Farm Insurance, said most younger people don't think they need insurance, that it's a waste of money. He simply points to the well publicized apartment fires and tornadoes of the last year.

"Your clothes alone and your pots and pans in the kitchen are worth thousands of dollars," he said.

Mr. Colet said homeowners' and renters' insurance covers valuables that can be stolen from your car, too.

Also overlooked is life insurance, which can be extremely important for young families with children.

"It really becomes important more so when you're married," said Lee Roberts, an insurance adviser with Sanford Bruker & Banks Inc. "That way (survivors) won't be saddled with unexpected debt."

Reach Eric Williamson at (706) 828-3904.