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Shaundra Patterson knows that achieving financial freedom requires having a plan. Unfortunately, like many people, the 24-year-old federal employee who lives in Richmond, Virginia, is stuck between her desire to act and not knowing what to do first.
Single and with no children, Patterson is responsible only for herself, and she is committed to finding ways to make her money earn more money. “I don’t have a lot of debt,” she says. “After I pay my rent, utilities, and student and car loans, I have about $300 left over. I usually spend it shopping, but I really want to start investing.” Here’s how she can begin:
Step 1: Identify goals and time frame. Walt Clark of Clark Capital Financial (www.clarkcapital.net) says beginning investors should create a financial plan that identifies their goals and the time period in which they want to achieve them. Patterson would like to pay off her student loan in five years, take affordable annual vacations, and have enough saved in 30 years to retire. Clark explains that a plan’s different objectives may require different investment strategies. “A short-term goal [less than five years] that requires a 20% annual return calls for a portfolio centered on individual stocks,” he says. But he notes that investments selected for long-term goals — 10 years or more — can have a combination of growth investments that include individual stocks, bonds, and mutual funds.
Step 2: Determine your risk tolerance. How much risk can you tolerate? The answer is influenced by factors such as age, income, financial responsibility, and job stability. Clark suggests the formula 100 minus current age to help determine how aggressive a person’s portfolio should be. For Patterson, the formula results in 76, meaning that 76% of her investments should be in moderate-to-aggressive growth investments. “As a person gets older, his or her portfolio will become less risky,” Clark explains. “This formula is simply a benchmark to use to get started.”
Step 3: Commit to funding your goals. Reducing expenses and eliminating nonessential purchases to better save for your goals is key. Patterson has already identified money for investing. Clark says this is a perfect time for her to plan for her financial future: “At her age, the odds are she will not have Social Security to supplement her retirement. So it’s important for her to reduce the chances of ever needing it. Furthermore, the earlier she starts investing, the more opportunity she has to build wealth later in life.”
Step 4: Time to invest! Once goals are set, time frames determined, and risk tolerance assessed, its time to invest! Use financial publications and Websites to learn about different types of investments. Then consult a certified financial planner if you don’t want to go it alone.