Allworth Financial Advisors discuss how credit utilization works.
Question: Connie in Colerain Township: My son is 22 and wants to start investing. But I don’t have much experience with it, so I don’t think I can help him much. Can you share some advice?
A: Of course! We’re happy whenever a young adult shows interest in investing and long-term planning. And quite honestly, that’s the first distinction we want to make: Your son needs to understand there’s a difference between long-term investing and stock picking (or day trading). It’s likely he’s heard of certain apps and websites that allow him to buy and sell stocks from minute-to-minute. In this case, short-term profit is all that matters, but in our eyes, this is akin to gambling. At Allworth and on our “Simply Money” radio show, we promote long-term investing. That is, having a goal that’s years away, making an investment plan to reach that goal, then sticking with it.
Your son should also use time to his advantage. As Albert Einstein once reportedly said, compound interest is the eighth wonder of the world. Essentially, money makes money – and the money money makes, makes more money. This means he should start saving now and not ever stop. Consistency and time will do more for him in the long run than anything else.
Additionally, he should think about short term and long-term goals. For any goals within two to three years, just a plain-old bank account is fine (that money shouldn’t be exposed to any market risk). For longer-term goals such as retirement, a simple index fund that tracks the S&P 500 (the 500 largest companies in the U.S.) is a good starting point. This allows him to invest in the major contributors to the American economy. And right now, it’s OK if he’s stock-heavy since he has decades to ride out the ups and downs of the market.
If he has a 401(k) through work, he should save at least enough to get the match (if offered). If his employer offers a Roth 401(k), saving in that is an even better idea since he’ll get tax-free growth. If he doesn’t have a retirement plan through work, he should open up a Roth IRA through a brokerage firm like Vanguard, Fidelity or TD Ameritrade. (He can also do this even if he does have an employer plan.) And he should never take money out of retirement accounts early.
The Allworth Advice is that your son should focus on time in the market, not timing the market. And while there may be temptation to get fancy with his investments, simple is usually best.
Q: Tim from Lawrenceburg: What’s your thought on having more than one credit card?
A: Our answer really comes down to what you see when you look in the mirror. Because whether it’s a good idea depends on you and your credit behavior.
If you’re someone who’s responsible with one credit card, meaning you pay your bill on time every month and you pay it in full every month, then having multiple cards can be beneficial. You could sign-up sign up for different cards depending on the rewards program and work each of those programs to your advantage. In this instance, however, you would still need to be careful about not increasing your spending just because you have more cards and a higher combined credit limit. As we’ve mentioned in this column before, it’s critical to keep your “debt utilization” under 30% every month.
On the flip side, if you come to the realization that you’re not exactly the most responsible with credit, then stick with one card for now. Work on changing your habits. Then you can think about graduating to an additional card or two.
Here’s the Allworth Advice: Having multiple credit cards can give you more financial flexibility. But doing so is only advisable if you have the proper discipline.
Every week, Allworth Financial’s Nathan Bachrach and Amy Wagner answer your questions. If you, a friend or someone in your family has a money issue or problem, feel free to send those questions to [email protected].
Responses are for informational purposes only and individuals should consider whether any general recommendations in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Call 513-469-7500 or visit allworthfinancial.com.
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