One of the biggest challenges to managing money can be where to start.
It doesn’t matter whether you make a lot of money or hold a college degree — young adults often feel overwhelmed about how to invest, save and spend.
According to the latest Merrill Lynch Affluent Insights report, which surveys high net worth individuals four times a year, 23 percent of respondents age 18 to 34 said knowing where to begin was the biggest challenge to retirement planning.
“It’s very natural to feel intimidated,” said Victoria Collins, a financial planner who teaches one-day financial planning courses for students at the University of California at Irvine.
But she added: “If there’s any time to start learning — and to make mistakes — it’s when you’re young and there’s not much money at stake.”
Start small: When her children were learning about investing, Collins and her husband would give each a small sum of money to invest for one year. When the year was over, the children would report their earnings or losses — and what lessons they learned.
“We offered a prize, but the child with the highest earnings didn’t necessarily win,” Collins said. “There was a qualitative part. You had to show that you learned something.”
Create a similar “game” for yourself, Collins says. Start investing with a small portion of your savings, so you won’t be as anxious about losing the cash if your strategy flops.
After a year, reflect on what you did (say, you sold your stocks when the market dipped) and what you understand better about investing.
“The best investors are people who are able to recognize where they went wrong and learn from it,” Collins said. “And when you’re young, it’s much easier to recover from a setback.”
Set realistic goals: You may be overwhelmed with financial planning if you’re buried in credit card bills or student loans.
Don’t worry about mastering investment just yet, Collins says. While it’s a good idea to be saving, your first goal should be to set up a plan for paying down your debt or building up cash reserves.
Then, move on to investing — slowly. “Buy something you know, like a mutual fund that invests in company names you recognize,” Collins said.
Also, if you’re not comfortable with risk, ease into stocks.
For instance, it’s OK to start with a portfolio that is 50 percent stocks and 50 percent bonds, says William Bernstein, author of “The Investor’s Manifesto,” (Wiley, $24.95). “You can raise your stock allocation” once you know how much risk you can tolerate.
Study up: Finally, keep in mind that like any skill, you have to learn how to invest.
“If you want to learn how to do medicine, repair computers or fly an airplane, there’s a relatively well-defined body of knowledge you have to master,” Bernstein said. “People don’t seem to realize that about investing.”
And a word of caution before you run to your parents for help: Not all parents know what they’re doing. According to a study from mutual fund company T. Rowe Price, parents grade themselves, on average, a B- when it comes to financial knowledge.
“You have to educate yourself,” Bernstein said. Investing is not as easy as “logging on, hitting some keys and making some trades.”
E-mail Carolyn Bigda at yourmoney@tribune.com.
