Why Invest Young?
One of the best, and most common, pieces of advice new professionals hear is to invest when they're young. There are two reasons for this. The first is that the younger you start investing, the more time your investments have to grow and earn compound interest (interest that grows on top of the interest your investments earn).
The second reason to invest when you're young is that you learn from your lessons when the stakes are much lower. Not only do you have more time to recover from investment mistakes when you are young (with many working years ahead of you), but you are investing with less money to begin with. When you are young, you probably only have a couple hundred dollars to invest each month. All investors make mistakes; it is good to learn your lessons when there is less to lose.
Best Investments for Young Adults
When you decide to start investing, it is hard to know where to begin and what to prioritize. As a young investor, it's important to keep your long-term and short-term goals in mind: What do you need your money to do for you now and what do you need from it in the future? Here are three things to consider:
You should invest in a retirement account with your first job. This is the best way to secure your financial future since your retirement funds will have plenty of time to grow. IRAs and employer-matched 401(k)s are the best place to start. If your company matches your contributions, make sure you give the maximum amount your company will match to get the most from this incentive.
If your company does not offer a matching 401(k) or other matching retirement plan, look into individual retirement accounts (IRAs). There are four types of IRAs. Traditional and Roth IRAs are set up for individual earners, while SIMPLE and SEP IRAs are best for small business owners and self-employed workers. Traditional IRA contributions are tax deductible, and the IRS does not tax the dividends as long as they stay in your account until retirement. Roth IRAs aren't tax deductible, but you can withdraw contributions penalty and tax free, provided you've had your Roth for at least five years. And when you turn 59 1/2, you can withdraw all of the money tax free.
Savings & Funds
Short-term investments are a necessary piece of your financial portfolio. This is money that you can easily access in the event of an emergency or to pay for a large purchase, such as a down payment on a home or car. Money market funds are low risk and earn slightly higher interest rates than traditional savings accounts. When your money is in a money market fund, you can withdraw it at any time – just as you would with a typical savings account.
Another good option is a certificate of deposit (CD). CDs have set maturity dates and interest rates. The interest rates are typically higher than those of money market funds. If you do not need to access your savings for a set amount of time, CDs are a good option. However, there is a penalty if you withdraw funds before the maturity date.
One final consideration when thinking about investments is your debt-to-income ratio. While paying off debt might not seem like an investment in the traditional sense, it is one way to maximize your financial potential. By paying off debts, you potentially save yourself hundreds of dollars in interest payments and are able to put more money toward savings or investments.
A well-rounded financial portfolio includes many different investments, including investments with long-term goals and investments that benefit you in the short term. While investing might intimidate you, it is important to start young and do your research. To learn more about investing or investment platforms, be sure to check out our financial articles.