You’ve graduated from school, you’re working full-time, and you may even have your own place (or share one with roommates who aren’t your parents). Regardless of the fact that you’ve been technically an adult since the day you’ve turned 18, many young adults don’t truly feel like they’re “adulting” until they begin investing their money.
Unfortunately, the reality is that most young adults would like to begin investing and saving for retirement but have no idea where to start. Whether you’ve just received your diploma, started your career, or you’re ready to make the plunge into an IRA or 401(k) account, we’ve created a crash course to help young investors make the most out of their money.
The Importance of Investing Early
Nearly every financial expert will tell you that one of the most important steps that we can make is to begin investing and saving money early. The benefits of getting started early include:
The power of compounding interest
Compounding interest is a fancy way to say “interest earned on the interest that you’ve previously accrued” and it’s a powerful force when it comes to building wealth.
Let’s say that you invest $5,000 a year beginning at age 25 and stop investing when you turn 35. Assuming a rate of 7% interest, you would have a whopping $602,070 by the time you retire—without saving another dime past the age of 35!
Compare that to someone who doesn’t start saving until he’s 35 but saves $5,000 annually from age 35 to 65. In total, this older saver will have invested $150,000 (three times the amount you did) and will still only have $540,741 by the time he or she retires. The earlier you begin to invest, the more effectively you can take advantage of the principles of compounding interest.
A fighting chance against inflation
In the year 1958, the average price of a home was $10,450, gasoline was $0.52 a gallon, and a brand new car would set you back anywhere from $1,967 to $3,929.
As a general rule, money becomes less valuable over time due to inflation. Investing at a younger age can help you outpace inflation by accumulating interest.
A retirement plan that’s a little less scary
Back in the 1950’s, it was a common practice for employers to take care of their employees after they retired with a generous pension plan crafted by the company in exchange for years of service.
As people began living longer and wages failed to keep up with inflation, it slowly became the responsibility of employees to handle their own retirement funds through contributions to a 401(k) or Individual Retirement Account (IRA).
Now, Baby Boomers face a serious problem—many of them do not have enough money to make it through retirement and are forced to work past the retirement age of 66. Young adults who begin saving now can avoid this problem by growing their money over time.
The Best Investments for Young Adults
1. Debt elimination
If you’re a Millennial or a member of Generation X, chances are that you’ve got some kind of debt. According to a survey from Young Adult Money, 43% of young adults have some form of student loan debt, and 83% of those with student loan debt say that paying back their debts is seriously affecting their ability to meet their other financial goals.
Even if you haven’t taken on any student loan debt, credit card debt may still be lurking on your credit profile; 7 out of 10 young people constantly carry a balance on their credit cards, and 50% of men and women say that they believe they have too much debt.
Debt does nothing to help your financial situation—and if left unchecked, accumulating interest can cause those in debt to pay sometimes twice their principal balance by the time the debt is repaid. If you have a student loan, an outstanding auto loan, or an unpaid credit card balance, paying it off can set you up to more effectively meet your investing goals.
Have more than one debt you need to pay off? Use the “snowball method” to slowly reduce your debts over time without missing a minimum payment. Identify your smallest debt and put all of your available funds towards reducing the debt while also paying the minimum balance on your other outstanding accounts.
After your smallest debt has been paid in full, devote all of your funds to your second largest debt and so on until you are debt free. While paying off your debts is not an investment in the traditional sense, eliminating your debts will set you up to be in the best possible position to save more in the future.
2. Index funds
Most people know that the stock market is one of the best places to invest their money, but few understand how to value stocks, what stocks are worth purchasing and how to effectively diversify a portfolio to avoid losing money.
Index funds are pre-packaged bundles of stocks that track a particular segment of the market; many index funds track the S&P 500, which is an index that’s widely considered to represent the health of the economy of the United States as a whole.
Index funds offer novice investors an easy way to build a portfolio quickly with expert assistance and they frequently come along with lower fees when compared to other types of mutual funds because they are not actively managed by a team of investors and financial advisors.
Want to start investing in index funds? Check out some of Benzinga’s favorite brokerages and open an account.
3. Higher education
Young adults today are a part of the most educated generation of Americans ever—40% of men and women over the age of 25 now hold at least a bachelor’s degree, a massive increase from just 4.6% in 1940. The decision of whether or not to go to college is one of the most difficult (and expensive) decisions that most young men and women will make. Some of the factors that may make a university education worth the investment:
- You’re interested in pursuing a career that requires a degree. Some occupational pursuits (like jobs in the medical or legal field) require employees by law to hold an advanced degree. In most other fields, individual employers choose to give more weighted consideration to applicants who have a college degree.
- You’re looking to move up your current corporate ladder. Most corporations hire entry-level employees without higher education. However, if you are unsatisfied in your current role, earning your degree can open the door to consideration for a higher position. Ask your employer about the company’s tuition reimbursement program—many employers will help student-employees out with the cost of tuition or other learning materials.
- You can’t find a job in your field. If you can’t seem to find a job that covers your bills in your area, an advanced degree can help you begin a new career. According to data from the U.S. Bureau of Labor Statistics, those with a bachelor’s degree typically have a higher median income and have less trouble finding gainful employment.
If you’ve decided that a collegiate education is a good investment for you, researching local scholarships is a great place to start—each year, thousands of dollars of scholarship money goes unclaimed because no one applies!
4. Money market funds
Money market accounts are like an online savings account with one important caveat—some are not FDIC-insured. While this is great for interest rates (you can earn more than the typical amount for a standard savings account) it can also put your investment at a higher level of risk.
Working only with reputable money market fund providers can help you secure your investment.
5. Short term CDs
Short term certificates of deposit (CDs) are bank products that hold a predetermined amount of money and allow it to accrue interest over the course of 90 days to five years.
CDs are FDIC-insured up to the limit of $250,000 and provide you with a risk-free way to earn a bit of interest. However, once you deposit money into a CD, you must allow it to mature—or you’ll be met with a high penalty. If you’re the type of person who frequently dips into your savings accounts to cover bills, a CD may not be the best choice for you.
Many young adults who rent believe that they should buy a home as soon as possible. After all, if the price of rent and a monthly mortgage are comparable, why not own the property? Unfortunately, the rent vs. buy debate is about more than just the monthly mortgage price—owning a home is a significant investment and one that should not be taken lightly.
For example, when you live in an apartment, you can call the landlord up to handle expensive home issues. A $4,000 furnace that dies in the middle of the winter is the landlord’s problem when you live in an apartment. When you own the home, there’s no one to call except the local heating repair company. Learning more about the true costs of home ownership can help you understand if you’re really ready to buy.
The best investing decision that you can make as a young adult is to save often and early and to learn to live within your means. Putting away more money now and learning about your investment options will poise you for financial success in the future.