[Millennial Money Tips] A Young Adult’s Guide to Investing
Editor’s Note: This post is part of the Millennial Money Tips series, brought to you by H&R Block. Read on to uncover millennial investing tips and other strategies as a new investor.
When you find extra money, what’s your first reaction? Is it to save it, pay off a bill or go out to dinner? You know the right answer, but what would you honestly do?
Increased financial responsibility is a signal of the transition into true adulthood, where living expenses and monthly bills move to the front of the line—which should also include investing. Yet, a recent study from the American Institute of Certified Public Accountants found that seven out of 10 young people define financial stability as only being able to pay all of their bills each month. For many millennials, investing simply isn’t part of the financial equation.
Putting aside money now for security in the distant future doesn’t seem to compute for a generation of postgrads who are still paying off their education while searching for decent-paying jobs. That could explain why a Forbes article reported 53 percent of millennials said the lack of money is a major factor for not investing.
But here’s some good news for you, millennials of the world: time is on your side.
A model scenario laid out by Wells Fargo demonstrates how a 25-year-old earning a modest salary of $32,000 can accumulate $1 million by the age of 65 with small and steady investments. This isn’t the only way to go about it – in fact, there’s an assortment of ways to invest your money. Each type of investment has varying levels of risk, liquidity and rate of return.
Here are three basic ways to get in the investment game and what you can expect from each:
Very low risk, very high liquidity, very low rate of return
Putting money into a savings account is the simplest form of investing and a very safe approach. There’s virtually no risk associated with it, however there’s a very low rate of return (1% interest rate is considered good). The biggest benefit here is liquidity, meaning you can take out your money whenever you want without penalty.
Low risk, very low liquidity, decent rate of return
This is a type of retirement savings account that is offered by employers where you place a portion of your earning in an account with specific tax benefits. There are two types of 401(k) plans that your employer may offer: traditional and Roth. With a traditional 401(k), your contribution is pre-tax, meaning it’s taken from your salary before taxes are taken out. In this scenario, you won’t have to pay taxes on that money until you withdraw it. The other type is a Roth 401(k), which makes the contribution post-tax, but isn’t subject to any further taxes upon withdrawal. Typically, the Roth variation is the better option since you’ll likely move into a higher tax bracket with age, which means paying more taxes on your money. On top of all that, most employers will match a portion of the amount you put into your 401(k), up to a certain percentage. So the more you put in, the more your employer puts in.
Stocks and Bonds
High risk, low liquidity, very high rate of return
This type of investment is not meant for beginners, but can offer a high rate of return if played correctly. Stocks are more risky than bonds, but they are also more lucrative. Your money isn’t very liquid in case, mostly because the goal is play the long game in order to get the best return on investment.
Remember these tips when you’re taking fall coats out of storage in a few months and find money in the pockets. Resist the urge to buy new and instead think about making long-term investments!
If you make a profit on the sale of your home, the gain may not be taxable. Learn more about the tax implications of selling a house with the experts at H&R Block.
If you are giving large gifts this year, it's important to know the IRS rules surrounding gift taxes. Learn more about the gift tax exclusion at H&R Block.
Contributing to an IRA is beneficial, but what if you’ve converted a traditional IRA to a Roth IRA? How should that be reported on your taxes? Learn more with H&R Block.
Learn more about the rules of reporting rental income and get tax answers at H&R Block.