Young Investors: Smart Places To Invest Your Money

Investing $20 may not seem like much, but it can be a great way to get started in the world of investing and establish good personal finance habits. While it won't make you rich overnight, it can be a good opportunity to learn about different investment options and get your money working for you. Here are some places where you can invest $20:

- The Stock Market: You can invest in individual stocks that are under $20, but be aware that these can be more volatile. You can also invest in fractional shares, which allow you to buy a portion of a stock based on the money you have.

- Real Estate: Consider investing in real estate investment trusts (REITs), which are companies that own income-producing real estate. You can also explore real estate crowdfunding platforms, such as Groundfloor, which allow you to invest in single-family homes for as little as $10.

- Robo-Advisors: Robo-advisors are automated financial advisors that manage your portfolio for you based on your risk tolerance and investment goals. They are a hands-off approach to investing and can be a good option for beginners.

- High-Yield Savings Accounts: While not as exciting as other investments, high-yield savings accounts offer a safe and low-risk option for your money. They provide easy access to your funds and can be a good place to park your money while earning interest.

- Mutual Funds and ETFs: Mutual funds and exchange-traded funds (ETFs) allow you to invest in a diversified basket of stocks or bonds. ETFs, in particular, offer instant diversification and can be traded like stocks. However, they may have expense ratios, which are fees that eat into your returns.

Start with a retirement account

Investing in a retirement account in your 20s is a great way to maximize your earnings with compound interest and ensure you don't outlive your savings. Here are some tips for getting started with a retirement account:

• Understand the benefits of starting early: The biggest advantage of saving for retirement early is that you'll have many years to take advantage of compounding interest. This means that even if you don't contribute large amounts, your savings can still grow significantly over time. Waiting until later means you'll need to save more and earn less, making it harder to reach your retirement goals.
• Prioritize a 401(k) plan: If your employer offers a 401(k) plan, this is a great option to start with. You can contribute a portion of your salary each year, and many employers will match your contribution up to a certain amount. For example, if your employer contributes $1 for every $1 you save up to 6% of your pay, try to contribute the full 6% to take full advantage of the match.
• Consider a Roth IRA: A Roth IRA is a good option if you don't have access to an employer-sponsored plan or want to supplement it. With a Roth IRA, you contribute after-tax money, and your earnings and withdrawals are tax-free in retirement. This can be especially beneficial if you expect to be in a higher tax bracket when you retire.
• Take advantage of tax benefits: Retirement accounts offer tax benefits that can reduce your taxable income. With a traditional 401(k) or IRA, you contribute pre-tax money, lowering your tax obligation. While a Roth IRA doesn't offer an immediate tax benefit, you'll reap the rewards in retirement with tax-free withdrawals.
• Start with a small amount: You don't need to contribute a large sum to get started. Even saving a small amount each month can add up over time, thanks to compound interest. As your income increases, you can gradually increase your contributions.
• Automate your savings: Consider setting up automatic contributions from your paycheck or bank account to your retirement account. This makes it easier to save consistently and ensures you don't forget to contribute.
• Seek professional guidance: If you're unsure how to get started or want help creating a retirement plan, consider consulting a financial advisor or using a robo-advisor service. They can provide personalized advice and guidance based on your goals and risk tolerance.

Understand risk and return

Understanding risk and return is essential for making informed investment decisions. Here are some key points to consider:

Risk and Return Relationship

The relationship between risk and return is directly proportional; the greater the risk of losing money, the greater the potential for substantial returns. Conversely, lower-risk investments typically yield smaller returns. For example, investing in a startup business comes with a higher risk of bankruptcy but also offers the potential for significant gains if the company becomes successful. On the other hand, investing in established blue-chip companies carries a lower risk of financial loss but may provide more modest returns.

Risk and Return Trade-offs

Investors may be willing to sacrifice potentially higher returns to avoid greater risk. For instance, when interest rates rise, investors often shift their money from stocks to bonds, as bonds are considered less risky due to their relatively stable prices and lower potential for substantial gains or losses.

Diversification and Risk Management

Diversifying your investment portfolio across a spectrum of risk can help balance risk and return. By investing in various assets, you can aim for strong returns on some investments while securing a portion of your principal in less risky ventures. This strategy ensures that potential losses in one area may be offset by gains or stable values in other investments.

Understanding Return

Return is a measure of investment gain or loss. It can be calculated by subtracting the purchase price from the current value or selling price of an investment. Total return includes the amount of investment gain or loss, plus any income received, such as dividends. To compare returns on investments bought at different prices, it is essential to calculate the percentage return by dividing the total return by the purchase price.

Factors Affecting Return

Several factors can influence the return on your investments:

• Timing of Buying and Selling: Buying an investment before its price increases will result in a stronger total return than purchasing after a price jump or before a drop.
• Taxes: Taxes can impact the return on different types of investments. For example, a municipal bond's total return may be lower than a corporate bond, but if you don't owe taxes on the municipal bond income, it could result in a higher net gain.
• Inflation: Inflation reduces the buying power of your investment return and income. Therefore, it is crucial to consider the real return, which is the return after correcting for inflation. If the inflation rate is higher than your investment return, you may be losing money in real terms.
• Income Taxes: Real return calculations should also consider income taxes on realized gains and investment income. Tax-deferred and tax-free accounts are attractive options to postpone or avoid these taxes.

Taking Calculated Risks

Taking risks is inherent to investing, and it involves the possibility of losing some or all of your invested money. However, it is essential to anticipate potential problems and put strategies in place to manage or offset these risks. Diversification and asset allocation are crucial in managing nonsystemic risks, which are specific to individual investments rather than the overall investment market.

Additionally, not taking enough risk can also be detrimental. Investing too conservatively or avoiding investing altogether may result in your investments failing to outpace inflation, leading to a negative real return. Therefore, it is crucial to find a balance between taking calculated risks and diversifying your portfolio to maximize returns while minimizing potential losses.

Choose investment vehicles

There are several investment vehicles that you can choose from, each with its own pros and cons. Here are some of the most common investment options for young investors:

• Stocks: Stocks tend to be higher risk than bonds, but the level of risk depends on the sector, industry, and specific company. Over a long time horizon, a buy-and-hold strategy can yield tremendous returns. However, with thousands of stocks available, this can also be a daunting area for young investors.
• Bonds: Bonds provide a low-risk access point for investors. These investments often require less day-to-day management than stocks, although they are limited in their potential for payout. A common approach is to allocate a percentage of your portfolio in bonds equal to your age, which means that young investors may not focus heavily on this asset class.
• Mutual Funds: Mutual funds are an excellent choice for many new investors. They provide broad diversification while minimizing the amount of trading and oversight required. They are also good for a buy-and-hold strategy, but the returns tend to be relatively modest.
• Exchange-Traded Funds (ETFs): ETFs are a highly popular option among both new and seasoned investors. They provide a one-stop-shop approach for investors not eager to manage individual stocks or other assets. ETF risk and return profiles vary considerably, allowing you to tailor your investment strategy to your risk tolerance.
• Real Estate: Real estate can be a solid investment choice, especially if you plan to stay in one place for a longer period. It can also be a good hedge against inflation.
• Retirement Accounts: Employer-sponsored retirement plans such as 401(k) and 403(b) accounts are a common way for young investors to start saving for retirement. These plans often include employer contributions, which can boost your retirement savings. Additionally, consider opening a Roth IRA, which offers tax advantages.
• Robo-Advisors: Robo-advisors are computer-based investment management companies that charge a percentage of your account balance for their services and investment tips. They can be a low-cost option for those who want help managing their investments.

When choosing an investment vehicle, it's important to consider your financial goals, risk tolerance, and time horizon. Diversification is also key to limiting your risk and smoothing out your investing journey.

Manage debt and build emergency funds

Manage Debt

Debt can be a major hurdle to investing. Student loan debt, credit card debt, and other types of debt can present a financial burden. To manage your debt, consider a debt-reduction system like the snowball method:

• List your debts in order of balance size.
• Make all minimum payments necessary.
• Allocate any extra money available to pay off the smallest debt first.
• Repeat the process with the next smallest debt until all are paid off.

Additionally, if you have student loans, stay on top of your payments and keep an eye out for federal programs that may help reduce your burden.

Build Emergency Funds

It is recommended to have two emergency funds: one for short-term emergencies and another for long-term emergencies.

Short-Term Emergency Fund

This fund is for immediate emergencies, such as a car repair or replacing a refrigerator. It should typically hold between $500 and $1,500.

Long-Term Emergency Fund

This fund is for emergencies that may not have a quick fix, such as losing your job, a lingering health crisis, or major damage from a natural disaster. It should be large enough to cover at least three months' worth of living expenses, with six months being preferable.

To start building your emergency fund, open two separate savings accounts specifically for these short-term and long-term emergencies. Look for banks with a high annual percentage yield (APY). It is recommended to choose a different bank from your checking account to reduce the temptation to use the funds for non-emergencies.

There are several strategies you can use to grow your emergency fund:

• Use your tax return: If possible, put your entire tax refund or a portion of it into your emergency fund each year.
• Increase your income: Take on a part-time job or sell items online to boost your income.
• Cut expenses: Reduce spending by carpooling, using coupons, eating out less, adjusting your thermostat, or staying home on vacation.
• Keep the change: Put aside any $1 bills you receive after breaking a $20 note into a jar, and deposit the money into your emergency fund when it's full.
• Move checking funds into savings: If you have surplus funds in your checking account, transfer them to savings, preferably a high-yield savings account.
• Use a grocery shopping list: Plan your grocery shopping with a list to avoid buying unnecessary items or giving in to temptation.

By following these strategies and maintaining your emergency funds, you can ensure you're prepared for unexpected expenses and protect yourself from falling into debt.

Automate investments

Automating your investments is a great way to simplify wealth-building. It's like putting your bills on autopay, ensuring consistency and timeliness. Here are some steps to help you automate your investments:

Create an investment account:

Choose a user ID and password, and select the type of account you prefer, such as a taxable investment or an Individual Retirement Account (IRA). Some advanced traders may need approval to open certain brokerage accounts.

Choose your assets:

Robo-advisors and micro-investing apps will select assets for you based on your goals, risk tolerance, and time horizon. Workplace retirement accounts provide a list of investments to choose from, while self-directed investment accounts offer a wider range of options, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds.

Link your funding account:

Choose the checking or savings account from which funds will be transferred. Provide the name of the financial institution, your bank's routing number, and your account number. If you're using a workplace retirement account like a 401(k), this step is unnecessary, as funds are automatically transferred from your paycheck.

Set your funding schedule:

Determine how frequently and how much money you want to transfer from your bank account to your automated investment account. Ensure that your transfers are large enough to receive any employer match offered with workplace retirement accounts. Be mindful of maximum contribution limits for accounts like 401(k)s.

Choose a platform:

There are several automated investment platforms available, each with its own features and requirements. Here are some popular options:

• Robo-advisors: Robo-advisors like Wealthfront, Betterment, Fidelity Go, and Schwab Intelligent Portfolios offer low-fee investment options. You provide your goals and timeline, and they create a customised investment portfolio.
• Employer-sponsored retirement accounts: Many employers offer 401(k), 403(b), or 457 plans, allowing you to save for retirement by transferring a percentage of your paycheck into the account. Some employers also match your contributions up to a certain percentage.
• Dividend reinvestment plans (DRIPs): This option allows you to automatically reinvest dividends and capital gains payments into the same asset, compounding your account value more quickly.
• Recurring transfers: You can set up regular transfers from your checking or savings account into your investment account.
• Round-up apps: Micro-investing apps like Acorns let you link a debit or credit card and round up purchases to the nearest dollar, investing the spare change.

Provide personal information:

To open an automated investing account, you'll typically need to provide your Social Security number, driver's license or passport information, employment status, and investment objectives and risk tolerance.

Consider minimum deposit requirements:

Some automated investment accounts have low or no minimum deposit requirements, such as Fidelity Go. Others, like the Empower robo-advisor, may require a higher minimum deposit but offer access to additional services like certified financial planners.

Evaluate factors like customer service, fees, account minimums, and research tools:

When choosing an automated investment platform, consider the level of customer service provided, including live support availability. Research the fees and commissions charged by the platform, and determine if they are worth the services provided. Additionally, check for any minimum balance requirements to ensure they align with your financial situation. Finally, if you're a self-directed investor, review the research tools, screeners, calculators, and trading platforms offered to ensure they meet your needs.

By following these steps, you can effectively automate your investments, making it easier to save for retirement, education, or other financial goals.

Frequently asked questions