Millennial Money: Why Educating Yourself and Investing Early Is Smart

When I was 18, my dad encouraged me to invest my money in the stock market. That phrase–stock market–sounded like a foreign language. I could barely pay for a night out with friends, so how in the world was I going to jump into the world of investing? He suggested I begin contributing to a Roth IRA, another term that went above my head.

I soon went on with my classes and waitressing job without another thought about these very adult-sounding ideas. Many years later, I wish I had listened to him. Though I eventually learned about the importance of IRAs, 401ks, and the opportunity to make money through smart investment in the stock market, I could have gotten started a lot earlier than I did.

Regardless of age, however, it’s never too late to start investing. Many people feel more comfortable keeping their pennies in a savings account – where they can see and access it. While we all need to have an emergency savings fund, that is not where you should put your focus. By investing your hard-earned money, you’ll see it grow exponentially over the years. In fact, it would be to your severe detriment not to invest it.

A couple of things to consider before rushing out to invest: Make sure you have an adequate emergency fund in savings that you can access immediately if necessary and pay down credit card debt. These are two key elements to starting your investment on the right foot.

If you’ve shied away from it due to feeling overwhelmed by the subject, now is the time to dust off your fears and get started. The truth is, investing doesn’t have to be complicated. Sure, there are those who live and die by day trading, constantly checking up on their individual purchases and selling when an opportunity seems ripe. But the majority of normal folks have a system set up to help them thrive in the long term. It’s just a matter of gathering a little information and routing things through on auto-pilot –  for the most part.

As one who’s been dabbling in investment now for the past eight years or so, here are a few tips for getting started with your investing.

Set up 401k Contributions: These are offered through your job. If you are working a full-time job, you’ll likely have the option to contribute to a 401k retirement plan. These plans allow employees to contribute a portion of their income to an individual account, often matched up to a certain percentage by employers. The idea is to access these accounts at retirement. Usually, the contributions are set and taken out before a check arrives in your inbox or bank account. It’s the ultimate “set it and forget it,” and I would encourage you to contribute the maximum amount you can.

Contribute to a Roth IRA: Similar to a 401k, the Roth IRA is a retirement account, but it has an annual contribution limit. Currently, you can contribute up to $6,000 each year. This money is taxed, so when it is withdrawn at retirement, it will be tax free. This is great incentive to save for the long term. Experts recommend the max contribution each year, as it is the best bang for your buck in terms of long-term savings. The Roth is especially popular for younger generations just getting started with investment. As of 2020, a single person making over $139,000 and a married couple making over $206,000 cannot use Roth IRAs as an investment tool. You can set up automatic contributions each month for this.

Contribute to a Traditional IRA: Traditional IRAs are similar to Roths, allowing people to contribute pre-tax dollars to a retirement account. There, investments grow, without tax penalty until retirement. This is another “set it and forget it” option (if you choose), allowing auto-payments each month. Unlike 401ks, however, both traditional and Roth IRAs will not be taken out prior to receiving your paycheck.

Buy Individual Stocks: Everyone is different when it comes to investing, but If you want to go beyond more mindless investing, it’s fun to start looking into buying individual stocks. This means keeping an eye on the market and companies that are public, meaning they are open for buying. A good example of the opportunity here: If you had purchased a single share of Coca-Cola for $40 back in 1919 when it was first available, that money would have grown to nearly $400,000 by 2020. Not every stock is going to be as wildly successful as Coca-Cola, but that is the fun of the stock market. It doesn’t have to take that long. I bought two shares of Amazon in 2017 at less than $1,000 each and my shares are now both worth over $3,000. This means I’ve made $4,000 since my purchase. Stocks can be risky, but if you have some money to play with, this can be to your benefit in the long run.

Contribute to a 529 plan: Got kids? The best thing you can do is start a 529 college savings plan, where you can contribute pre-tax dollars to an account that grows over the years to provide an investment plan they access when it’s time for college. We all know how expensive traditional universities are these days – and they aren’t getting any cheaper. I contribute a small amount for each of my kids each month, so at least we’ll have some footing on the cost of college when the time comes.

Use an Investing App, like Acorns: Whether you have any of the plans mentioned above or not, an investing app like Acorns makes it easy to make sure you are making the most of your money. For example, Acorns will round up all your purchases and invest the leftover change. If your coffee order was $3.75, Acorns automatically takes the leftover $0.25 from your bank account and adds it to your investment plan on their app. There are also other options on how to mindlessly add funds without feeling like you are “losing” money in the process.

Diversify Your Portfolio: You have heard this term used before – and it’s sage wisdom. Because we are relying on the market, we don’t want to put all of our eggs in one basket. Be sure you are investing in different places. You might want to work with a financial advisor to set up plans that include a variety of portfolios. This way, if one investment doesn’t go so well, you’ve got backup plans to ensure a safety net.

Read, Read, Read: The only way to get better at investing is to pay attention. Watch economic news, check the markets, subscribe to the podcasts. The more you learn about how investing works–and the ups and downs of the market–the better you will be at making the best decisions for your money.

With all of these investment plans, you have the option to be plugged into investments that are on a scale from risk-averse to more risky growth plans. Financial experts often recommend younger individuals choose higher risk plans, simply because the stock market is a long game. You could lose more, but it also offers the most opportunity to make money over a long period of time. When you are young, there is plenty of time to see your investments through the highs and lows of tumultuous times. You usually won’t be accessing those funds until retirement, so taking a chance on more risky investment plans is also an opportunity to make a lot more money in the long term.

Want to learn more? Check out Ericka’s interview with financial expert and The New York Times best-selling author Carol Roth!