Investing at a young age tips

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Saving for College If you are still trying to get through school or have not yet started, then there are several other vehicles for you to consider socking money into: Plans Every state has this type of college savings plan that allows you to put money away for higher education. It now covers K private education as well, but that likely won't be your problem.

The funds can be allocated among various investment choices and will grow tax-free until they are withdrawn to pay for qualified higher education expenses. The contribution limits for these plans are quite high, and they can also provide gift and estate tax savings for wealthy donors looking to reduce their taxable estates. Coverdell Educational Savings Accounts This type of college savings account is another option for those who want to take a more self-directed approach to their investments.

Savings Bonds These are yet another alternative to consider for conservative investors who don't want to risk their principal. The interest that they earn on U. Savings Bonds is also tax-free as long as it is used for higher education expenses. Short-Term Investments The alternatives for your short-term cash, such as an emergency fund, are pretty much the same regardless of your age.

Money market funds , savings accounts, and short-term CDs can all provide safety and liquidity for your idle cash. The amount you keep in these investments will depend on your personal financial situation, but most experts recommend keeping enough to cover at least three to six months of living expenses. Young investors should understand that over a long period of time such as their working years, investing in ETFs that track the market and letting dividends and interest build almost always beat a short-term stock trading strategy.

Although returns can be high, most day-traders bust within a year. In the worst-case scenario, they lose their entire principal and can even end up owing their brokerage interest on margin trades. The Bottom Line The most important decision you can make as a young person is to get into the habit of saving regularly.

What you invest in matters less than the fact that you have decided to invest. The right investments for you are going to depend largely upon your personal investment objectives, risk tolerance , and time horizon. Investing can be intimidating, but you don't need a degree in finance to start putting your money to work. Exchange-traded funds and mutual funds provide an easy way to keep pace with the overall growth of the stock market, and you don't have to go to the trouble of picking stocks on your own.

It's said that the only true miracle is compound interest. Young people may earn less money, but investing in your twenties will give your savings several decades to grow. Moreover, tax-advantaged retirement accounts and employer matching contributions give you even more reason to take advantage of those benefits. Investing can be a challenge for younger people because they tend to have little disposable income and they may encounter unexpected expenses.

However, putting your savings in the bank is not ideal, because these accounts do not accumulate significant interest. Once you do, the wisdom of starting your retirement fund as soon as possible will be undeniable. By making your money grow at a much faster rate than simple interest , which is calculated only on the principal, compound interest super-charges your savings—especially over time. Why start saving for your retirement in your 20s?

Again, because of the way compound interest works, the sooner you start saving, the less principal you have to invest to end up with the amount that you need to retire. Company-sponsored retirement plans are a particularly great choice. Not only do you get to put in pretax dollars which lowers the income tax you pay , but many companies will also match part of your contribution, which is like getting free money.

Those who are self-employed have a range of options for setting up retirement plans. Others can open their own IRAs, allowing for a set amount of money each month to be withdrawn from their savings account and contributed directly into their IRA. When a company offers you a starting salary, you need to calculate whether that salary will give you enough money after taxes to meet your financial obligations—and, with smart planning, meet your savings and retirement goals as well.

Fortunately, there are plenty of online calculators that take the grunt work out of determining what your after-tax salary will be, such as PaycheckCity. These calculators will chart your gross pay total earnings , how much goes to taxes, and your net pay earnings after taxes and other deductions, also known as take-home pay.

Then you need to consider city taxes as well. In the U. The amount will vary depending on taxes in your state of residence. Finally, take the time to learn to do your own taxes. Tax software has made doing your own taxes much easier than it used to be—and software also ensures that you can file online.

Guard Your Health If paying monthly health insurance premiums seems impossible, what will you do if you have to go to the emergency room—where a single visit for a minor injury like a broken bone can cost thousands of dollars? Look at quotes from different insurance providers to find the lowest rates.

Research all your options to see if you qualify for a subsidy based on your income. If you have health issues, know that a more expensive plan could be the most cost-effective in the end. If you can manage it, offer to reimburse your parents for the cost of keeping you on their plan.

It also makes excellent financial sense to build staying healthy into your daily routine as soon as possible. Common-sense health maintenance is very straightforward, and you've heard it all before. Eat fruits and vegetables, maintain a healthy weight, exercise, don't smoke, avoid excessive alcohol consumption, and drive defensively. Not only will you feel better physically right now, but these behaviors can also save you on medical bills down the road.

The plan also includes incentives for states that have not participated in the Affordable Care Act ACA expansion to do so, potentially extending healthcare coverage to over 3 million uninsured people. If you rent, get renter's insurance to protect the contents of your home from loss due to burglary or fire.

Disability insurance protects your greatest financial asset—the ability to earn an income—by providing you with a steady income if you ever become unable to work for an extended period of time due to illness or injury. If you want help managing your money , find a fee-only financial planner to provide unbiased advice. Unlike a commission-based financial advisor, who earns money when you sign up with the investments that their company backs, a fee-only planner has no personal incentive to give you financial advice that might not be in your best interest.

You should also protect your money from taxes, which is easy to do with a retirement account, and from inflation, which you can do by making sure that your money is earning interest. As you decide how to protect your savings, learn everything you can about relevant investment vehicles , because they all bring both different degrees of risk and different potential for growth.

For example, high-interest savings accounts, money market funds, and CDs are relatively free of risk; your money is safe, but it will grow slowly. On the other hand, stocks, bonds, and mutual funds are much riskier; the value of your portfolio could fall, but the potential for growth is much greater as well.

An excellent choice for a young adult is a fee-only financial planner. Unlike a commission-based advisor, who earns a commission if they sign you up with their company's investment plans, a fee-only planner has no personal incentive beyond your best interest, so they have no reason not to give you unbiased advice. Compound interest is one of the most powerful forces in finance because it grows your money exponentially, which means it can super-charge your savings, especially over time. The magic of compound interest for your retirement account is that it is interest on interest—literally.

You earn interest not only on the principal the money you put in , but also on the interest the money the bank pays you for holding your principal. The higher your salary, the higher your tax rate. If you just got a raise or took a new job at a higher salary, the change in the marginal tax rate on the additional income will definitely affect your paycheck.

Following these eight basic rules can put you on the path to financial security, which is the foundation that will allow you to build the rest of your dreams. Article Sources Investopedia requires writers to use primary sources to support their work.

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We made a comprehensive comparison between Betterment and Wealthfront right here. If you want to be more hands-on with your investing but can't afford a lot of stock, consider fractional shares. This is when you buy a portion of a stock for a fraction of the price. With fractional shares, you still own a portion of the company. Not every investing app or broker will let you buy fractional shares.

One great app that will also allow you to buy a portion of shares is Public. It also supports fractional share investing in stocks and ETFs. Buy a Home This one's kind of a mixed bag. On the positive side, owning a home lets you build substantial equity over many years. This is done by a combination of gradually paying down your mortgage and the value of the property increasing. Owning a home also has the advantage of leverage. That will increase your initial investment by a factor of But price appreciation of the property can make that number a lot higher.

The downside to buying a home when you're young is that you may not be at a point in your life when the relative permanence of homeownership will work to your advantage. For example, being early in your career, you may need to make a geographic move in the near future. If you do, owning your own home could make that move more challenging.

If you're single, owning a home forces you to pay for more housing than you actually need. And of course, a future marriage could also hold the possibility of making a geographic move or needing to purchase a different home.

Owning your own home is definitely an excellent investment when you're young. But you'll have to do some serious analysis to determine if it's the right choice at this point in your life. Open a Retirement Plan — Any Retirement Plan There are two primary reasons for doing this: getting an early jump on retirement savings and tax deferral. Being on that kind of fast track may even enable you to retire a few years early. But if you delay saving for retirement until age 35, the results are not as encouraging.

That's a compelling reason to begin saving for retirement as early as possible. Contribute as much as you can now and increase the amount as you move forward and your earnings increase. Tax Deferral The tax deferral angle is just as magical. A big part of the reason why that's possible is because of tax deferral. But let's say you choose to make the same investment each year in a taxable investment account.

That will lower the effective return on investment to just 5. What will the results look like after 40 years at the reduced after-tax investment return? Retirement Plan Options If your employer offers a company-sponsored retirement plan, this should be your first choice.

In addition to the tax deferral discussed above, retirement plan contributions are tax-deductible from your current income. A contribution of that size would produce a significant tax break. If you don't have a plan at work, consider either a traditional or a Roth IRA. However, the Roth IRA more than makes up for that lack of tax deductibility. Pay Off Your Debt One of the major investment complications for young people is debt.

But many young people also have car loans and more than a little bit of credit card debt. The problem with debt is that it reduces your cash flow. In a perfect world, you would have no debt at all. But this isn't an ideal world, and you probably do. If you do have debt and you also want to invest, you're going to have to find a way to create a workable balance.

It would be great to say that you'll just make your minimum debt payments and throw everything else into investments. That will certainly allow you to take advantage of the compounding of income that investments provide. But at the same time, there's an imbalance. Investment returns are not guaranteed, but the interest you pay on loans is fixed. One of the best investments you can make early in life then is to begin paying down your debts.

Even investing a small amount can make a big difference over time. By starting early and contributing to an appropriate savings or investment vehicle, the powerful effect of compound returns will grow your savings exponentially.

Here's how investing early can really pay off Opens in a new window. More benefits to starting early Beyond the clear advantage of compounded interest, starting to invest at a young age also helps you get into the responsible habit of saving and setting aside money for your future. You also have the flexibility to take on a bit more investment risk — like investing in stocks, which are generally riskier but also have the potential to generate more return over time.

For example, if your goal is to invest for your retirement, it is a long way off and your portfolio will have time to recover if the market gets volatile and your investments suffer. A few tips to get you started Taking advantage of dollar-cost averaging is a great way for new investors to get into the market.

This approach allows you to benefit from market volatility and price fluctuations to potentially lower the average cost of your investments. A simple way to get into this habit is to set up a regular investment plan so the process is more automated. Money is pulled from your savings or chequing account and deposited to your investment account at regular intervals.

It's an easy way to "set it and forget it" so that you easily introduce some discipline into your investment strategy. Part of developing good savings habits is to focus on paying yourself first — in other words, setting aside money for investment and savings before any other spending. Consider the possible benefits of setting up an automatic contribution to an RRSP and a TFSA, both of which allow you to contribute up to a maximum amount for each year while sheltering taxes on your investment returns.

Get your plan in order If you're ready to dip a toe in the investment pool, you'll first need to establish your financial priorities. For most people, that includes short-term goals like a vacation or a new car, medium-term goals like post-graduate studies or your first home, and long-term goals like retirement.

Determine how important each of these goals are and how much you'll need to save in order to achieve them. Build your portfolio Next, you'll need to make some decisions on how to invest your money.