Young Investor’s Guide: Investing For Your Goals
In the second part of this young investor series, we discuss three more investment concepts every young investor may want to embrace.
The future looks bright for younger investors. A 2024 analysis by the Investment Company Institute found that, adjusted for inflation, Gen Zers have nearly three times more retirement assets than Gen Xers did at the same age. That is a seismic shift, and we would propose it is largely due to improvements in the retirement system. For instance, defined contribution plans (think 401(k)s) as well as employee stock purchase plans are more common, providing you with a relatively easy way to start and build your savings.
Even so, if you are new to investing, it can be tough to know where to get started. There is so much information and advice out there, and it is hard to know what makes the most sense for you. The good news is that getting familiar with a few basic principles can help you see past the information overload and set you on the path toward a healthy financial future.
Let’s jump-start your efforts! In this first of a two-part series, we will tackle three important concepts for young investors to know about:
The debt you carry directly impacts every facet of your financial life. Put plainly, every dollar you put toward paying down a credit card bill or car loan is one less dollar that can grow to benefit Future You. That is why minimizing bad debt is the first step toward building a strong financial future.
Note that we said “bad debt.” The truth is, not all debts are bad. Low-interest student loans, for instance, can help you receive the education you need to follow a rewarding career path and earn income. And reasonable mortgages can help you buy a home and build equity. On the other hand, high-interest credit card debt can quickly become very expensive, and severely hamper your ability to make other, more important financial moves such as saving and investing.
Why is credit card debt so bad? Credit cards are a form of revolving credit. They allow you to carry a balance from month to month. If you can pay your balance off every month, you will not owe interest. But if you carry a balance, you will pay interest on that balance, often to the tune of 20% or more. That interest will be tacked on to your total bill, which will then continue to accrue interest.
What is more, credit cards allow you to make minimum payments equal to a percentage of your total balance. If you get in the habit of only paying the minimum every month, your debt load will only grow greater over time. Using this Bankrate calculator, let’s say you have $1,000 in debt on a credit card with a 20% interest rate. If you only make minimum payments of 2%, or $20, per month, it will take you 195 months, more than 16 years, just to pay off this single debt. And in that time, you will have paid $2,126.15 in interest, more than double the amount of your original debt.
In short: Use high-interest debt carefully. And if you can, only use your credit card when you know you will be able to pay off your balance in short order. That way, you will avoid getting trapped in a cycle of debt, and you will have more cash available to meet other goals, including investing for your future.
As a young investor, you may not have much money to invest. But what you may lack in resources, you more than make up for with time. With decades until retirement, the modest investments you make now can grow substantially over time.
This is thanks to the incredible power of compounding returns, or the return you earn on your returns. Indeed, the longer you can keep your money invested, the longer you can take advantage of compound growth to propel exponential growth in your investments. In tax-advantaged retirement accounts, these benefits are magnified as tax-deferred and tax-free growth allows even more money to compound over time.
You may be skeptical about just how important compounding can be. Consider this example.
If you start with a humble penny and double its value every day in June, you will end up with a cool $5.37 million by the end of the month. If you started this one-month savings journey in July, which has one more day than June, you would finish with more than $10.7 million. Of course, chances are slim to none that your investments are going to double every day. But the fact remains that compounding is one of the most powerful financial tools at your disposal. And when you pair compounding with time (remember that extra day in July?), the results can be even more impressive.
In short: The longer you stay invested, the more your investments will have a chance to increase exponentially, thanks to compounding returns.
The government wants you to save for the future. To encourage you to do so, retirement savings plans, such as 401(k)s and individual retirement accounts (IRAs), offer big tax advantages that can save you money today and compound the growth of your savings for tomorrow.
Employer-sponsored plans such as 401(k)s allow you to contribute pretax income to your account. In 2024, you can contribute up to $23,000. Better still, your employer may offer matching funds. Contribute enough to receive these matches and avoid leaving extra money on the table.
Come tax time, your and your employer’s contributions are not reported as taxable income. Investments held inside the account grow tax deferred. You will not have to pay any taxes until you start taking withdrawals from that account. The result? More money is available to work for you, and to benefit from the powers of compounding. Eventual withdrawals are taxed at ordinary income tax rates. But beware that making withdrawals before age 59½ can saddle you with an additional 10% early withdrawal penalty.
If you want to save even more, check out traditional IRAs. Like 401(k)s, traditional IRAs also allow pretax contributions (you can contribute up to $7,000 in 2024), and those contributions may be deductible on your taxes depending on your circumstances. Investments in the account grow tax-deferred, and withdrawals are taxed as ordinary income. Again, taking your money out early can trigger a penalty on top of your tax bill.
There is one more account to get to know: Roth IRAs. Unlike traditional IRAs, you make Roth IRA contributions after tax. That means you cannot deduct those contributions on your tax return. But it also means you will not owe taxes when you start taking withdrawals in retirement. In the meantime, just as with a traditional IRA, your Roth investments grow tax-free along the way. This can be a great trade-off if you are a younger investor who has not hit your peak earning years, and you are still paying a relatively low-income tax rate.
Here is another benefit of Roth IRAs. After your account has been open for five years, you can access your principal contributions penalty-free, though you will pay a penalty if you tap into your investment gains before age 59½. We would add a caveat here. Tapping your retirement funds should typically be a choice of last resort. Since the point of any IRA is to save for retirement, your Future You will thank you if you avoid thinking of your Roth as a resource for pocket money along the way.
In short: If possible, max out your retirement plans to take full advantage of their powerful, tax-sheltered compound growth over time. Also, avoid leaving money on the table if your employer is offering to match your 401(k) contributions.
In the second and final installment of this series, we will take a look at the importance of building a diversified investment portfolio, why speculating can harm your long-term prospects and how to build an investment plan that meets your individual goals.
This post was written and first distributed by The Writing Company.
DISCLAIMERS
This material is intended for general public use. By providing this material, we are not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. This is not an offer to buy or sell a security.
Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.
In the second part of this young investor series, we discuss three more investment concepts every young investor may want to embrace.
During this series, we have learned that our own behavioral biases are often the greatest threat to our financial well-being.
In the final installment of our Behavorial Biases Series, let’s take a deeper dive in sunk cost fallacy and tracking error regret.
In this installment of our Behavorial Biases Series, let’s look at overconfidence, pattern recognition and recency.