Young adults face financial complexities such as student loans, new mortgages, or car debt, coupled with low-paying entry-level jobs. With so much on their plate, those in their early twenties might feel overwhelmed by the words “saving,” “retirement,” or “investing.” If you’re in this situation, is it too early for you to start investing?
Paying off debt vs. investing
If you’re paying off debt, it may seem counterintuitive not to put every cent towards that goal. The key is to make sure that the amount you earn in interest in your investments is larger than the amount you are paying on your debt. Michael Kern, founder of Talent Financial, says, “The return you get from investing in the stock market varies greatly, but most people say you can conservatively expect around 5 to 7 percent return. So, if your debt carries about the same interest rate as the average return on the market, then it makes a lot of sense to pay it off rather than invest.”
For example, let’s say you have a mortgage at 4 percent. With an average 401(k) you can earn an interest rate between 5 and 7 percent and take advantage of employer matching. In this situation, it might make sense for you to opt for a lower monthly mortgage payment and put your extra dollars towards investing.
Steven Nuckols, founder of Wealth Compass Financial, says, “If you had the money to pay cash for a house, you would save on the 4 percent interest, but you would have an opportunity cost of 10 percent on average by passing up on investing in the stock market. You would also be passing up the tax write off of a mortgage interest deduction.”
However, other factors to think about before this decision might include taxes associated with investments, the reliability of your income, and the emotional security that comes from living debt free.
Some debt, like credit card debt or personal loans, carries high interest rates. Financial advisors like Rick Vazza of Driven Wealth Management agree that debtors should strive to pay off their credit cards as soon as possible. Vazza says, “Without question, we always encourage paying off credit card balances prior to investing. Most of the rates are into the 20 percent [range] and an investor will benefit from paying these balances off prior to investing.”
Logic proves that you can’t live a normal life now if you put all your money to saving for the future. Everyone has monthly bills. In contrast, it’s unwise not to save any money for the future. Gage Kemsley, vice president of Oxford Wealth Advisors, says that young adults must learn to “balance between paying off debt and saving for the future. I usually see the scale tipped too far one direction — someone throwing their entire paycheck to the debts they owe, like a mortgage, car or student loan with nothing going into their 401(k), Roth IRA, or savings account.”
Matt Ruttenberg, a financial expert and co-founder of The Money Twins, recommends keeping in mind your short-term savings goals so that you won’t need to take out your long-term savings or investments. “Many young families know there are a lot of things to check off the ‘grown-up financial checklist’ and investing for retirement is usually what comes to mind first. But most of the time, that is their longest-term goal. And, when it comes time to check off their short-term goals, like purchasing a home, they tend to pull money from their long-term bucket. This can be a very costly mistake with taxes and penalties from the IRS when cashing in your retirement accounts too early.”
Russell Robertson, owner of ATI Wealth Partners, adds, “I tell clients that investing should only be undertaken with long-term money; that is, money that they don’t plan on touching for at least two years. I tell people to have 6 to 12 months of expenses in cash as an emergency fund, then additionally keep any money you know you will need in the next one to two years in cash as well.”
A great option to grow your short-term savings is to put your money in a high-interest savings account such as those provided by many online banks. See our rankings of the best online banks here.
In regards to preparing to invest by creating an emergency fund and making sure you have enough money for upcoming purchases and bills, Jonathan DeYoe, author of Mindful Money, says, “Saving is not the same as investing. Saving is a prerequisite to investing.”
Starting to invest
If you want to invest, make a monthly budget of your expenses and income. This will show you how much you have left to put towards investments and where you can cut back on spending. With a budget in place, you can make a plan for your investments. Azhar Hirani of ZT Corporate advises, “For young adults who are interested in investing, the number one piece of advice is to get a plan down. It is important to have a clear picture of what you are trying to achieve in the long and short-term. Short-term investments mean that you’ll expect a return within five years. Examples of short-term investments include high-yield savings accounts, CDs, money market accounts, treasury bills, and government bonds. Long-term investments are equity type investments, such as private equity funds, stocks, real estate, etc. — returns that increase over time.”
Automatic investments make investing simple. Jeff Badu of Badu Tax Services says, “Set a monthly budget and put an investment amount (say $5 a day) in the budget. You can start small and increase your investments as your income increases. Try to use an automated investment app, which will make this similar to how people contribute to their 401(k)s. Once you establish a habit of investing, you’ll be an investor for the rest of your life.”
As you begin your investment journey you must remember that it’s just that, a journey. Patricia Russell, founder of FinanceMarvel, says, “It is important to remember that investing is the proverbial marathon as opposed to trying to find a stock that will double overnight.” Robert Johnson, a finance professor at Creighton University, says, “Trying to pick winners, for most, is a loser’s game. The solution is to invest in diversified funds and you don’t need to pick those winners.”
Todd Murphy, a financial advisor, talks about what a diversified stock portfolio looks like: “ a good investment portfolio of 50 percent large U.S. companies (S&P 500 Index), 30 percent mid-sized U.S. companies (Russell 2000 Index), and 20 percent international companies (MSCI EAFE Index – Europe, Asia & Far East) has historically earned about 6-7 percent compound annual growth.”
David Bakke, an investment expert at Money Crashers, says to watch out for fees when you’re investing, “One key thing to look for is a low expense ratio (which is basically the fees needed to manage the account). What you want is one that is 0.50 percent or less.”
Other kinds of investments
Remember that not all investments include putting your money away to earn interest. As an up-and-coming professional you can invest in higher education, certifications and licenses, business ventures, and opportunities to increase your earning power.
Bobby Casey of Global Wealth Protection agrees that not all investments look like stocks: “You need to focus on building a business or capital assets that can create passive income for your future. There are many avenues to achieve this; build a business that you later sell for $X millions, build a real estate portfolio, or build a cash flow business that is not directly tied to your time input.”
A financially stable foundation now will positively influence the rest of your life. Is it too early to start investing? The experts say no. You have investment options for any stage of financial growth.