Young adults have weathered difficult times the past two decades: mass school shootings, extreme weather conditions, student loan debt and a global pandemic. But now they’re witnessing an unprecedented job market, where even those with little to no work experience can dictate their own terms.
It’s important that we steer our young adults to good saving and investing habits now, while they have the capacity to earn increased income. This job market may not always be the reality, so it’s good to build a treasure chest when they have the opportunity. Here are some tips to get them started:
Invest when you’re young. You don’t have to wait until you have a lot of money — power of compounding interest makes time your greatest ally. When you start early, you can accumulate substantially more wealth with less invested capital than if you start investing later. In fact, you can start small — $50 to $100 a month — and increase the amount as you earn more. Investing regularly and automatically allows your money to work even harder than you do. The advantage of starting an investment program before you start making a lot of money is that you learn to live on less. Always strive to live below your means.1
Many graduates just starting out in the work world barely earn enough to make ends meet. There is one way to empower your ability to save a portion of what you do earn: Take control of your vocabulary. Instead of saying, “I can’t spend that much money” for something you want, say “I don’t want to spend that much money.” The second version implies that you are making a choice, and you choose not to overspend.2 We’d be happy to help you open an investment account and determine where to invest your savings every month. It’s never too early to start and no amount is too small to get started.
Diversify. Don’t invest all your money on one big stock tip you read about or receive from a friend. Spread it out over a portfolio of investments, which is less likely to lose money. The market will go up and down, but the way to protect your portfolio is to have some investments performing well while others don’t. The easiest way to do that is through a mutual fund or exchange-traded fund (ETF).3
At some point, you’ll want to establish a strategic asset allocation. There are three basic types of assets: stocks, bonds and cash instruments (like CDs and money market accounts). Stocks represent the biggest risk — meaning a higher chance of losing money for the potential of higher gains — followed by bonds, then cash. As a general rule, the younger you are, the more you’ll benefit from a higher allocation to stocks, but you may want to allocate a portion to bonds and cash as well.
It’s particularly important to establish an emergency fund for your cash account. That way if any big expense comes up — like a car repair — you won’t have to tap your investments to pay for it. The longer your money stays invested, the better its potential to grow (and the lower your risk of losing it). Asset allocation is similar to diversifying your investments, but it’s more strategic because you maintain that balanced mix of stocks, bonds and cash.
Invest tax deferred. Even if your employer doesn’t offer a retirement savings account, you can open your own. Anyone with earned income under age 50 can contribute up to $6,000 a year to an Individual Retirement Account (IRA), in which you choose which securities to invest. With a “traditional” IRA, you can deduct that amount from your current income taxes, and the account grows tax-deferred until the money is withdrawn. If you open a Roth IRA, you don’t get the tax deduction, but you won’t have to pay taxes on withdrawals (as long as you don’t take out money for at least five years from your first contribution).5
Whether graduating from high school or college, or transitioning with some time off, don’t get too wrapped up in the pursuit of money. Pursue your interests, and the money will likely follow. Invest time in learning about the job(s) that interest you while also investing in meaningful friendships and worthwhile hobbies that develop healthy habits and expose you to new opportunities. Start now and your rewards will grow with time. Your career, friends, family and activities are all seeds you plant now for a secure and happy future.6