Young Investor’s Guide to Building a Financial Future Part 1: Where Do You Start?
The future’s looking seriously bright for younger investors! A 2024 analysis by the Investment Company Institute reveals that, after adjusting for inflation, Gen Zers have almost three times more retirement assets than Gen Xers did at their age. That’s a game-changer, and we think it’s largely thanks to improvements in the retirement system. With defined contribution plans like 401(k)s and employee stock purchase plans becoming more common, it's now easier than ever to start and build your savings.
But let’s be real—if you’re new to investing, the sheer volume of information out there can be overwhelming. Where do you even start? Don’t worry, by understanding a few basic principles, you can cut through the noise and set yourself on the path to a healthy financial future.
Ready to jump-start your financial journey? In this first part of our two-part series, we’ll dive into three essential concepts for young investors:
• Starting off on the right foot by avoiding debt
• Harnessing the power of long-term investing
• Maximizing tax-advantaged accounts
Avoid the Vicious Cycle of Credit Card Debt
Debt is like a shadow that looms over your financial life. Every dollar you put towards paying off a credit card bill or car loan is a dollar that can’t grow for Future You. That’s why minimizing bad debt is step one in building a strong financial future.
Now, not all debt is created equal. Low-interest student loans can be a worthwhile investment in your future, helping you land a rewarding career. Similarly, a reasonable mortgage can help you buy a home and build equity. But high-interest credit card debt? That’s a financial black hole.
Credit cards offer revolving credit, meaning you can carry a balance month to month. Pay it off in full each month, and you’re golden. But carry a balance, and you’re looking at interest rates that can easily exceed 20%. That interest compounds, making it harder to pay off your debt.
Making only the minimum payments? That’s a trap. For instance, if you owe $1,000 on a credit card with a 20% interest rate and only make minimum payments of 2%, or $20, it’ll take you over 16 years to pay off that debt. And you’ll end up paying more than double your original debt in interest alone.
In short:
Use high-interest debt cautiously. Aim to only use your credit card when you know you can pay off the balance quickly. This keeps you out of the debt cycle and frees up cash for investing in your future.
Stay Invested for the Long Haul
As a young investor, you might not have a lot of money to start with. But you’ve got time on your side. With decades until retirement, even modest investments can grow significantly thanks to the power of compounding returns—earning returns on your returns.
The longer your money stays invested, the more it benefits from compounding. And in tax-advantaged retirement accounts, this growth is even more powerful due to tax-deferred or tax-free growth.
Here’s a mind-blower.
Imagine starting with a penny and doubling its value every day for 30 days. At the end, you’d have over $5.37 million. Add one more day (like in July), and you’d have more than $10.7 million. Now, while your investments won’t double daily, this illustrates the power of compounding over time.
Still not convinced?
Consider the Rule of 72, a simple way to estimate how long it will take for an investment to double. Divide 72 by your average annual return rate. For instance, if you earn an average annual return of 8%, your investment will double in approximately 9 years (72/8 = 9). Starting with $10,000, you’d have $20,000 in 9 years, $40,000 in 18 years, $80,000 in 27 years, and so on. This too demonstrates how compounding and time work together to significantly grow your investments.
In short:
The longer you stay invested, the more your investments can grow exponentially thanks to compounding returns.
Make the Most of Tax-Advantaged Retirement Accounts
The government wants you to save for your future, and they’ve set up some great tax incentives to help. Retirement plans like 401(k)s and IRAs offer significant tax advantages.
Employer-sponsored plans, such as 401(k)s, let you contribute pretax income. In 2024, you can contribute up to $23,000. Plus, many employers offer matching contributions. Don’t leave that free money on the table!
Your contributions and your employers aren’t taxed until you withdraw them, allowing your investments to grow tax-deferred. Withdrawals are taxed as ordinary income, but early withdrawals before age 59½ come with a 10% penalty.
For even more savings, consider traditional IRAs. These also allow pretax contributions (up to $7,000 in 2024), which can be tax-deductible. Investments grow tax-deferred, and withdrawals are taxed as ordinary income.
Roth IRAs are another fantastic option. Contributions are made after-tax, meaning no deductions now, but tax-free withdrawals in retirement. This is a great choice if you’re currently in a lower tax bracket and expect to be in a higher one in the future.
In short:
Max out your retirement plans to benefit from tax-sheltered growth. Don’t miss out on employer matches in your 401(k), and understand the tax implications of traditional and Roth IRAs.
Stay tuned for part two, where we’ll explore the importance of a diversified investment portfolio, the risks of speculative investing, and how to build a plan tailored to your goals.
Ready to take the first steps toward your financial goals? Reach out to set up a time, and let’s get started on securing your future!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.