This post comes from Stephanie Halligan at our partner site Quizzle.com
“You want me to do what with my money?”
It’s a natural response from millennials when told they should start investing while their young. Most of today’s 20-somethings, still scarred from the stock market collapse in September 2008, are down-right scared to put any of their hard-earned money into what seems to many as a risky financial move. Compounded by the fact that many millennials witnessed their parents lose considerable wealth in the market crash, it’s no wonder that more than half of millennials reported that they were less-than-confident about putting their money in the stock market.
Yet simple math shows that investing as a twenty-something is the best strategy to help build wealth over the long-term. Even the most conservative estimates of historical returns on the stock market show that compounding returns and investing early can mean a cushy retirement later.
So what’s a first-time, frightened young investor to do? If you’re a newbie investor and you don’t know where to begin, here are a few simple steps you can take to start building a portfolio:
- Sign up for your employer’s retirement plan and max out your retirement match. Your employer’s retirement plan, if that’s available, is a simple way to start investing your money. Most employer-sponsored plans will offer you a diverse set of investment options, which means you may be handed a stack of detailed (and confusing) paperwork to pick out your investments when you enroll. Don’t panic! In the packet, you’ll usually receive a guide or even investment options based on your age and risk tolerance. Don’t let information overload stand in your way of opening up an account. The important thing is to just get started, and you can always re-allocate your money later. If you’re deciding how much you want to contribute to your retirement plan, be sure you max out any retirement match offered by your company. That’s free money!
- Take advantage of tax-advantaged investment options, like Roth IRAs. Roth IRAs provide significant tax benefits, especially as a younger investor. Unlike an IRA (or 401k), where you invest money before taxes, a Roth, let’s you set aside after-tax income for retirement. You pay taxes upfront today and at age 59 ½, your earnings and withdrawals come out tax-free. Why exactly would you want to pay taxes today when you could wait until later? If you’re not earning a lot of money today, you’ll likely earn more when you’re older – which means your tax rate will likely go up as you get toward retirement. Paying taxes today means you’ll likely get more money in the future.
- Invest in inexpensive and well-diversified mutual funds. If you’re scared of taking a risk with your money, consider investing in more diversified, conservative options like mutual funds. Mutual funds tend to have less expensive management fees and your funds are diversified across multiple investments, so you’ll have considerably less risk than you would investing in an individual stock.
- Be consistent. A little bit of money invested overtime can go a long way, especially if you’re consistent. This is where dollar-cost averaging comes in, which means you contribute consistently to your portfolio, regardless of whether the market is up or down. If you contribute $100 to a mutual fund every single month, your returns will even out in the long-run. Remember: investing is a long-term strategy, so don’t let market hype or scary headlines stop you from building your portfolio today.
More from Quizzle: