Home > Insights > Investing > How to Invest When You’re Young

How to Invest When You’re Young

Young investor seeks investing tips

8 Tips for Investing Success

Young investors have a significant advantage when it comes to investing for the future: time. The sooner you start investing, the longer your assets have to grow and compound, which can significantly increase your wealth throughout your lifetime.

However, if you’re new to investing, it can be difficult to get started. With so many account and investment types, how do you know where to begin? The following tips can help you establish strong investing habits.

#1 – Make a plan.

The first step in developing a successful investment strategy is to have a plan in place. It doesn’t have to be complex, but it should guide your investing decisions. For example, determine a reasonable amount you can invest each month, then establish a strategy for doing so (for example, you could decide to automatically contribute a portion of each paycheck to an employer-sponsored retirement plan or investment account).

Whatever your plan looks like, make sure it’s one you can reasonably stick with. Also, understand that your plan will likely change as your life and financial situation evolve over time.

#2 – Establish an emergency fund.

While it’s great to want to jump right into investing, it’s important to take steps to help ensure your own financial security before you tie up your assets. Selling your investments at a loss to cover an emergency expense can derail your investment strategy for a long time, which is why it’s important to save for emergencies prior to investing.

Start by building up at least three to six months of expenses in a liquid emergency savings account. This fund offers the peace of mind of knowing you can cover unexpected expenses without disrupting your investments.

#3 – Start with your 401k.

One of the easiest ways to start investing is through an employer-sponsored retirement plan, such as a 401k or 403b. At a minimum, consider investing enough to take full advantage of any available employer matching contributions. For example, if your employer offers a 50% matching contribution on the first 6% you contribute, be sure to contribute at least 6% so that you can receive the full value of this benefit.

Another benefit of contributing to an employer-sponsored plan is that it’s typically effortless. Most employers allow participants to establish their desired deferral percentage and investment allocation then automatically transfer those funds to their retirement account with each paycheck.

Traditionally, 401k contributions are made with pre-tax dollars, which lowers your taxable income during the year in which contributions are made. Those assets then grow tax-deferred within the account and are subject to ordinary income tax rates when you withdraw them in retirement.

More recently, some plans have started offering the option to make Roth, or after-tax, contributions. While these contributions don’t lower your taxable income in the year they’re made, withdrawals during retirement are typically tax-exempt.

#4 – Open an individual retirement account (IRA).

Once you’re contributing enough to your employer-sponsored plan to take full advantage of any employer-matching contributions, consider taking the next step in your investing journey by opening an IRA. There are two main types of IRAs to consider:

  • Traditional IRA – Traditional IRAs are funded with pre-tax money, which can help reduce your taxable income in the year contributions are made. Withdrawals are then taxed at ordinary income tax rates when you withdraw funds in retirement (at age 59 ½ or later). Once you have retired and reached a certain age, the IRS mandates that you begin withdrawing a portion of the account each year, which is referred to as a required minimum distribution (RMD).
  • Roth IRA – Contributions to Roth IRAs are made with after-tax funds. While these contributions don’t reduce your taxable income during the year in which they are made, withdrawals in retirement are typically tax-exempt. Roth IRAs aren’t subject to RMDs, which means your money can continue growing indefinitely to fund your retirement. Also, there are certain circumstances under which you may be able to withdraw Roth funds prior to age 59 ½ if needed, such as to pay for a first-time home purchase, qualified education expenses, medical expenses, etc. (although you’ll still need to pay taxes on any earnings disbursed).

#5 – Open a taxable account

There are different terms for this account type, so you may also have heard it referred to as a “brokerage account.” You’re only able to put so much money in an IRA or Roth IRA each year, and you usually can’t access the money without a penalty and tax implications until you’re 59 ½. If you’re potentially saving for a house, a car, a vacation, etc., it may be beneficial to also have a taxable account. This way, you’re able to access the money at any time, and for any reason, if you aren’t yet age 59 ½.

#6 – Look for low-cost investment options.

Once your accounts are established, it’s important to select the right investments. Fees should play an important role in your decision.

If not carefully monitored, investment fees have the potential to significantly erode your returns over time. That’s why it’s important to look for low-cost investment options whenever possible. For many young investors, it makes sense to invest in index or exchange-traded funds.

  • Index funds – Low-cost funds designed to mimic the performance of a particular market index, such as the S&P 500.
  • Exchange-traded funds – Pooled investment vehicles that provide low-cost, diversified exposure to a variety of stocks, bonds and other investments.

#7 – Diversify.

Regardless of your age or where you are in your investing journey, it’s important to maintain a diversified investment portfolio. Investing in different types of assets can help spread out your risk, because when one investment type is performing poorly, another investment type that’s performing better can help smooth out your portfolio’s overall volatility. While diversification won’t prevent losses, it can reduce your risk of being too heavily invested in the worst-performing part of the market.

To achieve adequate diversification, consider combining stocks with bonds, large company stocks with small company stocks, U.S. stocks with international stocks, and investments from different sectors, such as technology, financial, energy, healthcare, etc. It’s also important to be aware of the underlying holdings in any funds to help ensure you’re not overly weighted in a certain area.

Also, don’t forget that diversification should occur across all accounts within your portfolio. For example, if you’re heavily invested in your employer’s stock within your retirement plan, it may make sense to increase your allocation to bonds within your IRA or taxable account. You’re able to have cash, stocks and bonds in your retirement accounts and taxable accounts.

#8 – Gradually increase your contributions.

Another smart move is to gradually increase the amount you invest over time. Each year, set a goal to increase your investment savings by 1% to 2%. These small, regular increases can have a big impact on the value of your portfolio over time, and you’ll be unlikely to even notice the difference in your net income.

Could you use some help beginning your investing journey? Creative Planning is here for you. Our experienced professionals serve as fiduciaries to clients, which means your best interests come first. We understand it can be difficult to take the first step in building an investment portfolio, and we’ll work with you to establish a strategy to support you exactly where you are in your investing journey while helping you prepare for your future goals.

To get started, schedule a call with a member of our team. We look forward to getting to know you.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


Find out how Creative Planning can help you maximize your wealth.

Latest Articles

Ready to Get Started?

Meet with a wealth advisor near you to see if your money could be working harder for you. Receive a free, no-obligation consultation.


Prefer to discuss over the phone?