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I am young, live on my own and have a couple of extra bucks...what should I do?
I am starting my career and living on my own, what are some good investment tips to consider when planning for my future. Are there better options than Roth IRA or 401K. Should I be playing the stock market? If so...what are the best options to consider (offshore investing, blue chips, etc.)?
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3 Answers
John, Congrats on your new career, and your interest in starting a financial plan. Many people wait until in their 40's, 50's or even 60's to start planning for the future.
There is no right or wrong investment, it's what is appropriate for your time horizon, risk tolerance, etc.
If you believe that income taxes will increase in the future, Roth IRA is a good alternative. Many people make the mistake of socking away money into a tax deferred (really tax-postponed) acct such as Traditional IRA or 401k, only to find out when they retire that they are in a higher tax bracket than when they were deferring the money. If you postpone taxes from a 15% bracket to a 35% bracket, did you really help yourself?
The great American philosopher Will Rogers was quoted as saying "I am more interested in the return OF my money than the return ON my money". So build a base of cash reserves in a safe account, before you begin to invest large amounts into more risky options.
John--
Great question! I like where your head is at. Here are my thoughts as someone who’s also in your position. ..
Despite being young, it’s never too early to invest, so by merely looking ahead to your financial future you’re well ahead of your peers. While you may lack the base capital to invest substantially, try to put away 15% of your paycheck—a little less is fine, but aim to be above 10%.
Unlike someone in their 40’s or 50’s ROI should not be a major concern of yours right now. Stability and security should be the keys to your investment search more than anything. At the same time, however, don’t go pouring your money into a traditional savings account or start investing in T-Bills and other low-yield bonds. At your age, it’s OK to take some risk!
You mentioned that you’re thinking about at IRA or a Roth IRA?—both are common investment choices. Do be aware, though, of the common regulations and penalties guarding both of these options as they should greatly influence your decision. I will say this; the nice thing about IRA’s is that they allow you to borrow those restricted funds if you’re purchasing your first home, without paying the normal 10% early-withdrawal fee.
For a Traditional IRA, you can access up to $10,000 to put towards a purchase. Conversely, a Roth IRA must be opened for at least five years before you make a “qualified distribution” tax-free. As always with a Roth, you can remove your annual contribution money tax-free to put towards a home, but beware of conversion and earnings: they can only be withdrawn tax-free if they’ve been in the fund for at least five years.
When it comes to traditional stock-market plays, nothing is a “guarantee” anymore. The days of being able to expect at 20% return by putting your money in a Bank of America or a General Electric are gone in my opinion.
If the recent financial crisis has taught you anything, the diversification of your investments and an ability to maintain caution about the fiscal stability of large corporations will prove to be immensely valuable to your future—if you don’t believe me, ask some of the former employees of Lehman Brothers or Merrill Lynch.
So in closing, whether it’s a Traditional IRA, a Roth IRA, a mutual fund or your own stock purchases made through an E-Trade account; gamble conservatively and DO NOT put all your eggs in one basket.
My wife would disagree, tell you to invest in a number of targeted funds appropriate for your age, and continue to make contributions when possible to build a solid nest egg for yourself. After what I saw the past few years, my advice would be to stuff it in your mattress :)
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