Fears That Prevent You From Investing
Its hopefully no secret that investing is the way to build wealth. Stock piling your money in a savings account wont help you become a millionaire, or even help you achieve your financial goals. Unfortunately, there are a lot of concerns and excuses that young professionals like to throw around that keep them from investing. I hope to dispel a couple of them in this post and to help motivate you to look at investing!
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Invest In The Stock Market Using Taxable Investment Brokerage Account
Once you have your first two retirement accounts in place, it’s time to start your non-retirement investment account. Traditional brokerage accounts allow you to buy and sell stocks, ETFs, mutual funds, bonds, and sometimes other assets.
Unlike the pre-tax and post-tax accounts above, there are no tax advantages with a traditional brokerage account. You have to pay capital gains tax on any profits, though you can offset profits with any losses you incur. But you can also buy and sell at any time with no restrictions. Tax-advantaged retirement accounts make you leave your money until you reach the government’s retirement age or face tax plus penalties for early withdrawals.
The freedom and flexibility of this type of account let you grow your money with few restrictions. You have to pay taxes when you make the right call and strike it rich in the markets.
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Should You Invest In College
If youre thinking of investing or youve already started, you have an advantage most investors dont have time. Weekly courses and exams might make it difficult to establish a solid source of income, but you also likely have plenty of free time that those working full-time jobs dont have. You can use this time for investing. Starting sooner rather than later could be great for your future finances. Even if youve never invested before, starting early may give you a bit of experience and financial cushion. In fact, the legal age to invest is 18 in most states, so you should be able to invest even if youre a first-year student.
But how much does it cost to invest? Many college students, though interested in investing, likely fear they may not have enough money to actually invest. This is understandable, but its also important to consider that not all company shares cost hundreds of dollars. Because share prices vary for different companies, you wont have to break the bank to buy equity. In fact, even blue-chip stocks sell for a range of prices. For instance, while runs more than $1,900 per share, a company like Macys only offers shares for about $21. The amount of money youll spend ultimately depends on the company you choose.
What Are Some Of The Most Popular Assets To Invest In
Stocks
And finding the right businesses to buy stock in isnt particularly easy. Still, if you can get it right, investing in stocks is where youll make the most money. We share tips on how to do that later in this post as well!
Mutual Funds
As a beginner investor, mutual funds are typically a good place to start. Thats because, when you buy mutual funds, you contribute to a pool of investor funds that a professional fund manager uses to invest in multiple assets.
The professional fund managers also take care of all important investment decisions for you at no extra cost. In other words, with mutual funds, you get a balanced investment. And you get that without needing to do as much work or take as much risk as you would if you were purchasing individual stocks.
Index Funds
Index funds are fairly similar to mutual funds. The main difference between the two lies in the investment strategy. When you buy a mutual fund, youre essentially investing in the company that manages the fund. You trust that they will use your money to invest it in a way that benefits you down the line.
On the other hand, when you purchase index funds, youre investing in all of the stocks of a particular , such as the S& P 500. The risks and costs of investing in index funds are also relatively low, making them another good option for beginner investors like yourself.
Exchange-Traded Funds
Target-Date Funds
Bonds
Certificates of Deposit
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Choose What To Invest In
You know your options: stocks, mutual funds, index funds, ETFs, and bonds. Most robo-advisors and micro-investing apps will offer suggestions on what makes the most sense for your unique profile. But, if youre taking a more hands-on approach, youll need to research what type of investment makes the most sense for you.
If youre unsure, your best bet is to start with mutual funds. By nature, mutual funds are great for beginner investors because they allow you to invest in a balanced portfolio of stocks and bonds. And if you want to be safer, remember you can always choose to work with a professional financial advisor.
Investing Money You Need In The Short Term
Remember: there is no guarantee that youll make money right away with investing. Youve got to stick it out of the long-haul if you want to see any significant value. In fact, in the short term, you could even lose money if the market drops. So, dont invest any money that youll need anytime soon.
For money that you might need soon, youre better off putting it into a high-interest savings account. In that type of savings account, youll still be able to collect some interest albeit a small amount while still having the assurance that it will be there when you need it.
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Ways To Save & Invest For College
Just as you want to combine multiple sources of funding for college costs, you should also combine multiple investing strategies for setting aside your own money.
Many middle-income parents jump straight to 529 plans and Coverdell Education Savings Accounts and ignore other options. These tools have their roles to play, but they also come with usage restrictions.
In a perfect world, you dont pay a cent in net tuition costs because you and your child cover them through more creative options. In that case, the money you set aside in the investment vehicles below can go toward your retirement and your childs inheritance, rather than contributing to administrative bloat at your childs college.
Investing As A College Student
A GFC reader recognized the importance of college students investing money, and asked the following question:
Hi Jeff. What is the best investment advice I can give my 2 college kids? They are still in school but work making just under a couple hundred bucks a week. Both are pursuing doctorates so loans are going to be quite large. What is the best investment plan they can start now? Also, regarding Roth IRA, can you have more than 1 and is $1000 the max initial investment? Thanks.
I love questions like this, because they take us in directions that we never expect to go and thats usually exactly where we need to go. The more I got to thinking about this question, the more important I came to realize the topic is.
Its not always possible for college students to begin investing because of finances, the question of how to make money in college can be hard. But for those who choose to invest in college, its actually a brilliant strategy on a number of fronts.
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Tips For Saving For College
No matter what vehicle you choose to invest in, here are a few general college-savings strategies to keep in mind:
- Start early. The sooner you start saving for college, the more time and opportunity for your investments to grow. Every dollar you save is one less dollar you or your child might need to borrow, and repay with interest.
- Be mindful of risk. Retirement savers generally move out of higher-risk investments and into lower-risk ones the closer they get to retirement. Use the same approach with college savings: You have time to bounce back from a market downturn when your kids are little, but you don’t want that risk when the tuition bills start coming in.
- Invest consistently. Set up regular, recurring contributions — whether it’s $50 a month or $500. Doing so makes it a habit and reduces the risks associated with trying to time the market.
- Make sure it’s liquid. Since timing is important, liquidity is key for these investments. Be sure you can access the money when you’ll need it by freshman year.
Tax Benefits Plus What To Watch Out For
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For many, college is one of the best times of a persons life but it can also be extremely expensive, and that bill could last a lifetime.
If you expect to be footing at least part of the cost, education planning is crucial to reducing or avoiding the hard hit to your wallet when the tuition bill comes. A 529 plan is one smart way to save, invest and pay for those expenses in a tax-advantageous way.
This is what you need to know and the pitfalls to avoid.
There are two major types of 529 plans, both of which are offered by state governments: a prepaid plan, where the investor picks a specific school before funding the account , and an education savings plan, where money is invested immediately and there are few limits on what school is eventually chosen.
The pros and cons of prepaying college tuition
Prepaid plans can sound like a great idea if youre worried about ever-rising tuition bills. But fewer and fewer states still offer them, and the plans that survive are very restrictive. Admission to that school isnt guaranteed, of course, and if a student opts to study elsewhere, the person who set up the plan can lose money. Any earnings that are distributed for non-qualified reasons, like those not put toward tuition, are taxed and incur a 10% penalty.
Keep in mind though: Only nine states offer prepaid 529 plans as of now, and the beneficiary is restricted to using the money for tuition at an in-state college. Basically, read the fine print.
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Start Saving For Your Childs College Early
Ideally, the best time to start a college fund is when your child is born. With compound interest and regular investments made monthly or yearly, the funds have an opportunity to grow over a longer period of time, and you dont need to put aside as much each month or year to reach your savings goal.
Your funding can be modest, and many parents find they can afford $25$100 from each paycheck, automatically deposited into the college savings plan of their choice. If you get a raise or bonus, that money can also be allocated toward college savings.
Family members can contribute to a child’s college savings by opening their own 529 plan accounts. They can also make contributions to an established 529 account under the child’s parents’ name, if the plan that the parents use accepts third-party contributions.
Some plans don’t accept these contributions, in which case it’s best to create a new account or gift the parents cash intended for deposit into the 529 plan. Regardless of how the plan is set up, its important to maintain contribution levels that will ensure you can afford tuition and other costs. Such discipline can be particularly useful if you face additional financial obligations later.
No matter what plan you choose, starting a college savings fund for your child is a big investment. Let a Nationwide financial professional help guide the process.
Who Are 529 Plans Good For
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529 plans may be a good fit for you in some circumstances.
First, they can be beneficial today if you live in a state that offers state tax benefits for contributing to your states 529 plan. Check with your state to see if you qualify for any tax benefits.
529 plans can also work well for those that know their child will be going to college without a doubt. Due to the way 529 plans are structured, the money must be used for a qualified expense . If it isnt, youll have to pay taxes and a 10% penalty on the earnings when you withdraw them.
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How To Maximize Net Investment Returns
Minimizing fees is the key to maximizing net returns.
Choose a 529 plan that charges less than 1.0% in annual fees, often called the total expense ratio. Some 529 plans charge less than 0.5% in fees.
Choose a direct-sold 529 plan, since they have lower fees than advisor-sold 529 plans, and dont charge commissions.
Consider both your state’s own 529 plan, if your state offers a state income tax deduction or tax credit on contributions to your state’s 529 plan, and a few out-of-state 529 plans with lower fees.
Generally, lower fees matter more when the child is young and the state income tax break matters more after the child enters high school. The fees are charged on the full value of the 529 plan every year, while the state income tax break applies only to that years contributions.
Passively-managed investment options, such as index funds, charge lower fees than actively-managed investments.
Start A Business With Your Child
Your child should have at least some skin in the game, even if you also help out with college costs.
Consider putting your child to work if you own a business or start a side business with them as a joint project. Pay out some of their earnings in immediate wages, and contribute the rest toward a college investment of some kind. Make sure to pay them something upfront or else theyll lose sight of why theyre sacrificing their nights and weekends to work.
By starting a side hustle today with your child, you can teach them life skills, financial literacy, and of course to help you earn some money together. And it doesnt hurt that you get some great parent-child bonding time working toward a common goal.
You could do something fun and hands-on like flipping houses, for example. That lets you teach them home renovation skills, how to manage and hire contractors, how to use leverage and loans for investing, how to estimate expenses and home values, and a dozen other skills.
Alternatively, you could start a virtual business with your teenage child. With their low startup costs, low overhead, easy technical outsourcing, and unlimited teaching potential not to mention profit potential explore an online joint business venture to help teach your child entrepreneurship. And it leaves you free to choose a niche that dovetails with your childs interests, to keep their attention.
Get creative with it, incorporate your child as much as possible, and have fun together!
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Waiting Too Long To Get Started
Its never too late to start investing. But the sooner you start, the more time youll give your investments to grow. In other words, you increase your potential for earning a lot more if you start now rather than later.
Just take a look at the difference 10 years can make in the chart below.
The investment portfolio of the person who started investing at 25 is more than 2x the portfolio value of the person who started at 35! And its more than 5x the portfolio value of the person who started at 45!
The key takeaway: take your time to research what you want to invest in and then get started ASAP.
Developing The Habit Is More Important When You Are Younger
Remind yourself that starting out small is ok. In fact, small is how most people start investing! Few people have $100,000 or more to get started with when they’re fresh out of college. At the beginning of your investing journey, it’s more about learning how to invest and developing the habit of investing.
Make investing part of your life and your budget by the time you’re 25, and you’ll more likely continue investing throughout the rest of your career.
On the flip side, if you keep putting off learning about investing and making room for it in your life, you lose time in the market. But then you’ve also mentally decided it’s less of a priority and are more likely to cut investing out in the future.
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