WARNING: This post might be long and boring, but I will put a picture of a cute puppy hugging/attacking a cute kitten at the end, and after you’re done reading and implementing this post you can take a nap 🙂
You’ve worked hard, earned money, saved it, and you’d like to invest it (excellent, and congrats on getting this far! You have a promising financial life ahead of you!).
First you’re going to set up an investment account, which is similar to a savings account. There are plenty of different types of investment accounts out there, but for young adults just starting to make money and focusing on long term goals, a great option is a Roth IRA. IRA stands for Individual Retirement Account.
A Roth IRA encourages you to save early on, because as your money grows and when you take it out, you don’t have to pay taxes on the earnings. (You do have to pay income tax on the money before it goes into the account though. In contrast, with a traditional IRA, your money is taken out of your paycheck before income taxes, it grows tax-free, but then you have to pay taxes when it is withdrawn)
The catch is that with a Roth IRA you will be penalized if you take your money out of it before you get to retirement age, which is 59 1/2 years old. If you want to keep your funds in a more accessible investment, then you would want to open up a brokerage account. A brokerage account would let you invest and do everything you could do in a Roth IRA, but your earnings will be taxed every year.
What accounts do I use? Great question!
I have both a Roth IRA, and a brokerage account. This is because I am starting to put money away for long-term, retirement purposes (Roth IRA) but I also want to have access to some money if I need it. I would suggest starting with a Roth IRA and focusing on long-term planning.
It’s super easy to open a Roth IRA account, and you can open one online today if you would like! I would recommend opening an account with Vanguard. They provide simple and cost-effective investment tools, and I personally use their services for both my Roth IRA and my brokerage account.
Here’s the link to open a Vanguard Roth IRA. (I don’t make any money when you open an account with them, I’m just recommending them because I’ve tried other companies and they’re the best out there)
Ok, I have my account. Now what?
Once you have your account open, you are going to need to purchase shares of a fund. I personally use Vanguard’s Total Stock Market ETF which goes by the ticker symbol VTI. This fund gives young investors like us as much exposure to the stock market as possible, and as much diversification as possible as well.
If what you are looking for is simplicity in your investments, just keep putting your savings into VTI, and forget about it. You can set up an automatic deposit with Vanguard so you can set it and forget it. Do that regularly, and in 30 or 40 years you will have plenty of money to do whatever you’d like!
So hypothetically, let’s say you put $1,000 into your Roth IRA from age 25-30, while you’re getting your career started. Then from age 30-60 you are able to put in the maximum contribution of $5,500 every year. How much would you have at 60 years old? You will have put $170,000 of your own money into the account, and it would have earned you $443,418.71, so your total would be $613,418.71. You made $400k and never had to pay a cent in taxes on it. That’s the power of a Roth IRA and investing #M
oneyGoals
As promised, here is your puppy and kitten. If you have any questions about investing or setting up an account, I’d love to help answer them! You can either comment on this post, or send me an email at hashtagmoneygoals@gmail.com
(Pictured: A sunset on (I think) Knife Lake, MN August 2016)