Best Investments for Young Adults: How to Invest in Your 20s [2020]

 

Your age plays a significant role in the type of investment accounts you should open or decisions you make. The best investment accounts for young adults have low (or no!) fees and no minimums. Further, the investment horizon matters because not all investing goals for young adults involve thinking over the long-term.

Specifically, young adults have competing investment timelines requiring them to consider both the best short-term and long-term investments based on these different needs.

Once decided on how to prioritize their investing goals, Millennials and Generation Z tend to gravitate towards investment accounts with easy-to-use mobile financial apps and top customer service through multiple channels. In fact, it’s becoming less important for banks and other financial institutions to have physical locations. Instead, young investors find it more crucial that their investing services are affordable and mobile-friendly.

Finally, the earlier you can learn how to start investing money, the better prepared you will be financially in the future. Keep reading to learn about the best investment accounts for young adults and how to invest in your 20s. Afterward, you will read about the most common questions young investors must answer before choosing their investment strategies.

Best Short-Term Investments for Young Adults

There are many reasons for young adults to have short-term investments. These typically won’t have as high of an overall return compared to a long-term investment, but the money will be available sooner. If you want to save for an emergency fund, wedding or a down payment for a house, short-term investments are wise.

Read below for some suitable investment ideas for young adults looking to make low-risk investments with higher-than-average returns.

→ High-Yield Savings Account

High-yield savings accounts are a type of federally-insured savings account which aim to earn interest rates much higher than the national average. Depending on where you look and the prevailing market interest rates overseen by the Federal Reserve, high-yield accounts can earn around 1.50% APY or more.

As a comparison, the national savings account average interest rate comes to 0.07% APY- a far cry from the most competitive offers in the market. All things equal, if you hold your money in an account which pays a higher interest rate, your balance will grow faster without any additional effort on your part. Certainly, a favorable way to make money while you sleep.

To illustrate the effect of holding money in a high-yield savings account compared to one offering a far lower rate, consider the following comparison. After one year, a savings account balance of $10,000 would earn $10 in an account with a 0.10% APY. If this money had instead been placed in a high-yield savings account offering 1.50% APY, your money would have earned 15x more, or a total of $150.

As no depositor has lost a single cent in federally-insured funds since 1933, balances of up to $250,000 are encouraged to be held in high-yield savings accounts or one of the following two short-term investments for young investors, depending on your liquidity needs.

Consider placing your money in one of the most competitive high-yield savings accounts available on the market through CIT Bank’s Savings Builder product.

High-Yield Savings Account Highlights:

• The best high-yield savings accounts typically come from online-only banks and can pay 15-20x more than the national average for regular savings accounts
• Usually, come with only 6 monthly withdrawals due to Federal Reserve Board Regulation D and result in charges if exceeded or transforming your account
• Almost all retail banking institutions offer these products
• Some high-yield savings accounts charge fees, eating into your interest. Shop around because opening a new account can take only 10 minutes to open

→ Money Market Accounts

Money market accounts are similar to savings accounts, except they can offer higher interest rates due to the ability of financial institutions to invest your account balance in certificates of deposit (CDs), government securities, and commercial paper. None of these are able to be done with your savings account. In exchange for the slightly higher risk, your interest rate is generally a bit higher with money market accounts.

Money market accounts can also sometimes be referred to as money market deposit accounts (MMDA). Different than CDs, which can charge penalties or surrender charges for early withdrawals, you can close a money market account at any time. You can usually even withdraw money each month, with limits to how many withdrawals within a specified period.

Further, money market accounts can allow check writing and debit card features. Financial institutions like banks and credit unions often require customers to deposit a minimum amount of money in order to open a money market deposit account and then maintain a minimum balance going forward. If the account holder goes below this threshold, the financial institution will often impose monthly fees.

Typically, if you want to earn the best rate on a money market account, you will encounter these minimum balance requirements.

Money Market Account Highlights:

• Best-in-market money market accounts pay higher or comparable interest rates as savings accounts but less than CDs
• Money market accounts are federally-insured and represent safer short-term investments than stocks and bonds
• Many retail banking institutions and brokerages offer money market accounts to their customers
• These accounts often come with debit cards and limited check writing features

→ Certificates of Deposit (CDs)

When you set up a CD with a bank, you agree to keep a set amount of money in the account for the term agreed upon -usually anywhere from 90 days to 5 years. The interest rate is higher than a typical savings account because you agree to keep your money with the bank for an extended period of time. In exchange, the banks agree to award you a higher interest rate to compensate you for your loss of liquidity and the use of your funds.

Nearly all retail financial institutions like banks, credit unions and thrifts offer these products to their depositors. To receive the best rates on CDs, you will want to shop around as you will find a wide variety of rates offered by brick-and-mortar only institutions and online-only banks. Typically, the latter tend to offer higher rates because they do not need to finance the costs of maintaining a network of bank branches and can pass these savings through to depositors like you in the form of higher rates.

Online banks like CIT Bank can offer competitively-priced CDs because of this corporate strategy. You will often find this bank offers special promotions to compete with the best offers in the market, though may come with unusual durations like 11 months, rather than the standard 3, 6, or 18 months or full-increments you will likely see from traditional brick-and-mortars.

CDs are FDIC insured up to $250,000 so there is minimal risk involved. Some great options are available in this low-interest rate environment. As called out above, one particular CD to highlight comes from CIT Bank, an online-only bank which aims to offer some of the most competitive rates in the market to attract potential depositors.

CD Highlights:

• Best-in-market CDs pay higher interest rates than savings accounts or MMAs due to the time commitment required
• CDs are federally-insured and represent safer, more conservative investments than stocks and bonds
• Almost all retail banking institutions offer these products and offer a variety of options and rates
• Even if you lock into a longer duration than you originally intended, you may break the agreement and exit early, often by foregoing a certain amount of interest as an early withdrawal penalty (EWP) or surrender charge

→ Short-Term Bond Funds

The first two short-term investments for young adults primarily rely on doing business directly with a bank like CIT Bank or one of its competitors. If you want to move a bit farther along the risk/reward curve but remain conservative overall, you might consider investing in short-term bond funds through a brokerage.

Short-term bonds have maturities of less than one year and carry less interest rate risk and sensitivity to movements in the market. Just because of their interest rate less-sensitive nature, this does not mean the short-term bond funds will not lose value. However, they do tend to move less in relative price than longer maturity bonds.

Overall, U.S. domestic bonds fall into one of the three following categories:

1. U.S. Government-Issued Bonds (Treasury Bills, Notes and Bonds)
2. Corporate Bonds
3. Municipal Bonds​

The first bond category, government bonds, act as an investment safe haven and are universally seen as a riskless investment. These bonds come backed by the full faith and credit of the United States government and carry lower interest rates than corporate or municipal bonds as a result.

For corporate and municipal bonds, these come backed by companies and states or municipalities, respectively. This represents a higher level of risk and you should expect higher returns to compensate.

One thing to note about investing in a bond fund like a bond ETF or bond mutual fund is that the principal invested can go up or down significantly. However, this could also be a good way to diversify your bond investments with one purchase.

If you do want to invest in bonds, you have to do this through a brokerage. One of the better brokerages I’ve found for investing in bond funds is Webull. The service offers a wide universe of available ETFs (bonds, stocks and more) and has no trading commissions. Plus, for signing up and making an initial deposit of $100 or more, you will receive two free stocks valued between $14.50 – $1,650.

Best Long-Term Investments for Young Adults

For young adults, time is on their side in terms of investing. They can take advantage of compound interest and tax-advantaged investments when they invest long-term. Young investors can take advantage of aggressive investing in their 20s and 30s and hold some of the best investments for the future.

→ Retirement Accounts for Young Adults

It’s never too early to start saving for retirement. Individual retirement accounts (IRAs) and company retirement accounts, such as 401(k), 403(b) and 457 plans are some of the most popular ways to save for retirement.

Traditional retirement accounts are tax-deferred so you do not pay tax until you withdraw the funds during retirement (when you’re likely in a lower tax bracket and will pay less in taxes on it).

Contributions to these accounts are one of the few tax breaks available for young adults. The best part is that many employers offer to match your contributions up to a certain percentage, which many refer to as “free money.” Some employers offer matching contributions on both 401(k) (or 403(b) and 457 plans) as well as on health savings accounts.

A common option offered by most employers to their employees as Qualified Default Investment Alternatives (QDIA) are target date funds. These assets offer a mix of underlying investments which take into account the individual’s age or retirement date and invests accordingly.

The best target date funds have low expense ratios and transition “through” retirement and not “to” retirement. As you can see below, these “through” retirement target date funds continue to transition their holdings as part of a glide path toward a more conservative mix, even after retirement age.

This provides for more time to hold money in the stock market, something our generation will need to do to grow our wealth sufficiently to compensate for lower lifetime earnings and longer expected life spans.

Target Date Fund with a Glide Path “Through” Retirement

Regardless of the funds available to you in your employer-sponsored retirement account, you should consider investing money in it.

On this site, I strongly advise all to “max out” your contributions to these accounts so you get as much “free money” and defer as much tax as possible. This investing strategy can yield a major impact on building wealth.

Roth IRAs, unlike traditional retirement accounts, have you pay tax the year in which you contribute. This allows the contributions to grow tax-free until you retire and then avoid paying taxes when you withdraw these funds in retirement. For young adults, this can be the superior option because they have so many years to grow tax-free returns.

→ Health Savings Account (HSA)

Health savings accounts offer a unique tax benefit not seen in other tax-advantaged investment accounts: a triple tax benefit. These benefits include:

1. No tax liability on contributions made into the account (deductible from your income)
2. No tax liability on gains recognized from investments made in the account (excluded from income)
3. No tax liability on withdrawals made for qualified health expenses

As for the mechanics of how these plans work, some have these accounts offered through an employer-sponsored account. In this situation, your contributions come straight from your paycheck pre-tax but you retain the ability to contribute to your health savings account directly as well. You claim these contributions on your tax return, thereby reducing your taxable income.

However, if you do not have an account available to you through your employer, you can set up your own HSA and deduct your contributions on your tax return. As touched upon above, when you invest money in these accounts, you receive tax benefits to encourage you to grow your money over long periods of time. When you use a service like those from Lively, you can invest your savings in mutual funds or other types of investments.

When the times comes that you may need to withdraw money for qualified medical expenses, these funds will come to you tax-free. However, if you withdraw funds and do not not use them for medical expenses before age 65, you will face a stiff 20% penalty.

Be aware that after age 65, you can withdraw money for any purpose without triggering a harsh penalty. Further, unlike IRAs, you do not need to take required minimum distributions (RMDs). These funds exist in perpetuity and do not have the “use-it-or-lose-it” character of Flexible Spending Accounts (FSAs).

Restrictions do exist for opening and contributing to these accounts. To be eligible, you need to receive health insurance through a high deductible insurance plan (HDHP) and also not receive Medicare. You also cannot be covered under any disqualifying health coverage or claimed as a dependent on another person’s tax return.

→ Exchange-Traded Funds (ETFs)

An ETF is a collection of securities, such as stocks, that usually tracks an underlying index (though they can invest in any number of industry sectors). An ETF is similar to a mutual fund, but it’s listed on exchanges like stocks. They contain several types of investments, including stocks, bonds, commodities, or a combination of investment types.

Advantages of ETFs for young adults include automatic diversification, lower costs, tax efficiency, and liquidity. While it’s possible to make short-term gains with ETFs, they’re generally safer as a long-term investment so young investors have time for an ETF to “bounce back” from possible negative market volatility.

Charles Schwab, Fidelity, Invesco, State Street and Vanguard index ETFs are all great options for new investors because they have some of the lowest investment costs for their index funds. Consider the following options, deemed best funds for young investors for their growth potential, diversification and low expense ratios:

• Schwab U.S. Broad Market ETF (SCHB)
• Fidelity Nasdaq Composite Index (ONEQ)
• PowerShares (QQQ),
• SPDR S&P 500 ETF (SPY),
• iShares Core S&P 500 (IVV),
• Vanguard S&P 500 ETF (VOO), and
• Vanguard Total Stock Market ETF (VTI)

→ Mutual Funds

Like ETFs, mutual funds act as collections of securities, such as stocks and bonds, which usually track an underlying index or trade based on targeted investing styles (e.g., growth vs. value).

Mutual funds are similar to ETFs by investing in several securities with one purchase and having expense ratios associated with the fund’s management and administrative expenses.

However, mutual funds differ from ETFs in many ways with some notable exceptions including:

• Purchase & redemption fees.

In some instances, mutual funds may charge a percentage of the transaction value every time you buy or sell. These purchase fees, paid directly to the fund, can eat away at your overall return but should diminish as a percentage of your overall return as you experience greater returns.

Redemption fees, on the other hand, typically apply only for a certain period of time. For example, you may face a redemption fee if you choose to sell your mutual fund shares if you have owned them for less than 3 months.

Funds justify these fees by collecting them to offset trading costs for buying and selling assets held in the mutual fund on your behalf. However, with trading commissions dropping to zero across the board, these fees have become harder to justify with many prominent mutual fund companies eliminating them.

• Loads.

Not to be confused with purchase and redemption fees some mutual funds charge, loads are similar such that funds charge them when you buy (front-end load) and/or sell (back-end load) certain mutual funds.

Where these differ, however, is that investors pay relevant front-end and back-end loads directly to the investment company, not the fund as you would with purchase and redemption fees.

• 12b-1 fees.

These fees do not appear for buying and selling ETFs. 12b-1 fees are unique to mutual funds and represent charges the fund company must pay to market and distribute the fund to potential investors.

• Commissions.

Like stocks and bonds where you must pay a trading commission to buy or sell securities, trading commissions can also apply to mutual funds. These trading commissions go directly to the broker used to buy or sell your mutual fund shares.

Some of the best mutual funds offer widely-diversified holdings and offer extremely low costs. Choices like VTSAX and VFIAX from Vanguard provide diversified, low expense options and have performed very well over long-periods of time.

To purchase superior mutual funds like this, I recommend using Firstrade, an investing app which allows users to purchase stocks, bonds, ETFs, mutual funds, options and more for free. Instead of having multiple investing accounts, this one allows young investors to buy and sell most of the investment types they might need to have a diversified portfolio.

Best Investing Apps for Young Adults

You can’t beat the convenience of monitoring your investments straight from your phone. In a move to be more competitive, many investment apps geared toward young adults have removed most types of fees and minimums.

They have also made it easy to invest small sums of money, which is excellent for young professionals who want to invest but don’t want to wait until they have an expansive cash reserve to do so. Read below for some of the best investing apps for young adults to get started with their investing journey.

→ Robinhood (Simple Investing)

Robinhood is a favorite investment app among young adults. The median age of users is 28 and 78% of users are under age 35. The app allows users to take advantage of commission-free investing in stocks, cryptocurrencies, and options.

In addition to avoiding fees, Robinhood is attractive to young adults because it offers fractional shares, meaning you can purchase part of a stock. For example, if you want to invest in the S&P 500 index fund on Robinhood, but don’t have a few hundred dollars to invest, you can buy half a share, or even a tenth of a share.

If you’d like to dabble in penny stocks on Robinhood to see how trading works with little money, this investment app is a great way to experiment due to its free trading feature. Consider doing your stock research with the best apps and software on the market.

Remember, all stocks inherently involve risks and potential to lose your entire investment. However, Robinhood allows new investors to try investing with less money (and therefore less risk of jeopardizing your net worth).

→ Acorns (Assistance with Getting Started)

Acorns is free if you are a student using a .edu email address or are under age 24, making it clearly geared towards young adults. It’s best to use on mobile, which also appeals to younger demographics.

A key feature of Acorns is the ability to connect a debit or credit card and have the app “round up” your purchases and invest that money on your behalf. Over time, with normal spending, you might find your money compound and lead to serious savings. Additionally, you can set up automatic deposits as well.

Another feature that sets Acorns apart is the “found money” feature where additional money is deposited into your account when you shop with Acorns partners.

Acorns is a good fit for young adults who want to invest small amounts incrementally, need help setting aside money to do so, and guidance on which investments to make. The app comes with higher costs which can be justified if this kickstarts a young adult’s investing journey.

To be clear, Acorns is the app for young investors when they need help getting started with their investing.

Investing apps like Webull, M1 Finance, or Firstrade (all discussed in this article) are for those who know they’re ready to invest and have an idea for what they should buy.

Webull (Self-Directed Investing)

Webull is an alternative to Robinhood. It has many of the desirable features of Robinhood, such as no commissions and no minimum threshold for investing in trades. Additionally, the analytical tools and educational materials it provides make it a prime candidate for young adults (plus, for the more risk tolerant, you can short sell on Webull but not Robinhood).

You can even simulate new strategies before trying them out with real money with their paper trading service. You’re given data charts with real-time information on options you’re considering so you can invest with more confidence and less guesswork.

Of note, Webull has wire transfer fees, but it’s overall still a strong choice for new investors. You can avoid these by opting to fund and withdraw money from your account through ACH transfers.

Right now, Webull also offers two free stocks for opening an account and depositing at least $100.

→ M1 Finance (Robo-Advisor without Fees)

M1 Finance offers to simplify investing with its robo-advisor functionality. Where Robinhood and Webull allow you to invest in shares at your own discretion, M1 Finance unlocks the ability to automate your investing in numerous investment portfolios.

It does this without charging asset under management (AUM) fees. Instead, it makes money from offering other services or earning interest on cash you leave un-invested in your account.

M1 Finance allows you to select the specific stocks and index funds you invest in for your investment portfolio. Or, if you prefer, you can opt to choose from over 80 expertly-made and managed portfolios.

M1 Finance also offers the ability to buy fractional shares, meaning if your desired stock carries a high share price (e.g., Google, Amazon, Berkshire Hathaway Class A, etc.), M1 Finance allows you to a smaller fraction of the stock on the platform.

Finally, investing with M1 Finance can be as simple as depositing money into your account, setting your investment selections and having the platform automate your investments on your behalf. As you have your account, M1 Finance will also rebalance your portfolio in line with your stated asset allocation targets.

→ Wealthsimple (Robo-Advisor with Financial Advice)

Wealthsimple is another robo-advisor in what has become an increasingly-popular investing product: automating your investing decisions and investment selections. What makes Wealthsimple different, however, is the unlimited access you can receive from a financial advisor for no additional cost. In fact, the expert financial advice comes with any of their investing products as part of the Wealthsimple Invest management fee.

Other services provide access to financial advisors but this often comes with an added cost, be it one-time, or a recurring set of fees. From my experience of screening investing platforms, this included financial advising is not something many other robo-advisors offer.

Wealthsimple also offers the ability to invest according to your values. That means you can choose specific investment portfolios which reflect your values. Some of the current values-based investing options include portfolios for Halal Investing and Socially Responsible Investing.

Wealthsimple is available in Canada, the US and the UK.

The Most Common Questions Young Investors Face

As young adults, we face many questions as we age, not least among them is how to handle our money. Understandably, if you haven’t had extensive exposure to personal finance or sound financial planning while growing up, you might not have a clear answer to several burning questions you likely face right now.

Some of the most common questions young adults face regarding money include the following 4 items:

1. “Should I invest aggressively just because I’m young?”
2. “Should I pay off debt before investing?”
3. “Should I contribute to a Roth or Traditional retirement account?”
4. “How long does it take to see results?”

Let’s explore these 4 top-of-mind questions and you can develop a clearer answer to each with sound investment advice for young adults.

1. “Should I invest aggressively just because I’m young?”

When you have time on your side, the common advice for young investors is to invest aggressively. This usually holds true because you have little to lose and need a path for accumulating wealth with higher returns.

To accomplish this task, the typical portfolio recommendation includes investing in a high percentage of stocks and a small percentage of bonds or cash. Undoubtedly, in a vacuum, this logic proves sound but only truly represents half the story young investors face. In fact, the missing half should serve as the most important part of your financial decision-making: your financial foundation.

Before proceeding in earnest with building a long-term investment portfolio, such as funds set aside for retirement, you will need to build other financial accounts important for financial security.

While retirement accounts and other excess money you want to invest should bias toward riskier assets (e.g., stock index funds), learning the best ways to invest in your 20s should also include building these account balances to accomplish other nearer-term goals.

Before we throw everything in a retirement account and wait 40 years to withdraw, let’s look at some examples of goals which should not have aggressive risk-taking, high return investments just because we’re young.

→ An Emergency Fund.

You know what’s more important than holding a low-cost index fund which doubled in value over a five year period? A fully-funded emergency fund capable of covering at least 3-6 months of expenses. Depending on the nature of your work, reliability of paycheck, and lifestyle you may opt to hold more or less in this account.

While specifically recommended below as two of the best short-term investments for young investors, consider holding these funds in a high-yield savings account or money market fund with CIT Bank. In either type of account, your emergency fund can earn considerable interest while being held for a rainy day.

→ Wedding Costs.

If you haven’t yet tied the knot and have plans to do so in your 20s, you’ll fall in line with your peers according to data provided by the U.S. Census Bureau. In particular, the median age of a first marriage for men is 29, and 27 for women.

When it comes time to say your vows, you will want to have access to some liquidity and conservatively-invested funds so you won’t have to worry about what to do when stocks go down during a market crash. You don’t want to delay formalizing your union because these funds get tied up in a bear market, so you’ll want this money set in conservative investments.

→ A Home Down Payment.

My wife and I hope to buy a home of our own soon. If we do, we will purchase one at the same time as many other young adults. According to the New York Times in 2017, the median age for purchasing a first home is 32.

While I purchased a condo by myself shortly after graduate school, I knew it would always serve as an investment property long-term. Investment property is often a good investment idea for young adults who do not need the money immediately and have excess funds to invest.

I made the decision to withdraw money from the stock market about 6 months before I entered the market and missed out on a decent stretch of market gains. However, I could just as easily had the opposite market environment give my home down payment fund a haircut of 10% or more. If that had happened, I might not have had enough money to buy a condo, forcing me to continue renting.

If 32 serves as the median age for first-time home buyers, that indicates most people saved for that house in their twenties, likely in conservative investments to provide certainty the funds would be there when needed.

As highlighted above, thinking about how to invest money for these shorter-term goals should involve keeping a considerable amount in cash in some conservative income-generating assets like certificates of deposit, high-yield savings accounts, or the like. Both of these accounts tend to earn a higher rate than traditional savings accounts.

2. “Should I pay off debt before investing?”

Young adults struggle to decide where their financial priorities should lie in terms of paying off debt quickly and starting to invest as soon as possible. Many are faced with the dilemma of deciding whether to invest or pay off student loans, and the answer can be complicated.

When making this decision, consider the type of loan, the interest rate, your risk tolerance, and your overall expected return from an investment.

According to WalletHub’s Credit Card Landscape Report, the average credit card interest rate is 15.1% for existing accounts and 19.02% for new offers. Furthermore, this debt is guaranteed, whereas most investments are not.

It’s almost always smarter for young adults to pay off credit card debt first than investing. This is because you are more likely to receive a lower rate of return on the investment than you would avoid by paying off the high interest from a credit card.

Whether you should invest before or after paying off student loans is trickier. That’s become a key decision young adults must make when learning how to invest in your 20s or 30s.

risk dice

The average interest rate for student loans is between 5% and 7%, which is much lower than credit card interest. Paired with the fact that you can use interest payments on student loans as a tax write off (subject to certain income limitations), this means that for many people, it’s a good move to be investing and paying off student loans simultaneously.

However, some people are stuck with higher interest rates on their student loans and might desire the mental relief of paying down loans first. Should you qualify, there are several great offers on the market for refinancing your student loans.

Depending on the amount of student loan taken on and the profession you chose to pursue, student loans may act as a cost-effective way to invest in yourself. If you stand to make substantially more income from your decision to take on student loans and you come out ahead, you can safely consider your student loans to count as “good debt.”

Another form of “good debt” comes from pursuing a mortgage on a home appreciating in value. However, in the world of investing, we must look at how you invest in terms of opportunity cost. Meaning, how else could you have invested your money which may have led to better returns?

Some people face the decision of investing or paying off their mortgage faster. Usually, people can achieve higher returns by investing rather than the reduced interest expense they would pay by paying off their mortgages a bit earlier.

Additionally, because of the possibility of housing bubbles bursting, it’s strategic to have a diversified portfolio. In many cases, most people agree that you should begin investing before paying off a mortgage.

3. “Should I contribute to a Roth or Traditional retirement account?”

Another common question young investors ask themselves involves deciding which type of retirement account they should choose for investing. Specifically, should you choose a Roth retirement account (e.g. Roth 401(k), Roth IRA) in your twenties when your tax burden is lower? Or should you use a traditional account to save more money now and pay taxes later?

In general terms, these two retirement account types works as follows:

• Traditional: Contributions to these accounts are usually pre-tax, meaning you set aside tax-deferred money now and pay taxes on this money when you withdraw it later.
• Roth: Contributions to these accounts generally occur after-tax, meaning you take advantage of lower tax brackets today and keep all gains from these investments when you withdraw them later.

In either scenario, you face a tax consequence. The question comes from when you think you will face a higher tax rate: now or later. If you think your income is set to rise over your career and push you into higher tax brackets as you go, investing a Roth account might serve as a good option. Likewise, if you expect your tax bracket to drop in retirement, a traditional retirement account could also lead to beneficial results. As a general rule:

• If you currently have a higher tax bracket than your expected tax bracket in retirement, you should choose the Traditional option.
• If you currently have a similar or lower tax bracket than your expected tax bracket in retirement, you should choose the Roth option. Roth options also come with the ability to withdraw contributions without facing a tax penalty under certain scenarios.

4. “How long does it take to see results?”

Undoubtedly, waiting is the hardest part when it comes to long-term investing. Because humans seek instant gratification, something Millennials have a notorious reputation for possessing, waiting to see the fruits of your labor might appear difficult.

The same challenge applies to the investments we pick to hold over long-periods of time as we want to see overnight results. Who doesn’t?

While we have learned about the magic of compounding interest, remaining motivated can prove a tall task. Perhaps the marketing behind Acorns, a popular Millennial investing app covered above, can help to teach us about how the mightiest investments start small and take time to grow.

In fact, having a measured approach to investing expectations is likely best because most of the investment growth happens later in life. Very little growth occurs when you initially invest your money.

Final Thoughts

When it comes to investing, the sooner you start, the better. Young adults have the opportunity to make simple investments now which will appear smart with significant time added. The only exception would be if you have a substantial amount of high-interest debt to pay off first.

If the amount of debt held overwhelms your personal finances and leaves little room for investing, allocating more money early on toward rapid debt repayment might serve you better. As an alternative, you can also consider investing small amounts through apps like Acorns, Robinhood, or Webull to deploy small amounts of money into diversified investments.

Despite not earning money on commissions, learn how Robinhood, Webull and Acorns make money. Short version: they monetize other products and services to offset this free trading. The bottom line is that consumers win with free trading costs, so long as this doesn’t encourage excessive trading and potential erosion of capital or payments to Uncle Sam.

Young adults have a need to own and hold both short-term and long-term investments. The right combination ensures you’re prepared for major purchases, as well as retirement, down the road.

Many investment apps today were created with young adults in mind and make it easy to get started investing with little money. Start your investing journey now and improve it along the way. You will see how your net worth grows and want to track your progress across time with a free app like Personal Capital. Your future self will thank you.

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Previously published on Youngandtheinvested.com.

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