If you just clicked on this article and you’re still in high school or just stepped onto campus for your first semester at college, you’re already ahead of the game. It’s time to start thinking about investing in your future, and you need to get your money in the market as soon as possible.
That’s right, the earlier the better. And it doesn’t matter if you’re sitting on $100 or a couple thousand because, either way, you’re going to reap the power of compound interest and watch that money grow over the years.
So, if investing early is so important, why don’t they teach you about investing in high school? Well, your guess is as good as mine. But, luckily, your friends here at Ideal are going to help you out. This is how to get started investing as a student! Let’s go!
Why It’s Important To Invest Early – Ahead of the Game
So, before we get into how to get started investing, let me briefly explain to you exactly why it’s so important to get started investing as early as possible. The main reason why it’s so important to start investing is that the earlier you get in the game, the more you’re going to benefit from the power of compounded earnings. And if you’re unsure what that means, it basically means that the money you invest now will generate interest. Easy.
Then, that interest you earned in the first year of your investment will get reinvested. After that, the next year, you’re going to earn interest on that interest. Then the next year you earn even more interest, and the next year even more, and so on and so forth. In that way, your earnings are going to grow exponentially. And the earlier you start this process, the more money you’re going to make in the end.
Let’s say you plan to retire in 30 years, in 2051, and you put $5,000 in an investment that gets 6% annually for those 30 years today. Over those 30 years, you’re going to make a total of $23,717 in interest. That’s a ton of money!
Now, let’s say you instead decide to hold off investing for 5 years. And so, in 2051, your money’s been invested for 25 years, not 30. Just from waiting those 5 years, the interest you’re going to bring in is going to go down to $16,459. That’s still a lot of money, but you still missed out on more than $7,000 by not investing 5 years earlier. That right there is the power of compounded earnings. And if your interest rate is even higher, the difference is going to be even bigger.
So, now that you understand why it’s so important to get started investing as early as possible, let’s talk about how you can get your foot in the door, and get that money in your piggy bank working for you.
Open a Roth IRA – Tax-Free Growth
Remember that example I just did? Where you earn that whopping $23,000 over 30 years? Sounds pretty great, right? But here’s the thing: if you keep your money in a normal investment account, you’re going to have to pay capital gains tax on that money when you try to take it out after those 30 years. And everyone knows that taxes suck.
Luckily, there’s a tricky little workaround that lets you pay way less in taxes, and it’s called a Roth IRA. A Roth IRA is a type of account that lets you save for retirement on your own. You can put up to $6,000 per year in your Roth IRA, and all of that money will be after-tax money. That basically means that you pay taxes on it before it goes into the account.
Then, after those 30 or 40 years or whatever, when you decide to take it out, you don’t have to pay any taxes at all! That is a huge advantage if you’re a young person because most of us will probably be in a higher tax bracket when we’re older, and avoiding those taxes means you’ll be saving yourself a boatload of money!
Now, to open your own IRA, you need to be 18 years or older. However, if you’re still in high school and under the age of 18, you can talk to your parents or legal guardians about a Roth IRA for Kids. I know, I know, you’re not a kid, that’s just what the suits at Fidelity and Vanguard unfortunately call it.
You can get one of your family members who’s over 18 to open the account on your behalf, and then you can contribute your earnings into it, and watch them grow tax-free! They do require that you have a job of some sort, but that job can include babysitting, shoveling snow, or anything like that!
Seriously, no one wants to fork over more money in taxes than they have to. So, open up a Roth IRA, start investing, and keep all your earnings to yourself. But, once you open a Roth, it’s up to you where exactly you invest your money. And if you’re not careful, you might end up not making any earnings at all!
What Not To Invest In – Bad Ideas
Now, if you’re in high school or just got into college, you might think about investing as putting your money into stocks, maybe through Robinhood or Fidelity or something. But that is far from the only kind of investment, and to be honest, investing in individual stocks is on the riskier side of potential places you could put your money.
At your age, chances are that you don’t know a whole lot about the stock market, or maybe you do, but the fact of the matter is that you want the majority of your investments to be safe. You want to look at places where you know your money is going to grow, and you know you’ll be setting yourself up for a good financial future.
No, Bitcoin is not going to guarantee you a comfortable retirement, neither is Dogecoin or Litecoin, or one of those weird CrytpoPunks NFTs. And buying stocks in individual companies inherently carries the risk of those companies flopping, which means that you would lose a whole lot of your investment.
I’ve also heard a ton of talk about day trading lately, and while you might have heard stories of people earning millions with this strategy, I would absolutely not recommend it for inexperienced investors. Maybe if you have a supercomputer that can predict market trends, then day trading is a decent idea. But for young people just getting started with investing, stay away.
Alright, enough negativity. Here are some places you should actually think about investing.
What To Invest In – Real Financial Growth
If you’re just starting to put money into that Roth IRA account you just opened, you want to start putting that money into large index funds. I’m talking about the big boys that track the S&P 500. These are among the safest investments you could possibly make, and they continually generate good returns year after year.
What it is is a fund that tracks the growth of the 500 largest publicly-traded companies in the USA. And since the U.S. economy grows pretty steadily, it tends to always go up in the long term. There are several of these funds out there, and all of them are pretty much the same thing, so all of them are a solid place to start investing. Then, just leave your money in there until you retire, and you’ll probably be amazed by how much it’s grown.
If you want to go even more hands-off, you can put your money into your Roth IRA, and then select one of the retirement planning features. Then, you pretty much just plug in what year you plan to retire, and your broker will automatically invest you in a diversified portfolio of funds that will get you to that financial goal. How easy is that?
So, as you can tell, getting started with investments is a great way to make sure that you’re financially set when you’re older. But, that’s not the only benefit.
Other Benefits of Investing Early – Financial Literacy
One of the biggest reasons that it’s important to start investing early, besides the massive financial benefit of compound interest, is that investing early will give you an introduction to the world of finance. The earlier you start learning about how money works, and the more interest you start to take in it, the more of an advantage you’re going to have over your peers, and the better off you’re going to be in life.
As I said, I have no idea why they don’t teach you about investing in school. But, that just means it’s up to you to get your own financial literacy up, and getting started with investing is the best first step you can take.