When you’re in your 20s, you may not feel as if you have a lot of money yet, but you do have a savings and investment advantage that many Americans no longer have — time.
Thanks to the power of compound interest, even a little bit of savings in your 20s can grow to a large sum by the time you retire. This makes your age the greatest investment trick in the world. Getting started early is the most important step, but where you choose to save and invest your money is also critical in terms of boosting your long-term wealth.
Not every investment is right for each particular investor, but here are some of the best ones you can choose from when starting your long-term savings plan.
Workplace Retirement Plan
If your company offers a 401(k) plan, that’s a great place to start with your investments. Not only are your contributions to the account nontaxable, but they grow tax-deferred until you withdraw them.
The fact that the money you put into a 401(k) is extremely difficult to get out until you retire may seem like a negative but it’s actually a huge positive, as it all but ensures that you won’t siphon off your retirement funds for temptations like buying a new car or going on an extravagant vacation. Best of all, your employer will likely match a portion of your contributions, which essentially amounts to free money being deposited into your account.
S&P 500 Index Fund
Buying a plain vanilla S&P 500 index fund won’t score you many points with the online message board crowd. But in terms of generating long-term wealth, it could be the smartest move you ever make. Don’t believe it? Here’s what legendary billionaire investor Warren Buffett says about the idea: “Consistently buy an S&P 500 low-cost index fund. Keep buying it through thick and thin, and especially through thin.”
For people looking to build retirement savings, Buffett says that index funds make “the most sense practically all of the time.” The so-called “Oracle of Omaha” doesn’t hold much faith in message board touts — or even financial advisors. According to Buffett, “It’s amazing how hard people make what is a simple game.”
Robo-advisors offer a diversified portfolio of exchange-traded funds designed to match an investor’s self-reported investment objectives and risk tolerance. Portfolios are rebalanced on a regular basis and are generally tax-efficient. As most robo-advisors have small or no investment minimums and charge just 0.25% of assets — or even less — as an annual fee, they can be a great way for new investors in their 20s to get started.
In addition to offering zero commissions on most trades, many online brokers now also offer investors the chance to buy fractional shares. This is great news if you don’t have much money to start investing, as you can now afford to assemble a diversified portfolio for a very low cost, an idea that used to be impossible in the not-too-distant past. For example, instead of having to come up with over $2,000 just to buy a single share of Chipotle, you can spend just $5 at a firm like Schwab and buy a “Stock Slice” instead.
Debt is one of the biggest drains on your cash flow. Debt payments draw money away from your savings and investments, and this can have a big effect on the long-term creation of your wealth.
This is particularly true in the case of credit card debt, which often carries interest rates in excess of 20%. That’s much higher than the return you could expect from even the stock market, which has a long-term average annual return closer to 10%. In that sense, “investing” in paying off your debt is one of the greatest financial moves you could ever make.
Probably the greatest asset you’ll ever have is your earnings potential, and this makes investing in yourself — whether through acquiring additional degrees or learning new skills — a great choice. The more you can make yourself indispensable to companies, the more you will earn over your career.
Not only can this provide you with a better quality of life, but it can also boost everything from your retirement nest egg to the amount you’ll earn in Social Security.
High-Yield Savings Account
A high-yield savings account isn’t much of an “investment,” but it’s a great place to park your emergency fund. As an emergency fund is the cornerstone of any long-term financial plan, opening a high-yield savings account and stocking it with at least $1,000 — and ultimately, three to six months of your expenses — is a great move. This is particularly true in recent months, as you can get a high-yield savings account paying 4.3% or even more.
More From GOBankingRates
- Houses in These Cities Are Suddenly Bargains
- Get Top Travel Tips To Help You Save More
- 3 Things You Must Do When Your Savings Reach $50,000
- Have a Favorite Small Business? Let Us Know About It
This article originally appeared on GOBankingRates.com: Investing in Your Future: The Best Investments To Make in Your 20s
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.