If you’re a millennial who is trying to get ahead financially, it’s only natural to worry about the future. After all, news headlines spell mostly doom and gloom for the younger generation these days, citing massive student loan debt and low wages as reasons millennials lag their peers in a financial sense.
Still, the statistics don’t always line up with what the media says. According to the Better Money Habits Millennial Report from Bank of America, 63 percent of millennials are saving money every month. Further, 67 percent who said they created a savings goal were meeting it consistently.
Even more surprising is the fact that 16 percent — or one in six — millennials has $100,000 or more in savings and investments. And almost half (47 percent) have at least $15,000 stashed away.
Millennials and Debt
Still, one problem many millennials face is debt, and specifically student loan debt. According to Student Loan Hero, the average student debt for Class of 2017 graduates worked out to a soul crushing $39,400. From there, credit card debt, car loans, and other consumer debts work against millennials who may not yet be earning healthy salaries. With that in mind, you may be wondering if you’re ready to invest — or if you should focus on your debts first.
Unfortunately, this is where things can get tricky since there is no “right” or “wrong” answer for everyone. While some millennials may be better off if they focus on paying off high interest debt before they start investing, others may want to focus on both goals at once.
How do you know which path to choose? Typically, it makes more sense to start investing right away — even if you’re in debt. This is especially true if your debts are going to take years or a decade or longer to pay off. If you wait to become debt-free before you start investing, you will miss out on years of compounding that could help you build more wealth over time. To get a better idea of how much your savings can compound, click here.
On the other hand, it can pay to spend some time paying off high interest debt if you can pay it off fast. This is especially true if you have debts at an incredibly high interest rate (10% APR or higher) since the interest you pay will likely work out to more than you would earn if you started investing your money.
5 Basic Investing Strategies for Beginners
At the end of the day, only you can decide when you’re ready to invest and if you should knock out debt before you get started. Once you know you’re ready, here are some basic investing strategies to consider:
Savings and Money Market Accounts
Savings and money market accounts may seem like an obvious place to stash your money, and they very well could be. However, current rates have created a situation where it doesn’t make much sense to keep too much money stashed in savings or money market accounts for long.
Consider the fact that the average savings account is returning around 1% APY and that the average money market account has a return of 1.75% APY. That’s not a lot, and it’s certainly less than you will likely earn by investing your money in the stock market.
With that in mind, savings and money market accounts are a solid choice if you need to store your savings temporarily. They are also good options for storing your emergency fund if you have one — or building one from scratch.
Beef Up Your 401(k)
If you have a workplace 401(k) account, this is probably where you’ll want to focus most of your efforts as a beginning investor. Not only do 401(k) contributions made with pre-tax dollars reduce your taxable income, but you may qualify for an employer match that makes it easier to build wealth over time.
While it may not seem like it, increasing your 401(k) contribution by even a single percentage point can make a huge impact. Let’s say you earn $50,000 per year and stash away 5 percent per year of your salary for twenty years. If you earned an average return of 7 percent, you would have $102,324 in the end. But, if you bumped up your savings to 7 percent of your salary, you would have $143,156. If you also received an employer match and were able to contribute 10 percent of your salary total, on the other hand, you would have $204,649.
The money you contribute to retirement now matters more than you think, and compound interest works best when you have time on your side. With that in mind, it’s smart to contribute at least enough to your 401(k) to get your full employer match and potentially more if you can.
Open a Traditional or Roth IRA
In addition to employer-sponsored retirement accounts, you can also consider opening a traditional or Roth IRA. In 2018, you can contribute up to $5,500 across both accounts (or $6,500 if you’re ages 50 and older).
But, which IRA should you choose? It all depends on your goals. Many young people who worry about their income tax rates later in life ultimately choose to open a Roth IRA for its tax benefits. While the contributions you make to a Roth IRA now are made with after-tax dollars, your money grows tax-free and you can take distributions without paying income taxes once you reach retirement age. Further, a Roth IRA allows you to deduct contributions (not earnings) at any time without taxes or a penalty.
A traditional IRA works more like an employer 401(k) account since you make contributions with pre-tax dollars and have the ability to deduct them on your taxes provided you meet income requirements. Your money does grow tax-free, but you do have to pay income taxes when you take distributions in retirement age.
Invest in Real Estate
While buying real estate may sound unfathomable when you’re first starting out, new technology has made it easier than ever to invest in commercial and residential real estate without being a landlord. With Fundrise.com, for example, you can invest in funds similar to a real estate investment trusts (REITs) with a minimum investment of just $500. The best part is, Fundrise.com has reported average returns that range between 8.75 percent and 12.42 percent over the last four years. In 2017, the average investor who used the platform received a return of 11.44 percent.
If you’re leery of investing in online platforms without long histories, you can also invest in REITs directly via an online brokerage account through a firm such as Vanguard or Fidelity. With any of these options, you get access to the potential for growth via investing in real estate without a huge down payment or the responsibilities of a landlord.
Consider Peer-to-Peer Lending
Finally, you can also consider peer-to-peer lending. With this type of investing, you loan money to other consumers as if you were a bank. The upside here is that you, the investor, get to earn similar returns as banks do when they make loans. The downside is that, like with other investments, you do have the potential to lose money if borrowers don’t repay their loans.
Platforms like Lending Club help you mitigate risk by letting you spread your loan out across multiple borrowers in increments of $25. By loaning out money to individual borrowers at just $25 each, you can avoid much of the risk that comes with loaning money to a single person.
Lending Club reports historical returns of 3 to 8 percent for their investors, with the highest returns going to those who loan to riskier borrowers. This platform or its competitor, Prosper, is a smart option to consider if you’re taking full advantage of tax-advantaged retirement accounts and still have money to invest each month.
The Bottom Line
If you’re a millennial who is tired of waiting on the sidelines while others build wealth, the time to get started is now. Whether you choose to spend time paying off high interest debt first is your decision, but you’d be wise to sit down and figure out the best ways to get started.
If you plan to focus on debt first, it can help to track your spending and create a monthly budget that dictates where your money goes every month. Whatever you do, take time to create a plan — and follow through. Every year you wait is another year you’ll have to play catch-up later on.