By request, I’m sharing some of my favorite money tips for high school and college students who are working hard this summer to save money for the future.
When I was in my 20’s working at my first job and feeling like I was not contributing enough to my 401(k) I asked my Dad for his thoughts. His response went something like this: “You are in the ‘acquisition phase’ of life. It starts in your late teens and lasts more than a decade. You spend a good deal of this time acquiring the things that you need in adulthood. This includes a car and insurance, a house, furniture, and this stuff is expensive. So, take the pressure off yourself. You don’t need to save everything now for retirement despite what you’ve seen on television.”
Balance Is the Key
Retirement savings is very important, and perhaps you’ve seen some of the illustrations demonstrating the value of getting an early start. However, when in the “acquisition phase” of life, it’s important to find a good balance between spending and saving for long-term goals.
It’s important to remember that in the absence of good data, your emotions will take over your decision-making. With that in mind, envision what major “adult things” you would like to acquire and exactly when you’d like to acquire them. There also may be some travel or other experiences you want to do while you are young and may have a flexible schedule. Prioritizing your expenditures and future goals will lead you to a path to determine how much you need to save and when. Focus on this for now, and decide on a percentage of your income you will save for retirement. Saving 10% of your income for retirement could be a good place to start.
Avoid a Gamblers Mentality
Once your goals are laid out, it’s important to remember that many great investors do boring things. At Wheeler Financial, we use our On-Purpose Method™. As humans, we are often drawn to the “shiny” solution like picking the hot new growth stock, buying cryptocurrencies or buying some other speculative instrument which most likely will not be the best option.
If your savings goal will happen within a year, it really makes most sense right now to keep that money in a savings account at the bank. I know, that sounds really boring, and savings account yields are very low. However, I would hate to see you save $3000 for a dream trip and then see that turn into $2300 because it was improperly invested. A diversified stock portfolio may be appropriate for your longer-term goals. If you are 18 and want to save for a house down payment at age 28, a more significant allocation towards stock would likely be appropriate.
I know, you probably expected I would lead with investing, as it is an integral part of the process, but the planning part is much more important.
Let’s start with which account type to use. You can certainly use an individual brokerage account, but a Roth IRA can be a consideration too. Roth IRAs are great because they are funded with post-tax money, and qualified distributions are not taxable. Annual contribution limits on a Roth IRA are currently $6000 per year. Additionally, you can withdrawal the money you contributed without penalty prior to age 59 ½. This allows you to find some balance between your retirement goals and your near-term goals within the same account. You can earmark a portion of your savings for near-term goals and a portion for retirement goals.
Before investing, click here to learn some important details about a Roth IRA. https://www.investopedia.com/terms/r/rothira.asp
As far as actually investing, you may consider using a Robo advisor. These are services that will select investments for you based on your answers to a few basic questions. Simple situations need simple solutions. As your portfolio grows and your financial situation gets more complex, it may make sense to use a comprehensive advisor such as Wheeler Financial.
Congratulations on your hard work this summer! I wish you all the best as you look to achieve your financial goals!