Save and invest for the young investor
By Anthony Lupo, CFP, Rob Tilson, CFP, and Eric Tilson
These days, young people looking to invest have more options and platforms than ever before. Starting to invest at a young age is key to building long-term wealth, as the power of compounding works its magic over the years.
The easiest thing to do would be to tell anyone under the age of 30 to invest in an ETF or a basket of diversified stocks in a brokerage account and let the market work for them. While this is still a great option, there are other investment vehicles that can prove to be even more beneficial in the short or long term. While there are many options for investing additional savings, we want to address a few areas where young people, or really people of all ages, can invest additional money: namely, paying down debt, using plans. pension through an employer and make full use of an HSA (if available).
Pay off the debt
The first element, debt repayment, is pretty obvious. We must emphasize here that we are talking about additional savings – it is very important to build an emergency fund that can cover 3-6 months of living expenses if you have been made redundant or have a medical emergency and are unable to work for a while. .
Debt can mean anything from student loans to credit cards to car loans and more. Interest rates vary from product to product, but credit cards generally have high interest rates, and student loans and car loans have lower rates. For example, if a person had a credit card balance of $ 5,000 at 20% and paid it off over 18 months at $ 325 per month, they would have paid about $ 720 in interest.
High interest debt accumulates quickly. One of the best strategies people can use is to look at all of their debts and prioritize the extra money from the high interest rate item to the lowest interest rate item, in that order. This leads to efficient repayment of all debts and minimizes interest paid.
Keep in mind, however, that not all debt is bad debt. If you think you can get a return on your investment that is greater than the interest rate on that debt, it might be worth investing rather than paying off the debt.
Use employer plans
An important investment vehicle that all workers can use is a 401 (k) plan (or a 403 (b) plan for people employed by public schools and some tax-exempt 501 (c) (3) organizations) . Contributing to a traditional pre-tax 401 (k) plan (up to $ 19,500 for 2021) gives workers a tax deduction for the current tax year and allows investments to grow tax-sheltered. tax until withdrawal. The money is fully taxable at the time of withdrawal, which is allowed once the employee turns 59 and a half, but withdrawing before that age imposes a penalty of 10% plus tax on you. There are hardship withdrawals and early withdrawals allowed in certain circumstances without penalty, but still taxable.
Another type of 401 (k) that many employers now offer is a Roth 401 (k). While the traditional 401 (k) now offers a tax deduction, the Roth 401k is the opposite. With a Roth 401 (k) you don’t get a tax deduction today, but the account grows tax free and so do withdrawals. This makes the Roth 401 (k) very valuable for young workers who have the capacity to invest over a period of more than 35 years, especially those who are currently in a lower marginal tax bracket and expect to be in a higher bracket after retirement, because all growth is totally tax exempt.
Many companies also offer a matching contribution for employees contributing to a 401 (k) (traditional or Roth), but this will vary depending on the employer. For workers with cash in the bank, a better option may be to start contributing or increasing the amount contributed to a 401 (k) or Roth 401 (k).
Health savings account
An often overlooked investment vehicle is the Health Savings Account (HSA). Many health insurance plans offer HSA plans as an additional option. With these plans, participants are allowed to contribute funds to an HSA, receive a tax deduction for the current year, and grow their investments tax-free with tax-free withdrawals for expenses related to health.
This type of account is very valuable for young and healthy people who are unlikely to need to dip into the funds for very long. For example, someone who invests only $ 100 per month (well below the current annual maximum of $ 3,600) from age 25 and earns a return of 7% per year, will be over $ 257,000 at age 65 . This amount can be withdrawn tax-free for things like vision and dental costs, health insurance premiums, and long-term care costs. An HSA plan thus offers a triple tax advantage.
While this is by no means an exhaustive list, these are just a few of the investment strategies and vehicles that we believe are underutilized. Prioritizing paying off your highest interest rate debt, followed by lower interest rate debt, is a great way to improve your credit score and short-term cash flow. taking full advantage of things like 401 (k), Roth 401 (k), and an HSA are some of the best long-term moves a younger person can do to put them on a solid financial footing later in life. .
About the authors: Anthony Lupo, CFPÂ®, Rob Tilson, CFPÂ® and Eric Tilson
Anthony has been with Tilson Financial Group since 2010. As a Financial Analyst, Anthony’s responsibilities include research and analysis, portfolio rebalancing and developing financial plans for clients. He is a member of the firm’s financial planning and investment committees. Anthony holds CERTIFIED FINANCIAL PLANNER â¢ (CFPÂ®) certification and graduated with Distinction from Rutgers University where he earned a Bachelor of Arts in Economics and Psychology.
Prior to joining the Tilson Financial team in 2016, Rob spent six years with Gabelli & Partners, LLC, a financial management firm in Rye, NY. As a financial planner, Rob’s primary responsibilities include investment analysis and business development. He is also a member of the firm’s financial planning and investment committees. Rob holds CERTIFIED FINANCIAL PLANNER â¢ (CFPÂ®) certification and is a graduate of Boston College where he obtained a Bachelor of Science in Finance and a Bachelor of Arts in Philosophy.
Eric joined Tilson Financial Group in mid-2021. Eric has spent the past six years with Prudential Financial, Inc., most recently as a Portfolio Administration Specialist in the hedge fund area at the Newark headquarters. Eric’s main responsibilities are investment analysis, financial planning and operations. He is a member of the firm’s investment and financial planning committees. He graduated from Lafayette College with an undergraduate degree in economics and holds an MBA from the Stern School of Business at New York University with a specialization in quantitative finance and strategy.