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Investing Advice for Millennials – 8 Financial Principles to Build Wealth

Investing is one of the most effective ways to build wealth, but if you’ve never invested before, it can feel overwhelming. You might not know where to start. 

Many millennials struggle to invest for a variety of reasons. It’s especially hard to get started when you’re young and just out of school, or even several years into a young career. You might be burdened with student loan debt and feel like building wealth is an unachievable goal. 

The good news is that once you learn the basics, investing isn’t too difficult and it can help you reach your financial goals.

Investing Advice for Millennials

Millennials face a unique situation. Most are fresh out of school or early in their careers and have faced difficult economies and multiple recessions. That, combined with student loan debt, high housing costs, and low wages typical of younger workers can make it hard to get ahead financially.

If you can scrape together some extra cash, investing is one of the best paths to building long-term wealth. You don’t have to start with a lot to build great investing habits today. Investing can seem complicated, but with a few simple steps, you can set yourself up for success.

1. Start Investing Early

The number one thing that you can do to succeed when investing is to start as soon as possible. The old adage “the best time to start investing was yesterday, the second-best time is today” exists for a reason. 

The reason that investing early is so important is the concept of compound interest

Imagine you find an investment that offers 10% returns every year, so you invest $100.

After one year, you’ll earn $10, giving you $110 total. After two years, you’ll earn $11.00, meaning you now have $121.00. The third year earns you $12.10, bringing your balance to $133.10.

As your balance grows, you’ll earn more and more each year. Over long periods, the power of compounding can be massive.

For example, if you continued the above investment for 35 years, your $100 would grow to a balance of $2,810.20. If you added an extra five years beyond that, you’d wind up with $4,525.90. Starting just a few years early adds more than 60% to your balance.

Although a savings account won’t let you earn 10% per year, the S&P 500 has returned roughly 10% before inflation since it was established, making that a reasonable goal.

The sooner you start, even if it’s with small amounts, the more that the power of compounding can help your investments grow.

2. Learn the Basics

Investing can be as complicated or as simple as you want it to be. You might hear people talking about options, futures, commodities trading, cryptocurrency, non-fungible tokens (NFTs), real estate and REITs, and all sorts of other investments, but you can safely ignore all them if you choose. You can get started with just a few basic concepts.

The whole point of investing is to buy something and have it increase in value. 

Stocks are one of the most common investments. You try to buy them and hold them until they gain value. Bonds are similar. You buy them and get value from them in the form of interest payments.

You can build a successful portfolio using just stocks and bonds. If you learn to evaluate these investments based on factors like the company’s earnings, value, and a few others, you can do well as an investor.

An even simpler strategy is to invest in mutual funds and exchange-traded funds (ETFs), which hold a huge variety of stocks, bonds, and other investments. Buying shares in low-cost, diversified ETFs can be one of the easiest ways to invest and can still produce strong returns.

3. Identify Your Financial Goals

Before you start investing, you should understand why you’re trying to invest. Your goals will have a major impact on your strategy.

Two of the most important variables to consider are your time horizon and risk tolerance.

For example, imagine you’re investing to help build a retirement nest egg. If you’re 30 years old, you have between 30 and 40 years until you hit traditional retirement age. That means you can afford to take a bigger risk with your investments. If they don’t pan out or experience periods of volatility, you have time to recover.

On the other hand, if you’re investing so you can build up a down payment to buy a home next year, you can’t afford to lose that money. That means you should seek less risky investment opportunities.

Regardless of the reason for investing, make sure you set goals that are measurable and achievable. That will make it easier for you to track your progress and make sure you’re on track to meet your goals.

4. Choose an Investment Strategy

There are many different strategies investors can use.

For example, value investors look to find companies that are trading at lower prices than their true value. This can often include larger, more established companies.

Growth investors, on the other hand, aim to buy shares in businesses that are poised to see major growth in the future. However, there’s always the risk that they don’t manage to realize those growth opportunities.

Yet other investors want to use passive investing strategies, such as buying index mutual funds or exchange-traded funds. These people aim to match the stock market’s returns rather than beat it.

You can choose your strategy based on your preferences and goals. Some people find investing enjoyable and want to earn higher returns than the market. Others want to keep it simple and are happy accepting returns similar to the overall market’s.

5. Know Which Investments Are Best for Millennials

There are different investments designed for different types of people. Some may be more suitable for millennials than others.

Millennials are roughly between 25 and 40 years old. That means, by and large, millennials have a long time to go before retiring and want to find investments that offer reasonable returns. They can also handle some volatility in their investments.

That makes investments like a stock index fund or target-date retirement fund with a long time until the target retirement date a good fit for young investors.

Compare this with an older investor who is retired or close to retirement. They may be looking for investments like annuities, managed payout funds, or bond index funds that will help them turn their nest egg into a source of income and minimize their risk.

6. Maximize Your Retirement Contributions

One of the best ways to save money is to take advantage of retirement accounts. Individual retirement accounts (IRAs) and 401(k)s offer tax incentives when you use them to save.

Traditional versions of these accounts let you deduct contributions from your taxable income, saving you money on your tax bill today. You then pay income taxes on the withdrawals in retirement. 

By contrast, you don’t get a tax deduction for money you contribute to a Roth IRA or Roth 401(k) today, but you can withdraw from the account tax-free — including your investment gains — in retirement.

These tax incentives can be worth a lot of money.

If you’re a single person with a taxable income of $50,000, you fall into the 22% tax bracket. If you max out your traditional IRA contribution by adding $6,000 to the account, you get to deduct that amount from your taxable income, meaning you only report $44,000 in taxable income. That saves you $1,320 in income taxes, so adding $6,000 to your retirement savings only costs you $4,680 out of pocket.

A 401(k) offers the same benefit, but can only be opened if your employer offers one. However, many employers also offer matching contributions, meaning they add money to your account when you put money into it. It’s like getting free money from your employer whenever you save.

7. Automate Your Investments

Unless you enjoy being an active investor, automating your investments can be a good idea. You can set accounts up so that you save money without even thinking about it. All you have to do is check in on your account every few months to make sure you’re still on track.

Most brokers will let you set up automatic transfers into your investment accounts. For example, you could set up an automatic transfer into an index fund so that you invest $200 each month. You can make automatic investments that coincide with your paychecks, so the money comes in and goes right into your investments without you even really noticing it. Over time, you’ll keep adding to your investment account and the balance will grow.

If you want to be as hands-off as possible, you could consider enlisting the services of a robo-advisor. Robo-advisors are programs that handle investing decisions on your behalf. The program builds and manages your portfolio based on your investment goals and risk tolerance. They can also provide advanced investing strategies that may help boost your returns. All you have to do is tell the program when you want to deposit or withdraw money.

8. Don’t Be Afraid to Ask for Help

The truth is that investing can be difficult and complicated, especially if you choose individual stocks or start dabbling in other asset classes. Even if you feel confident with managing your money and with basic investing concepts, you should never be afraid to ask for help or to get a second opinion.

Financial advisors are professionals who can help you with a lot of things related to money. They can assist you with designing a financial plan, building an investment portfolio, and executing an investing strategy.

Some financial advisors can serve as guides or consultants you ask for help when you need investment advice. Others will take over managing your investment portfolio for you based on your goals and risk tolerance. You can choose the advisor that’s right for you based on your personal needs.

When you choose a financial advisor, make sure their style meshes well with yours. You should also take a close look at how they make money. Some earn commissions by directing you to specific investments, whereas others charge hourly or asset-based fees.

Final Word

Investing is important, but it can be difficult if you’re just getting started and feel like you don’t know what you’re doing. The good news is that with a bit of work, you can learn about how investing works and build yourself a solid portfolio. You can use that to prepare yourself for future goals like buying a home or retirement.

TJ is a Boston-based writer who focuses on credit cards, credit, and bank accounts. When he's not writing about all things personal finance, he enjoys cooking, esports, soccer, hockey, and games of the video and board varieties.