Tips for Investing Under 30
As someone who reached financial independence very early in my own life, and who has documented much of it on my personal blog over the years, I'm sometimes asked about strategies and concepts related to investing under 30; what a relatively young person should do to secure his or her financial future. It makes me glad whenever I am because it means a person is already on the right track, often while there is still time that a few small seeds planted can turn into towering redwoods. Though it's not exactly a secret that the power of compounding results in some pretty crazy outcomes if you start putting your money to work early in life—even small amounts put into a good, well-structured portfolio of productive assets such as stocks, bonds, real estate, and private businesses can turn into a multi-generational fortune with a big enough runway—a lot of investors 30 or younger have no idea where to begin.
First, though, let's look at that time advantage so you appreciate the scope of consequence for delayed action.
When You Begin Investing Under 30, You Give Yourself a Massive Lifetime Wealth-Building Advantage
Let's consider two scenarios. In the first, a hard-working 18-year-old decides that he is going to put aside $500 a month into a portfolio of blue chip stocks; something that is absolutely doable if a person has even a modicum of drive and intelligence absent extraordinary circumstances such as a medical disaster or physical handicap. He never plans on increasing this amount with the rate of inflation. Were the long-term results of these holdings, as an asset class, to match the historical long-term experience of the past century or so, he might expect to find himself sitting on $7,306,484 or so by the time he retires at 65. By the end of his life expectancy in the United States, he'd have accumulated $30,696,747. If he treats this particular pile of capital as stealth-wealth wholly aside from any other investments acquired over his lifetime, it would be a massive pile of hidden loot to pass on to his children, grandchildren, and/or charity. There is no real heavy lifting required, just the steel-nerved ability to ignore recessions and stock market collapses while sitting back and reinvesting dividends; to opt for a systematic or valuation based purchase strategy rather than market timing, which cannot be done with any degree of consistency or predictability.
On the other hand, if this same investor waited until he was 40 years old to start building a portfolio—still very young and barely over the halfway point for life expectancy—he'd only end up with $686,480 by 65 and $3,041,147 by the end of his life expectancy; a breathtaking reduction of more than 90 percent in both cases. To end up with the same amount he otherwise would have had, our investor would need to put aside $5,322 per month to reach his goal by 65, or $5,047 per month to reach his goal by the end of life expectancy. It goes back to the old proverb, "The best time to plant a tree was yesterday. The second best time is today." In the investing business, that sums up the role of time nicely.
A General Checklist for Investing Under 30
How does an investor under the age of 30 go about building a solid investment portfolio? Though your own situation may differ, and could require the services of a registered investment advisor, generally, I'd think a rough outline might look something like this assuming you are self-made and not fortunate enough to have a sizable trust fund:
- Contribute to your 401(k) plan or other comparable work retirement plan, at least up to the amount of the company match, if any. The tax advantages are substantial (tax deduction from payroll at the time of funding, plus your money can grow tax-deferred for years, perhaps even decades depending on your age and willingness to leave it in the account after you've retired up to the mandatory distribution age of 70.5 years old), you instantly earn an outsized return thanks to the leveraging effect of the employer's contribution, and you have unlimited bankruptcy protection for your assets in almost all circumstances, meaning if you get wiped out, you might be able to keep your retirement funds beyond the reach of creditors so you don't have to start over from scratch when you emerge from the courthouse. The same goes for your spouse if you are married (another one of the many financial benefits of marriage). You might opt for a collection of low-cost index funds as these are almost always the best you can do working for a large company.
- Contribute to a Roth IRA, if you are eligible, as it very well may be a perfect tax shelter ever devised for a majority of American households. Though you won't get a tax deduction at the time the account is funded like you would with a Traditional IRA, there is currently a low seven-figure protection in place against creditors should you declare bankruptcy (which is on top of the unlimited protection your employer-sponsored plan offers, such as the 401(k) we discussed a moment ago) and, as long as you don't break certain rules, the money in your Roth IRA will never be subject to any domestic taxation, Federal, state, or local, ever again no matter how enormous it may grow (unless, of course, Congress changes the rules that have been in effect since the beginning).
- Consider exploiting the Health Savings Account (HSA) regulations to effectively turn an HSA into a third IRA. It's not perfect but it is a real option for some families.
- If you are like a vast majority of American households who fall under certain adjusted gross income limits, you may be entirely exempt at the Federal level from taxes on dividends and capital gains. This means you could collect thousands, or even tens of thousands, of dollars in passive income in a year and owe nothing on it. As a result, it makes sense at this point to consider establishing an otherwise fully taxable brokerage account and filling it with a diversified collection of high-quality dividend and dividend growth stocks. If you prefer, you can establish direct stock purchase and dividend reinvestment plan accounts, instead. You get a statement from the transfer agent of the company showing exactly how much ownership you have in the firm. When the company sends out a dividend, you either get a paper check in the mail, a direct deposit into your bank or brokerage account of choice, or have those dividend plowed back in at (often) little to no cost.
The main thing, and a point I constantly hammer home on my personal blog, is the expansion of what I have taken to calling your "core economic engine". These are the things that actually produces the initial investment capital for you in the first place. One of my first engines, way back in the day, was a letterman jacket company my husband and I started from our college apartment. Along with several other cash generators, it provided part of the stream of initial capital that allowed us to accumulate other holdings that went on to produce cash flows of their own, ad infinitum. This means, if you are in medical school, consider the specialty that allows you to earn the most money at the trade-off you are willing to accept for lifestyle and personal happiness. If you are a small business owner, find a way to expand your profits so you have more dry powder to invest.
Whatever you do, the biggest challenge you are likely to face as an investor under 30 is the temptation to do something; to sell out during panics, to buy more during bubbles. It's human nature. While making money is simple, behavioral economics has demonstrated time and time again that people are mostly irrational and become their own worst enemy.