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Young Investor’s Guide to Building a Financial Future

The future looks bright for younger investors. A 2024 analysis by the Investment Company Institute found that, adjusted for inflation, Gen Zers have nearly three times more retirement assets than Gen Xers did at the same age. That’s a seismic shift, and we would propose it’s largely due to improvements in the retirement system—think 401(k)s—providing you with a relatively easy way to start and build your savings.

Even so, if you’re new to investing or know someone who is, it can be tough to know where to start. There’s so much information and advice out there, it’s hard to know which of it makes sense for you. The good news is that getting familiar with a few basic principles can help you see past the information overload and set you on the path toward a healthy financial future.

Let’s jump-start your efforts with six important concepts for young investors to know about.

Avoid the Vicious Cycle of Credit Card Debt

The debt you carry directly impacts every facet of your financial life. Put plainly, every dollar you put toward paying down a credit card bill or car loan is one less dollar that can grow to benefit Future You. That’s why minimizing bad debt is the first step toward building a strong financial future.

Note that we said “bad debt.” The truth is that not all debts are bad. Low-interest student loans, for instance, can help you receive the education you need to follow a rewarding career path and earn income. And reasonable mortgages can help you buy a home and build equity. On the other hand, high-interest credit card debt can quickly become very expensive—and severely hamper your ability to make other, more important financial moves such as saving and investing.

Why is credit card debt so bad? Credit cards are a form of revolving credit; they allow you to carry a balance from month to month. If you can pay your balance off every month, you won’t owe interest. But if you carry a balance, you’ll pay interest on that balance—often to the tune of 20% or more. That interest will be tacked on to your total bill, which will then continue to accrue interest.

If you get in the habit of only paying the minimum every month, your debt load will only grow greater over time. Using Bankrate’s calculator, let’s say you have $1,000 in debt on a credit card with a 20% interest rate. If you only make minimum payments of 2%, or $20, per month, it will take you 195 months—more than 16 years—just to pay off this single debt. And in that time, you will have paid $2,126.15 in interest—more than double the amount of your original debt.

In short:

Use high-interest debt carefully, and if you can, only use your credit card when you know you’ll be able to pay off your balance in short order. That way, you’ll avoid getting trapped in a cycle of debt, and you’ll have more cash available to meet other goals, including investing for your future.

Stay Invested for the Long Haul

As a young investor, you may not have much money to invest. But what you may lack in resources, you more than make up for with time. With decades until retirement, the modest investments you make now can grow substantially over time.

This is thanks to the incredible power of compounding returns, or the return you earn on your returns. Indeed, the longer you can keep your money invested, the longer you can take advantage of compound growth to propel exponential growth in your investments. In tax-advantaged retirement accounts, these benefits are magnified as tax-deferred and tax-free growth allows even more money to compound over time.

You may be skeptical about just how important compounding can be. Consider this example: If you start with a humble penny and double its value every day in June, you’ll end up with a cool $5.37 million by the end of the month. If you started this one-month savings journey in July, which has one more day than June, you’d finish with more than $10.7 million. Of course, chances are slim to none that your investments are going to double every day. But the fact remains that compounding is one of the most powerful financial tools at your disposal. And when you pair compounding with time (remember that extra day in July?), the results can be even more impressive.

In short:

The longer you stay invested, the more your investments will have a chance to increase exponentially, thanks to compounding returns.

Make the Most of Tax-Advantaged Retirement Accounts

The government wants you to save for the future. To encourage you to do so, retirement savings plans, such as 401(k)s and individual retirement accounts (IRAs), offer big tax advantages that can save you money today and compound the growth of your savings for tomorrow.

Employer-sponsored plans such as 401(k)s allow you to contribute pretax income to your account. In 2024, you can contribute up to $23,000. Better still, your employer may offer matching funds. Contribute enough to receive these matches and avoid leaving extra money on the table.

Come tax time, you and your employer’s contributions aren’t reported as taxable income. Investments held inside the account grow tax deferred. You won’t have to pay any taxes until you start taking withdrawals from that account. The result? More money is available to work for you—and to benefit from the powers of compounding. Eventual withdrawals are taxed at ordinary income tax rates. But beware that making withdrawals before age 59½ can saddle you with an additional 10% early withdrawal penalty.

If you want to save even more, check out Roth IRAs. Unlike traditional IRAs, you make Roth IRA contributions after tax. That means you can’t deduct those contributions on your tax return, but it also means you won’t owe taxes when you start taking withdrawals in retirement. This can

be a great trade-off if you’re a younger investor who hasn’t hit your peak earning years and you are still paying a relatively low-income tax rate.

In short:

If possible, max out your retirement plans to take full advantage of their powerful, tax-sheltered compound growth over time. Also, avoid leaving money on the table if your employer is offering to match your 401(k) contributions.

Get Diversified

In the short term, stock market swings can test even the strongest-willed investor, but over the long term, the market has historically shown a remarkable ability to smooth out performance and head in an upward direction. Holding a diversified basket of many different types of investments helps your portfolio weather short-term bumps in the market and benefit from the market’s growth over time.

What is diversification? In a general sense, it’s about spreading your risks around. In investing, that means it’s more than just ensuring you have many holdings. It’s also about having many different kinds of holdings.

So, how do you get diversified without overcomplicating your life? Invest in one or a few basic ETFs and mutual funds with a broadly diversified basket of stocks similar to those in broad market indexes, such as the S&P 500 or the Russell 2000. Favor those with relatively low expense ratios. You can build a well-diversified portfolio with just a handful of these sorts of low-cost holdings or look for a target retirement date fund to take out the guesswork.

In short:

Investing broadly across assets of various sector, size and geographies can help you build a resilient portfolio that can better weather the ups and down of the market over time.

Avoid Speculating

Focusing attention on broad market indices can also help you avoid speculative behaviors that tend to have a negative impact on your long-term returns. These include market timing and stock picking.

Attempts at timing the market—buying and selling stocks based on breaking news and short-term market movements—often turn out poorly. Because you’re typically buying into hot trends and selling when conditions are scary, you end up buying when prices are high or selling when prices are low. In both cases, that behavior can take a big bite out of your savings, causing major setbacks as you work toward your long-term financial goals.

In fact, investors’ poor track record around market timing is well-known to researchers. A long-running annual survey of investor behavior by DALBAR found that the average equity fund

investor trailed the S&P 500 by roughly 5.5% in 2023 due in large part to poor decisions surrounding when to buy and sell.

If you hold a large portion of your portfolio in just a few stocks, each holding can have an outsized effect on your portfolio. Should something happen to just one of the companies you happen to hold—bankruptcy, for instance—you could lose a big chunk of your savings.

In short:

Timing the market can lead you to buy stocks when they’re expensive and lock in losses by selling during downturns. When it comes to stock picking, it’s exceedingly difficult to pick single stocks that will be winners, and holding concentrated stock positions can introduce uncompensated risk to your portfolio. Instead, build a diversified portfolio as part of your long-term financial plan.

Follow a Plan That Fits Your Goals

So how should you divvy up your diversified investments? Start with your asset allocation, which is how your portfolio is spread among asset classes including stocks, bonds and cash. Then base your asset allocation on your personal goals, tolerance for risk and the length of time you have to invest. With years ahead of you, if you’re able to remain calm and invested during the market’s inevitable rough patches, a healthy dose of stock market returns can take you far.

In short:

Build your portfolio based on your personal goals, risk tolerance and time horizon rather than chasing or fleeing hot or cold investments or focusing on generalized rules of thumb.