This guide features lesser known, yet very effective, investment vehicles for young adults (18-25+ years old) who already have the finances for their rent, bills, food, and other essentials, but have extra money to spare. The most popular advice is to create a savings account that has a high interest rate or invest in stocks and bonds, but these tips will show how you can leverage investment techniques to accomplish that advice much more effectively.
Investing podcasts are a great way to learn from the experts:
“The best investment you can make, is an investment in yourself... The more you learn, the more you’ll earn” ー Warren Buffett
As you complete the tips in this guide, check them off below!
Open a Roth IRA
Check to see if your parents have a high-deductible health plan
If so, start contributing to your HSA
Invest using a Robo Advisor
Learn about the Mega Backdoor Roth IRA
Open a Roth IRA
A Roth IRA is an individual retirement account that provides tax-free growth and tax-free withdrawals during retirement.
It is recommended to invest in Roth IRAs when you expect your current income tax rate to be less than your tax rate in retirement. Contributions are made post-tax, so you are eating the cost of paying tax on your income so that you don’t have to pay tax on the returns when you withdraw the money. This differs from the Traditional IRA, whose contributions are pre-tax, allowing you to avoid paying taxes now so that they can be paid later. Since young investors are still at the beginning of their careers and likely aren’t making that much relative to their income later in their lives, a Roth IRA is an excellent way of investing.
Learn more about Roth IRAs and their rules and restrictions here:
Monthly Contribution amount to your Roth IRA in Dollars
Level of Risk (Percentage in returns)
Low Risk: ~5%
Medium Risk: ~10%
High Risk: ~15%
Money in your Roth IRA Account
Account Balance Table
Contribute to an HSA
An HSA is a Health Savings Plan that you can contribute to if you are covered under a high-deductible health plan (HDHP) to save for qualified medical expenses. The money invested in a HSA is triple-tax advantaged, which means that there is no tax on the withdrawals, growth, or the expenses as long as the money is spent on qualifying medical expenses.
Although most people are on their parents’ health insurance until they turn 26 years old, many people don’t know that if you file your taxes as an independent while covered by your parents’ HDHP, then you are still eligible to contribute the full amount to your own HSA. The reason for this is that when you start filing as an independent, your parents can no longer pay your medical expenses using their HSA account, giving you the ability to make your own HSA to cover your expenses.
Learn more about the advantages of a HSA here:
Invest using a Robo Advisor
Many young investors don’t have the interest, time, or knowledge to strategically invest in the stock market on their own, which is where Robo-advisors come in. Robo-advisors are a class of financial adviser that provide financial advice or investment management online with moderate to minimal human intervention.
They usually have small fees around 0.25-0.5% which are required to manage your investments. Robo-advisors like Wealthfront and Betterment allow you to set your risk score from 1-10 based on how risky you want your investments to be. All you have to do is put your money into a Robo-advisor account, set a risk score, and sit back while your investment grows.
Investors argue that Robo-advisors are too expensive and that you can accomplish the same thing by investing in a retirement fund ETF with low fees. This is partially true, but Robo-advisors have a few nifty features that make it worth it for some people who are looking for a hands-off approach to investing. First, they have automatic rebalancing on assets, so every so often, your investments are redistributed among the different classes in your portfolio including US stocks, foreign stocks, emerging markets, emerging market bonds, municipal bonds, and real estate. Second, they provide automatic dividend reinvesting. Third, they provide tax-loss harvesting so that you can save money on taxes every year.
Robo-advisors can not only be used to open taxable individual investment accounts, but also to open Roth/Traditional IRAs, college saving accounts, and more.
Read more about Robo-advisors:
Here is a video summarizing how Wealthfront works:
Bonus: Mega Backdoor Roth IRA
This tip will only apply to a small number of people, but if your company provides a 401(k) retirement plan that allows for after-tax contributions, then you may be able to work around the annual $6,000 Roth IRA contribution limit and contribute upwards of $37,000 to your Roth IRA. By using this technique, you could gain a huge advantage in saving towards retirement.
See if you qualify for a Mega Backdoor Roth IRA here: