So you’re young, you’re fresh out of college, and – unlike the rest of your friends – you’ve just managed to land your first real, grown-up job. Money is flowing into your hands faster than you’d ever thought possible, and it’s starting to flip your financial problems upside down. You’ve gone from worrying about how you’ll earn enough to pay your rent to worrying about what to do with all of the cash you’ve got just lying around.
Here’s some advice for you – don’t just let your money sit in the bank. When you make the decision to really make that cash do work for you, your reward is interest –and lots of it. So instead of depositing your next paycheck directly into your savings account, do the wise thing and put that money into one of these three investments instead.
1) A Roth IRA. A Roth IRA is pretty much the ultimate long-term investment tool. These government-backed retirement accounts will give you a tax-free shelter for your money so that you can make the most of your savings. They don’t just shelter your money, though. A Roth IRA will actually compound your investment at a ridiculous rate – which is why it’s important to start contributing when you’re young.
If a 25-year-old were to put just $5,000 into a Roth IRA every year, he or she would have over $1 million in the bank by the time retirement rolled around. The only catch to this awesome investment is that once you put money in, you have to wait until a) you buy a house or b) you retire at age 65 to withdraw it again. If you want to take your money out for any other reason, you’ll have to pay a 10% penalty fee and your withdrawal will be taxed.
2) The Bond Market. The bond market is a lot like the stock market, only less volatile. Your annual returns will be smaller than they would be if you were to invest in stocks alone– between 8-10%, typically – but your investment will be much less likely to crash and leave you broke. This makes the bond market a good solution for anyone who wants a more liquid and aggressive approach to long-term investing than what an IRA provides.
You don’t need a finance degree to invest in bonds, either. There are plenty of large investment firms – like Vanguard and Charles Schwab – that would be happy to help you break into the market. They’ll help you pick a diverse portfolio of low-risk securities to kick off your investing career. All you need to do is sit back and watch the money trickle in.
3) A House. A house is more than just a place to live. It’s a long-term investment. Here’s how it works. As you pay off your mortgage, you’ll earn equity in your home. The more equity you have, the more money you’ll earn when you sell the house. So let’s say you bought your first home for $200,000. After ten years, you’ve paid the home off and have added a deck and some other improvements, and by doing that you’ve increased the home’s overall value to $220,000. When you sell your home, you’ll be able to pocket that $220,000 – and that means that your investment was profitable in the long run.
Though the shaky housing market might be off-putting for some, now is actually a great time to invest in a house. The market is recovering slowly, but home prices are still lower than they’ve been since 2001. This means that as long as you care for your property, it should steadily appreciate in value over the next five to 10 years.
Young people, your money isn’t happy in the bank. It would rather be pulling its weight for you in a mortgage or in the bond market. If you can spare a few thousand dollars every month, investments like these will help you prepare for retirement with minimal effort. So please, think about what your money really wants – because like a working dog, your money isn’t happy unless it’s doing something worthwhile.