Investing as a young adult is among the most important things one can do to prepare for their financial future. As per Kavan Choksi, after setting up their investment accounts, one would be able to save for their key goals like buying a home, going on a world tour or even retirement. Getting a head start on investing usually pays off well. Money that people invest in their 20s would compound for decades, making it a great time to invest for long-term goals.
Kavan Choksi provides a few tips to 20-year-olds starting their investment journey
Prior to making any investments, 20-year-olds must think about the goals they are trying to achieve by investing. While some may want to buy a car in two years, a few others would desire to travel every single year. There are many who start investing early so that they can comfortably retire by their 60s. One has to craft an investment plan based on their specific goals. The accounts they use for short-term goals like travel or buying a car, will differ from the investments meant to meet long-term retirement goals. Young investors should also have a good understanding of their risk tolerance. This shall involve thinking about how they may react if an investment performs poorly. Broadly speaking, the 20s can be a good time to take on investment risk because one shall have a long time to make up for losses.
After one has outlined a set of investment goals, they can explore specific accounts and investment options. 20-year-olds who start their investment journey through an employer-sponsored tax-advantaged retirement plan can especially benefit from decades of compounding. This plan usually comes in the form of a 401(k). A 401(k) allows people to invest money on a pre-tax basis, which grows tax-deferred till it is withdrawn in retirement. There are several employers who offer a Roth 401(k) option as well, enabling employees to make after-tax contributions that grow tax-free. Hence, they would not have to pay taxes when taking withdrawals during retirement.
In the opinion of Kavan Choksi, not everyone has access to a 401(k) plan at work, and hence they could choose to put their money in an individual retirement account, or IRA. IRA options are of two types, traditional and Roth. Contributions made to a traditional IRA are much like a 401(k) as they go in on a pre-tax basis and are not taxed until withdrawal. On the other hand, Roth IRA contributions go into the account after-tax, and qualified distributions may be withdrawn tax-free.
When it comes to investment options for beginners, ETFs and mutual funds are fairly popular as they allow investors to purchase a basket of securities at a fairly low price. Funds that track indexes such as the S&P 500 are popular with young investors because they easily provide broad diversification for fees that are close to zero. To meet their long-term financial goals, 20-year-olds must also consider buying stocks. While this can be done through ETFs or mutual funds, they may also pick individual companies to invest in.
