May 17, 2017
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Hi! Today, I have Alex Flores who is full-time high school mathematics/computer science teacher by day and run his fair share of side hustles. His two sisters both own all of his businesses and they make an awesome family team. I am thankful for Alex for sharing why investing at a young age is so important and not just financially. Enjoy this guest post!
The Reality of Investing at a Young Age
Investing in yourself, your health, your family/friends and your happiness
Enjoy every day to the fullest. At the end of the day, if you are not happy about what you are doing, then you must change your life. Life is too short not to enjoy every moment of every day. There will always be days that are tough and times you may just want to give up, but everything will work out in the end. Always remember to keep your chin up and to remain positive.
Investing for tomorrow
Put money in a savings account; have an emergency fund. Everyone should have at least three types of accounts: a checking account, savings account, and a credit card account (if and only if, you have zero debt and no overspending issues. If you do, use cash.). The majority of your money should be in your savings account since it does grow at some very low interest rate, when your checking usually does not. Also, since you must pay for bills and other expenses, get a credit card where you gain bonus points for every dollar you spend. Over the past two years, I have earned over $1,000 dollars from paying my bills and purchasing gas. (Once again, if and only if, you have zero debt and no overspending issues. If you do, use cash and forgo the credit card rewards; they are not worth the debt overspending trap.)
Related Post: How Much to Save for Emergency Fund
If you own a home or a car, make sure to have an emergency fund readily available in case of a dire situation. Most loan companies like to see a minimum of six months expenses saved up in order for you to purchase a home, car or receive any type of large loan amount. You always want to be prepared for the inevitable.
Related Post: How to Save Money
Now, that you have saved for the near future, the next section digs deep into some of the most popular ways to invest for your retirement. It may seem likes years away, but exponential interest is your best friends, specifically if it is utilized over a long period of time.
Investing for retirement
The main reason to invest at a young age is not because you want some financial security for when you or your family are older. However, if you do not invest from a young age, you are being foolish. Exponential growth is still your best friend and not just when you were sitting in Algebra II. The most common money example of exponential growth is a penny double a day. For example, if one day you have one penny, day two four pennies, day three eight pennies and the pattern continues for thirty days; guess how much money you have at the end of the month? A little over ten million dollars. This example is not exactly realistic, but it shows how exponential growth and compound interest work.
A more realistic example is if you start investing $5,500 in a Roth IRA at the young age of 18 years old. You invest until you can take out your money at 65 years old and receive an average of 7% return a year (which is the average for the stock market and investment accounts) over the length of time. When you hit age 65, there will be $1,937,486 in your account to enjoy for the rest of your life.
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If you are hesitant on investing at such a young age or believe that this is not possible, then you have a poor mindset. Putting away ten, five or even one dollar a day can make an impact on your future down the road. If you do not want to invest for yourself, invest for your future family and loved ones. Make it a competition with your friends or family, so there is some type of incentive if you cannot find one right now.
Various Types of Retirement Accounts
1. Traditional IRA –
An investment account that you must setup through an investing agent like Ally Invest, TD Ameritrade, or Motif Investing. A traditional IRA has a maximum contribution amount of $5,500 a year or $6,500 a year if you are 50 or older. Shop around with various companies to find the best fit for your investing strategy.
Pros: There are no income limits that restrict contributing to a traditional IRA. Any contributions to your traditional IRA lower your taxable income.
Cons: When you take out your money at retirement age, you pay taxes on your withdrawals. The name of the game is similar to that of 401/403b that are listed below and that is to have a high level of income now, but a low tax bracket during retirement. However, that is not true in many cases.
2. Roth IRA –
An investment account that you must setup through an investing agent like Ally Invest, TD Ameritrade, or Motif Investing. A Roth IRA has a maximum contribution amount of $5,500 a year or $6,500 a year if you are 50 or older. Shop around with various companies to find the best fit for your investing strategy.
Pros: Your income is not taxed once you start to collect your retirement money from your Roth IRA since it was taxed when you put the money in the account. Contributions can be withdrawn both penalty and tax free any time before the age of 59.5 years old. (Earnings may be subject to penalties and taxes.) Five tax years after your first contribution, you may take out up to $10,000 for a qualified first time home buying purchase.
Cons: A Roth IRA has an income limit. If your AGI is over $132,000 a year as a single filer or $194,000 filing jointly, then you are ineligible to contribute to a Roth IRA. There are no tax breaks for contributions.
** For both types of IRA investment accounts, there is normally a 10% penalty for early withdrawals of funds.
3. 401k/403b –
An investment account setup through your employer. A 401k is for private sector and 403b is public sector employees. For example, as a school teacher, I invest in a 403b and my sister invests in a 401k since she works for a private corporation. Some companies will match a percentage of what you contribute a year and this is one reason that this type of investing is extremely smart. Always shop around with the various investing agents that are given through your employer, some have very high fees which can kill the amount of money you make over your years of working. The maximum contribution a year for 401k/403b. Many corporations are starting to offer Roth 401k, too.
Pros: A 401k/403b is invested at a pre-taxed amount. For instance, your employer puts the money into the account before it is taxed, if you put $100 into the account then your paycheck will only go down about $80. This type of investment account is great because it lowers your taxable income today.
Cons: The main downside of 401k/403b investing is that when you take the money out after you turn 51.5 years old is that the money is then taxed. The game of investing in a 401k/403b is to be in a high tax bracket while you are working, but a low tax bracket once you start collecting your retirement.
What if I do not have enough of an income?
Get a side hustle. A penny saved today is worth more in the future, well usually. My sisters and I all work 40+ hours in full time careers and could live easily off of our salaries, but we all have at least two side hustles.
Will these side hustles make us rich over night? Probably not. But, they may help relieve some stress financially or could even allow one of us to retire from our full time career earlier than we expect. Since we are all young, under the age of 28, we know that during this time in our lives it is vital to work as much as possible but only as long as we remain happy.
The three of us run a homemade candle and bath/body essentials business out of kitchen, Mason Jar Candles & Co. My younger sister and I run a real estate investing business. We currently have one investment property raking in over $600 profit a month! You can read about the entire process from searching for the property to refinancing the mortgage eight months later here. My older sister lives in Manhattan and is a babysitter when she has some spare evenings throughout the week.
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We all enjoy our careers but also enjoy the side hustles we endeavor. Our parents taught us to never get complacent. If you are not challenging yourself, then you need to switch up what you are doing.
Investing at a young age is extremely important in our family. Hopefully, this has inspired you to start investing at a young age, too!
Alex Flores is a full time high school mathematics/computer science teacher but enjoys his fair share of side hustles. He is owner of Rational Revivals, Mason Jar Candles & Co. and recently started an e-commerce apparel company called Farmhouse Apparel Co. His two sisters both own all of his businesses and they make an awesome family team.
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