4 High-Priority Financial Investments For Young Adults

Take full advantage of time by investing in your future as early as possible

Having financial freedom as a young adult is a great feeling. Now with a full-time salary and few financial obligations, you may find that you have an excess amount of money. With a solid emergency fund and savings account in place, what should you do with that money? Well, investing it early will pay off big time down the road. 

Investing early puts you at a huge advantage. Not only will you be able to make the most of compounding on your investments, but you can also make riskier decisions for a potentially higher payoff. And not only that, having a solid investment plan leads to less opportunity for you to spend your money recklessly. 

For young adults just starting to invest their money, it can be a challenge to know which avenues will give you the best payoff later. However, prioritizing paying off your debt, investing in your retirement fund, finding a cheap life insurance policy, and devoting money towards mutual funds are some of the best places to start. 

 

1. Invest In a Debt-Free Future

Prioritizing paying off large debts now will provide you with financial freedom down the road

For young people, student loans can feel like a huge weight on their shoulders. And paying off student loans can take around 10-30 years depending on how much you have, your interest rate, and your repayment plan. As recent grads look at their student loan repayment plans, it can be easy to simply accept they will have this payment for a long time coming. Because of this, it may be tempting to start putting money toward investing before paying off your current debt. While you can absolutely invest and pay off your debts in tandem, you may want to prioritize making extra payments on your outstanding debt before making major investments. 

By paying off your debt early, you save yourself money on the interest associated with your payment. Look at your savings on interest as a guaranteed return: if you have an interest rate of 7%, you will essentially get a 7% return when paying down your debt early. While you may or may not get a certain long-term return on, let’s say for example stocks, you can be certain that you will see a return from paying off loan payments early. Making larger strides towards your large debts will help you decrease your debt-to-income ratio and become debt-free sooner so you can embrace a higher level of financial freedom much sooner.  

2. Contribute To Your Retirement Fund

The best time to start saving for retirement is now

Even if you start out small, it’s best to start saving for retirement as early as possible. Especially as you start working full-time, your company will likely offer a 401(k) plan so you can start contributing part of your paycheck. Keep in mind that a 401(k) is not your only option here. In fact, many people opt to open an IRA to either supplement their 401(k) or contribute their retirement investment fully. 

401(k)

Many employers offer a 401(k) to their employees, and as an added benefit, many employers will match contributions. A 401(k) is a type of retirement saving plan that gives employees the opportunity to devote a percentage of their paycheck to an investment account. There are two different types of 401(k) options that employers typically offer:

• Traditional 401(k) – When an employee makes a contribution to a traditional 401(k), that is taken from their pay before it is taxed. When the money is withdrawn, then the money is taxed. 
• Roth 401(k) – When an employee makes a contribution to a Roth 401(k), those contributions are made after their pay has been taxed. However, when the money is withdrawn, the money will not be taxed again. 

When an employee sets up their 401(k) and starts their contributions, they must choose how their contributions are invested. Normally, the choice is determined by the level of risk the employee is willing to take on their investment. There is also an annual limit on how much someone is able to invest, which was $20,500 for employees under the age of 50 in 2022. 

Individual retirement accounts (IRAs)

While a 401(k) is a great way to start saving for retirement, it might not be an available option. Even if a 401(k) is an option for you, it may not be enough in the long term. That’s where an individual retirement account (IRA) comes into play. An IRA can be used to supplement 401(k) investments or to get started without an employer. There are 3 types of IRAs to choose from:

• Traditional IRA – The contributions you make on a traditional IRA can normally be used as a deduction on your tax returns. Those contributions are normally tax-deferred as your investment grows in your account. These savings will be taxed when they are withdrawn. 
• Roth IRA – Contributions made to a Roth IRA are made after the pay is taxed. These contributions are normally tax-deferred as the investment grows as well. However, when your money is withdrawn during retirement, it is almost always not taxed. 
• Rollover IRA – When you leave a company and have invested in their 401(k) plan, one of the options to move the money from the employer is to roll it over into a traditional IRA. 

No matter what type of retirement account you choose, it’s wise to start making contributions—even if you start off small. 

3. Find a Life Insurance Policy Now

Buying a life insurance policy as a young adult will lock in a lower premium payment 

Life insurance may not be the top priority for young adults looking to invest their money. It may even seem ridiculous to a single young adult in great health with little or no financial obligations. But that is exactly the reason that you should find a life insurance policy now. While you may not feel a strong need to get it now, a life insurance policy might be something you prioritize down the line if you plan to get married and start a family. However, if you put off getting a life insurance policy until you get to those stages in life, you can expect to pay much more for your coverage. 

When determining premiums, life insurance companies consider your age and your health as some of the most important factors. So, as a healthy, young adult in your early 20s, you are much more likely to find affordable life insurance coverage now than you will 10 years down the line. When buying a life insurance policy early on, you can adjust to the monthly payment now when you are a bit more financially free from other obligations. 

In general, most young adults find that term life insurance is the best option for them. Term life insurance is a type of death benefit that covers a policyholder for an agreed-upon amount of time. This term of the policy can last as little as 10 years and as long as 40 years, so young adults can find a lot of flexibility in their policy options. Should the policyholder pass away within the timeframe of their coverage, their beneficiaries would be paid the entire coverage amount, which is typically not taxed. 

Another option, though typically not as popular, is a whole life insurance policy. With a whole life insurance policy, a policyholder will have coverage for the entirety of their life. This type of insurance also accrues a cash benefit, which can be used in the future to borrow money. While this type of coverage is much more extensive than a term life insurance policy, it also comes at a higher price. Even with some financial freedom and independence, a lot of young people find that this type of insurance is way out of their budget. 

Even though a term life insurance policy does have an expiration date, once that date is reached, a policyholder can renew their term life insurance policy or convert it into a permanent life insurance option. With so much flexibility at a low price point, there is an argument for getting a life insurance policy—even at a young age. 

4. Invest In Mutual Funds

Diversify your investments with a mutual fund

Mutual funds give investors the opportunity to invest in things like stocks and bonds, but mutual funds are overseen by money managers to ensure that the way the money is invested aligns with the investor’s goals. As a shareholder in a mutual fund, investors get access to professionally managed portfolios and receive proportional gains and losses from the fund. Essentially, mutual funds allow investors to pool their money with other investors to be able to afford certain investments that may have been otherwise unaffordable. 

For a young adult just starting out, mutual funds instantly diversify an investment portfolio because their investment will be spread over many stocks and bonds. Because it is professionally managed as well, there is a much higher level of security in the investment because fund managers are doing much of the heavy lifting in the investment. 

 

As young adults, many people are able to enjoy a certain level of financial freedom without too many financial obligations. But, when they have extra money left over in their budget, it can be tempting to spend it. However, investing that money into things like mutual funds, retirement, and affordable life insurance coverage, can pay off tenfold down the road.