Eighteen-year-olds are in one of the best spots to make long-term investments. They don't have as many financial responsibilities as parents and can wait several years before they even have to think about selling some of their stocks.
However, being young also gives them less experience. That's why an 18-year-old who's interested in investing turned to Reddit for some suggestions.
"I'd like to get into investing," the recent high school graduate shared in the Personal Finance subreddit.
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The 18-year-old currently has savings in a Wealthfront account, which has a 4.00% APY. Redditors offered several suggestions on how to approach investing.
Start Contributing To A Retirement Account Now
Many Redditors encouraged the 18-year-old to contribute to retirement accounts. If the employer offers retirement accounts, the young Redditor should aim to max out the account.
However, you don't need an employer-sponsored retirement plan to get started. Anyone can create an individual retirement account, even if they are doing freelance work. These tax-advantaged accounts let you accumulate assets while reducing your tax bill.
Roth IRAs make more sense for people who aren't earning high incomes. Your account contributions get taxed, but you don't pay any taxes on withdrawals, dividends, or capital gains. Traditional IRAs let you make tax-free contributions, but you get taxed on the way out. These accounts are better for people who have high incomes.
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Learn How To Start A Business
Although investing often revolves around stocks and real estate, you can also invest in yourself and learn how to start a business. One Redditor encouraged the 18-year-old to go in that direction.
The original poster currently works full-time at an HVAC company. While the industry can pay well, your earnings potential will skyrocket if you start a business instead of relying on an employer's paychecks.
"Learn everything you can about not only HVAC but how to run an HVAC business! You'll do really well by the time you're 30!" one commenter suggested.
Starting a business isn't only good for boosting your earnings. It also diversifies your income and reduces financial risk once you establish your business. When you own a business, you're not at the mercy of an employer potentially laying you off due to a slow economy. You have more control over your company's outcomes and can tap into new markets to increase revenue.
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Focus On Index Funds
Most 18-year-olds don't know much about investing. It's not taught in most schools, and you learn the most about investing by experiencing it.
Instead of picking individual stocks, the Redditor can focus on an index fund that tracks an established benchmark like the S&P 500. These funds typically have low expense ratios and tend to outperform most active investors.
Index funds can produce much higher returns than a savings account that offers 4.00% APY. Plus, you won't be taxed on any of your unrealized capital gains. Any qualified dividends also get taxed at better rates than the interest payments you receive from a high-yield savings account. Stocks are riskier than savings accounts, but the 18-year-old has a lot of time to wait out any corrections and volatility.
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