If your child is financially minded, she may want to start investing the money she gets from her job.
While this is a great goal, and there are ways to invest that can set her up for a very comfortable future, she should first make sure that she has other needs taken care of. Her first priority should be investing in herself.
First Things First
Before your child invests, she should use the money to pay for current priorities.
Pay for College
If he is attending college, his first priority should be to pay for college and get through their studies with minimal or no student loan or credit card debt. That includes tuition and room and board as well as living expenses.
For many students, just covering this expense will take all of their money, but it’s worth it not to go into debt for college.
If she is lucky enough to have her college education paid for, either thanks to relatives’ generosity or scholarships, the next item to work on is an emergency fund. When she begins her career, he may have times of unemployment, and an emergency fund can help during these times of transition. Ideally, she should save three to six months, depending on what field she is in and how stable his employment is.
Down Payment On A House
If he has already covered paying for college and has an emergency fund, the next thing to do is to save for a down payment on a house.
Most lenders require 20% down in order to avoid private mortgage insurance (PMI). Avoiding paying PMI will save her thousands of dollars over the life of the home loan.
The average price of an American home is $226,800 (Business Insider), which means she should save at least approximately $46,000 for a down payment. Also, keep in mind that the higher the cost of living in the area in which she resides, the more she’ll need to pay for a house and a down payment.
Remember, before you buy a home, make sure the time is right for you.
Once she’s covered all three of the above steps, she’s ready to invest. At a young age, a Roth IRA can make an excellent investment.
The money will continue to grow for the next 40 to 50 years of her life, earning her an excellent start on retirement.
If he does not plan to buy a house in the near future, rather than saving for a down payment, she can invest in a Roth IRA and take $10,000 of the principal from her Roth IRA out when she is ready to buy a house. The principal can be used for part of the down payment.
If she’s had the Roth IRA for more than five years, she can take the money out tax free. If she’s had the Roth IRA for less than five years, she’ll need to pay taxes on the amount but will not need to pay a penalty.
Some places to consider opening an account:
To get a quick start if she doesn’t have a lot of extra money, consider getting some free stock.
One More Consideration
Since we’re talking about young people, there is one more way to use the money that she might want to consider.
When a person is single without a spouse and kids, there will never again likely be a time when it is so easy to travel, so I’d encourage young people to also save money to go out and see the world.
In my 20s, I traveled to China, and I know, as a middle-aged woman with a spouse and three kids, a trip like that now would be out of my reach, both for the cost and the logistics. Travel when you’re young!
Kudos to any young adult who wants to invest at 18. That is a good goal, but make sure that other financial obligations are first taken care of.
How would you recommend an 18-year old invest?