You’ll read a lot in the personal finance community about the perfect ordering of how you should invest your money in investments.
Such investing strategies typically goes like the following:
- If your employer has a 401(k), invest in that first.
- Next, put you money in either a Roth or Traditional IRA.
- Finally, open a regular brokerage account and put any money left over in it.
The strategy above is a sound strategy, no disputing that, but it also makes investing kind of boring and a bit like a self retirement tax, especially for those very young and still in college. It’s hard to build passion for an activity when you know that its main purpose is for when you are very old and less active. To me, this seems boring and lackluster.
My Young Investment Strategy:
In the past, I have followed a different path when it came to my investing strategy, and it looked like the following:
- Buy stocks in a regular brokerage.
- Buy stocks in a Roth IRAs.
- Participate in a 401(k) when available.
That’s right, my investing strategy was basically opposite the common wisdom of today! Back when I first started working, the companies I worked at didn’t have a 401(k), so that made it easy to move 401(k)s to position number three, and while a Roth IRAs were interesting, for a teenager it seemed to distant of a goal (although my viewpoint of Roth IRAs has dramatically improved since then).
Another advantage of the above teenage/college age investing strategy sequence is that it made investing fun. It was fascinating watching stocks that I owned appreciate in value! I still remember the first stock that I owned that doubled (EBAY) and how excited I was when it did so! I had an uncle that would buy a few shares of dividend stocks for me as a child, and receiving “free money” from the dividend stocks was exciting for a kid.
Okay, it wasn’t free money, but back when I was a young child, dividends checks that would come by mail seemed like free money!
Every quarter I was very happy to take all of the checks to the bank and have them deposited. Even though the dividend amounts wouldn’t be considered a lot of money to adults, to a kid it was! I actually felt like a big deal going to the bank with my parents to make my deposits. This strategy (that I really grew into, thanks to my uncle) helped make me a more financial focus individual today.
How Does My Investing Strategy Look Today?
Today, my investment strategy looks much more closely to the typical model:
- 401(k)
- Regular brokerage account
- Roth IRA.
Yes, a Roth IRA is still my third choice, although I’ve been thinking hard and long about moving that up to position number two. A Roth IRA has too many benefits for it to stay at my third option. In fact, the structure of a Roth IRA is so flexible that I use it as both a dividend tax shield and a stealth emergency fund.
So while I agree with the common knowledge of the best way to invest your money, I, myself do not follow it to 100%. I especially think that young people should dabble a small percentage of their money in a stock to two, but to teeth on the process. Investing in stocks is complicated, but if done with a small amounts (perhaps a thousand dollars), it can be a great learning tool and a lot of fun both at the same time.
Bests,
MR
My first investment was 1 share of McDonald’s stock. My grandpa bought it for me when I was in 4th grade or something. I checked the paper every morning for about a year following that stock.
I’m not sure what happened to it. I didn’t sell it, so I assume it’s still floating around out there somewhere.
Sweet! McDonalds is a great stock!
Yeah, I’m sure it is, it pays a dividend too (we have it in my wife’s Roth).
I’ve never invested, but I figure I’ll do that when I get out of school and make more money to actually invest. Would you invest while you still have debt? I’d love to hear you’re thoughts on that.
If you consider mortgage and car debt, I did invest while paying both of those off. But not a lot, both have fairly low interest rates. But if I had credit card debt, first I would pay off that!
I follow your strategy almost dead on. I have a 401(k) and rollover IRA where I have diversified funds. I have a Roth where I use Target Date Funds primarily. I also have a regular brokerage account where I buy stocks.
Sounds like a very smart system!
I use my Roth as an investment swiss army knife kind of vehicle. It’s very powerful and flexible.
What if your employer didn’t have a 401(k)? Would the IRA be number 1 then?
Definitely, but I would go with a Roth instead of traditional, but that just my taste…
Personally, I ca not think of anything more fun and exciting than making money. My son’s first investment was in Amgen roughly 20 years ago. It went from $9 to $45 in just a couple years.
I agree with investing in the taxable brokerage account if one plans to retire early. Fact is that until you are 59 1/2, 401K and IRA’s are largely not to be touched. I’m working on retiring before 50, so I’m putting a lot of effort on taxable investments.
Yeah, I don’t want all my money tied up in a retirement account either. But with a Roth IRA, you can withdraw the contributions amounts and any time. It’s the earnings that hurts if you draw before 59 1/2
I like this thought process because who knows how long a teen or college kid will stay at a part time job, let alone at a first job. When the time at each may be limited, it seems smarter to invest in one place, like a stock, than try to juggle multiple small-dollar amount 401(k) rollovers.
Good point about a teenager or college kid job hopping a lot when they are younger!
I started to invest in my 20’s on and off. I started with stocks and then when I had some money put it into my roth IRA.
I didn’t do it religiously year after year, as a matter of fact, I completely stopped for 10 years when I went traveling and didn’t want to be responsible.
But now that I’m stable (some what) and have a family, I first send off money to my roth IRA, again, I was guilty for a time of not even investing it into stocks, just having it sit there, but it felt kind of good knowing that I have 5k for that year.
Now that I’m educating myself on how to invest, I play around it with it a bit more.
I have to say it’s either my #1 or #2!
Investing should be fun and not enough of people even talk about it as such. My first investment was in a Templeton Fund back before the internet boom. Just being able to see the regular statements were exciting.
Just doing step 1 of your Young Investment Strategy is a great way to get kids involved with investing early on too.
How come you haven’t move the Roth IRA to #2?
There are so many advantages over regular stock brokerage account?
Yeah, I especially like Roth IRAs as a dividend shield.
A Roth is a great instrument, no question about that! I’m very close to flopping the position #3 and #2…
I think once I get to a certain dividend payout level in my brokerage account, my Roth IRA will be #2…
I’m really curious as to why you’re investing in a regular brokerage account before a Roth IRA, when a Roth IRA can be AT a regular brokerage account. (Mine is with Zecco.) Why not get the benefits of the Roth?
I know, kind of crazy huh… I have my Roth Ira at my regular broker too (Schwab).
I want to have a certain amount of income coming from my regular brokerage account’s dividends first before I shift it down to #3 and bump up my Roth IRA focus to #2.
There are also a few benchmarking reasons that I wouldn’t go because I don’t recommend for others to do the same…
Perhaps I do experiment too much 🙂
You are far more advanced than I was as a child. I was just getting started in bank CD’s and Internet Accounts paying around 5%. I personally still put the Roth IRA above the brokerage account, but to each his own. The fact that we’re even saving at all puts us in a far better position than most people.
I agree, putting money in a Roth is the wiser move than a brokerage account.
Probably in 2 years, I’ll be able to max out my Roth and hopefully my wife’s too.
I remember playing an investment game in middle school, and the thrill we got each day checking our theoretical stocks in the newspaper.
We have decided that our children will each get a set amount to play around and invest with. The account will be in our name, but the kids will dictate what we do with the investments. Once they’re 18 they’ll inherit the account, and hopefully by then they’ll be avid investors!