October 07, 2021
Investing in the stock market is one of the most meaningful ways that Americans can grow their wealth and save for important milestones in their life, like buying a home or retirement. The problem is that millions of Americans are neither investing nor saving. Nearly a quarter of Americans have saved less than $50,000 for retirement according to a TD Ameritrade survey. Another poll says that nearly half of Americans have no material stock ownership at all. Among younger Americans (18 to 34), that number is even higher sitting at over 70%–in fact, a mere 37% of 18 to 34-year-olds have money invested in the stock market.
There could be countless reasons for this. Not everybody got the same education, studied a high-paying profession, could afford to do multiple internships, had the same connections, or came out of school with a job offer. Compound those factors with a high dependence on student debt and other debts and you’re looking at a class of entry-level employees making scraps and burning the majority of their income on rent, interest payments, and other essential expenses.
It’s hard to blame young people for not investing, and given that there’s few resources for young people, it might seem tempting to just jump on a free brokerage app like Robinhood and start buying companies you know about. That’s one way to get started, but there are many ways you can maximize your investing, especially if you’re strapped for cash. Here’s a basic how-to on how to make it work:
Pay down credit card debt, student loans, and other obligations
Americans have a complicated relationship with credit: they spend on credit cards, take out student loans, and buy expensive houses and new cars–the “typical” American lifestyle costs a lot of money. You can’t fault people for using credit, especially if money is tight. In fact, credit cards have been touted as a constructive tool, to help build a credit history, which contributes to your credit score. But, instead, credit is often a tool for people with resources and a disaster for people without them.
As a result, it’s imperative to pay down obligations that carry high interest rates first. For most Gen Zers, those obligations will generally be student loans or credit card debt. However, it might also include auto loans, mortgages, personal loans, or some other form of credit. Each of these loans will carry their own interest rate and term. If you don’t know those off the top of your head, it might be a good idea to take a look at your credit profile at this point.
Let’s say you’re paying more than 5% in interest on any form of a loan. You should start by paying down that type of loan before investing in anything else. In order to pay it down quicker, consider making payments in excess of the statement balance. The reason why is simple: you’ll be hard-pressed to get a market return that beats a 5-8% interest rate. Meaning, it’s hard to find places to grow your money at a higher rate than your debt is growing. The higher the rate, the harder it is to beat. It’s generally not a good idea to gamble and invest the money you could otherwise use to pay it down. It’s better to kill that line of credit entirely and be done with it. If you can’t do that right now for any reason, consider looking into refinancing your debt. We’ll talk about that in the next section.
If your obligation is below 3%, those economics change considerably. If you’re strapped for cash, you might consider making the minimum payment and investing money instead. If you have a steady job, you might choose to pay it off in full every month. That said, you will want to pay this loan down on a schedule that works for you. But, if you invest in an index fund, you will generally make more than 3% per year. This means that market growth will exceed the rate that interest is accruing on your debt. This could allow you to prioritize investing and pay down this obligation in the future when you have a windfall or have a surplus of cash.
Refinance high-interest loans if you can
There are a lot of Americans who are paying sky-high interest rates on student loans, credit card debt, and other lines of credit. If you’re paying 6-8% in interest on any line of credit, you might consider refinancing that line of credit. You might be able to do that through your existing banking partner. However, you might find lower rates if you shop around.
When refinancing, observe the difference between variable and fixed rate loan-types. Variable rates can change based on market conditions and generally will change without warning. A variable rate will likely be lower, but a fixed-loan will remain the same for the term of your loan. So, weigh your options. One lender might offer a set of rates, another might offer a different set of rates. If you have the benefit of a co-signer (like a parent, grandparent, guardian, spouse/husband, or other trusted person), you might even be able to get these rates even lower.
Consider all these factors when looking to refinance any line of debt.
Invest intelligently: get a retirement account
Millions of users signed up for brokerage apps like Robinhood and Public. It’s great that people are investing in the markets, but there is a more intelligent way for everyday people to invest: retirement accounts.
Retirement accounts are vehicles that can help investors avoid capital gains tax, reduce their end-of-year tax bill, and hit their goals faster. There are a lot of different retirement accounts, and depending on your situation, you’ll have different options at your disposal. Your employer might offer a 401(k), or if your employer is the government or a public entity, they might offer a pension, a 457 plan, a 403(b), or some alternative. If you are your own employer (maybe you’re a savvy entrepreneur), then there are options available to you in the form of SIMPLE, SEPs, and SARSEP plans.
We’ve compiled a list of options that can help you figure out the best retirement account for your situation. Regardless of who you work for, you can probably get started by opening an individual account such as a Traditional or Roth IRA. You can open an account through a traditional broker like TD Ameritrade or Charles Schwab, go to a certified financial planner at a company like Vanguard, or entrust your money with a robo-advisor, like Wealthfront.
Should I play with stocks on my own?
Once you’ve paid down those hefty debts and maxed your tax-advantaged accounts, you can do what you want! If you want to YOLO your money on GameStop calls, go for it. If you want to go pay off your house or car, do that!
To boil it down to the basics, you should:
- Pay yourself first
- Pay down debts
- Invest whatever else you reasonably can–in retirement accounts first, individual taxable accounts (like a Robinhood trading account) second.
Follow these steps to cover your bases and have a bit of fun investing. If you want to level up your own stock market investing game, check out apps like Front that connect to your brokers, like Robinhood, Stash, and TD Ameritrade, to give you a portfolio score and help you make smarter investments. Good luck!