Young investors today who wish to begin a savings plan face a bewildering array of investment options. There are not only thousands of products and services to choose from, there are almost as many different firms and vendors that market them in various capacities. Fortunately, deciding which types of investments are best is not as hard as it may seem if you're a young person in today's world. Finding the right answer begins with examining what you want to get out of your money both now and in the future.

Saving for Retirement
If you are young, then your greatest financial asset is time. At this point in your life, your primary investment objective for your long-term savings should be growth. Investors in their 20s will have least 40 years over which to accumulate retirement savings. Historical data clearly shows that common stock and real estate are the only two asset classes that have grown faster than the rate of inflation over time. This means that most or all of your long-term savings should probably be placed in some form of equities, such as individual common stocks and stock mutual funds, and perhaps real estate, either in the form of a personal residence or a mutual fund that invests in real estate holdings. It is imperative that you are able to increase your purchasing power in your retirement savings over the course of your life, because you will need every ounce of it that you can muster after you stop working.

Of course, IRAs and employer-sponsored retirement plans are the best places to start when saving for retirement. Employer-sponsored plans often provide matching contributions, and this can give your retirement savings a tremendous boost; a 50% match on the first 5% of your contributions can result in tens of thousands of extra dollars in your pocket at retirement. Most financial experts tell young people to use a Roth IRA instead of a traditional IRA because of the tax-free withdrawals. Roth features are also available in many qualified plans such as 401(k) plans, and these may also be superior to traditional tax-deferred options that are taxable upon withdrawal at retirement. Ultimately, the combination of tax-free growth coupled with the superior returns posted by equities is virtually impossible to beat over time.

Buying a Home
Traditional financial wisdom has usually dictated that a house is one of the best investments you can buy, but whether or not this is true depends upon several variables. The duration of your residence and the current housing market will factor heavily into this issue, as will the current interest rate environment, rental prices and your personal financial situation. If you plan on living in one place for less than five years, then it is probably cheaper to rent in most cases, because, mathematically speaking, it usually takes at least five to seven years to accumulate enough equity in a home to justify buying one versus renting.

Saving for College
If you are still trying to get through school or have not yet started, then there are several other vehicles for you to consider socking money into:

529 Plans - Every state has this type of college savings plan that allows you to put money away until you begin your higher education. The funds can be allocated between various investment choices and will grow tax-free until they are withdrawn to pay for qualified higher education expenses. The contribution limits for these plans are quite high and they can also provide gift and estate tax savings for wealthy donors looking to reduce their taxable estates.

Coverdell Educational Savings Accounts - This type of college savings account is another option for those who want to take a more self-directed approach to choosing their investments. The annual contribution limit is currently $2,000 per year, but it may still be a viable alternative if you want to purchase a specific investment that is not offered inside a 529 Plan.

U.S. Savings Bonds - These are yet another alternative to consider for conservative investors who don't want to risk their principal. The interest that they earn is also tax-free as long as it is used for higher education expenses.

Short-Term Investments
The alternatives for your short-term cash, such as an emergency fund, are pretty much the same regardless of your age. Money market funds, savings accounts and short-term CDs can all provide safety and liquidity for your idle cash. The amount that you keep in these investments will depend on your personal financial situation, but most experts recommend keeping at least enough to cover three to six months of living expenses.

The Bottom Line
The most important decision that you can make as a young person is to get into the habit of saving regularly. What you invest in matters less than the fact that you have decided to invest. The right investments for you are going to depend largely upon your personal investment objectives, risk tolerance and time horizon.

Related Articles
  1. Professionals

    Illiquid Real Estate: Correlation Pros and Cons

    Stock and bond markets are moving more closely in tandem with each other. Is illiquid real estate the vaccine for this correlation?
  2. Professionals

    How Legacy Planning Can Help Capture New Clients

    Don’t underestimate the importance of legacy planning with your clients—it could serve as method for you to create new business with any heirs.
  3. Taxes

    The Top 10 Caribbean Tax Havens

    Discover relevant tax policy information about the top 10 tax havens located in the Caribbean, including the Cayman Islands and the Bahamas.
  4. Professionals

    How to Protect Retirement and Help Adult Kids

    Parents can both protect their retirement money and help their adult kids. Here's how.
  5. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  6. Retirement

    5 Ways to Use Your Home to Retire

    Retirement is going to cost a lot, and for homeowners who face a shortfall, their home can be a source of income. From downsizing to renting, here's how.
  7. Retirement

    This Is How You Could Live in Costa Rica for $1,000 a Month

    Explore the cost of living in Costa Rica, and learn how you could sustain a nice middle-class lifestyle for yourself on about $1,000 a month.
  8. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  9. Professionals

    3 Benefits of Working Longer (and Retiring Later)

    There are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
  10. Professionals

    How to Get Free Social Security Spousal Benefits

    Married couples should thoroughly examine whether they are eligible to collect free spousal benefits on their Social Security income.
  1. Do financial advisors get paid by mutual funds?

    Financial advisors are reimbursed by mutual funds in exchange for the investment and financial advice they provide. A financial ... Read Full Answer >>
  2. Do financial advisors prepare tax returns for clients?

    Financial advisors engage in a wide variety of financial areas, including tax return preparation and tax planning for their ... Read Full Answer >>
  3. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  4. What fees do financial advisors charge?

    Financial advisors who operate as fee-only planners charge a percentage, usually 1 to 2%, of a client's net assets. For a ... Read Full Answer >>
  5. Under what circumstances would I benefit from a high net worth insurance policy?

    A high-net-worth insurance policy is specifically tailored to suit the needs of high-net-worth individuals. It is specifically ... Read Full Answer >>
  6. When is litigation better than mediation in a high net worth divorce case?

    Typically, litigation is better than mediation in high-net-worth divorce cases for two major situations – when there are ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!