Money & Career
Help the Young Adult in your Life become an Investor
6/1/2019 1:00:00 PM

Investing


Is there a young adult in your life; a recent graduate or a 20-something starting out on their own? Likely, you want to help them get off to a good start. What can you give a young person that would be useful and meaningful? Cash may seem too impersonal. Furniture or small kitchen appliances may not be their personal style.


Instead, consider introducing them to the world of investing. Only 33% of millennials participate in the stock market, whether it’s contributing to an IRA, 401(k) or investing in an after-tax mutual fund, according to Kevin Lacy, Commercial & Industrial Lake Charles Market Manager/SVP with Investar Bank. "The primary reason for this is simply because they cannot afford to participate. They either work in an industry that pays them in cash with no retirement benefits or they invest strictly in a savings account and/or CDs. These accounts generate little to no interest income to promote additional savings. Also, their risk appetite is much lower than previous generations.”


Many young people find the idea of investing intimidating or decide they’ll wait until they have more money to put away. Consequently, they miss out on one of the most powerful drivers of return: time in the market. "Compounding interest is the interest you earn on interest,” says Lacy. "The advantage of compounding interest is that, rather than taking the interest income for a period, you reinvest back into the principal. The best analogy for compounding interest is a snowball rolling downhill. As it rolls down, the snowball gets bigger and faster. The higher up on the hill that you are (the earlier you start investing), the bigger your snowball will be at the bottom (retirement).”


How can you help a young person start down the path to a lifetime of saving? Consider the following:

1. Match savings contributions

Saving can be hard to do on a small salary, but it’s such an important skill to learn. Encourage your young adult to open a savings account to stash away money for an apartment, a new car or some other goal—and as an incentive, make the initial deposit and offer to match a portion of the contributions. Keep in mind that taxes may apply on gifts, depending on the amount gifted. In 2019, you can give up to $15,000 per recipient without being subject to the gift tax ($30,000 if you’re giving as a couple). Check with your tax advisor or the IRS website for more information.


2. Fund an IRA

Help your young adult open a tax-advantaged individual retirement account (IRA). Especially if the young person isn’t yet working for a company that offers a workplace retirement plan such as a 401(k); opening an IRA now is a great way to jumpstart retirement investing.

Roth IRAs, which are funded with after-tax dollars and offer tax-deferred growth and earnings—as well as tax- and penalty-free withdrawals in retirement—are particularly practical for younger investors, who are likely to be in a lower tax bracket today than they will be at retirement.

Roths also provide flexibility, since contributions can be withdrawn at any time without tax or penalty. (But encourage your young adult to keep the funds invested for retirement!)


3. Give stocks with youth appeal

The stock market can be intimidating to young people, who often don’t know where to start. The great thing is that they’ve got time to recover if a high-growth stock runs out of steam or a portfolio begins its life a bit unbalanced.

Consider piquing their interest in investing by gifting individual stocks in companies that they like or share in a mutual or exchange-traded fund (ETF) that invests in sectors that interest them, such as technology or biotech. (You may want to help the recipient establish a brokerage account as part of the gift.) Be sure to impart the importance of an emergency fund that allows the young investor to leave investments positioned for the long-term when times get tight.


4. Automate investing

One of the newest financial innovations on the market is the automated investment advisory service, or robo-advisor, which provides algorithm-based portfolio management advice and can help build a portfolio that is appropriate for various goals and time horizons. Some offer automatic rebalancing to help keep your investments in line with your risk tolerance as different assets move up or down in value.

For young people, robo-advisors have a lot of appeal. It’s easy to get started—new investors simply answer an online questionnaire to help determine risk profile and time horizon and then review the recommended portfolio. Many robo-advisors have additional tools to help track performance and progress toward goals and can be monitored easily on a mobile device.

If you’re a parent or grandparent who wants to encourage your young adult to start investing, Lacy suggests you help them develop a monthly budget and always include a dedicated amount of money to savings, as if it is a vehicle note or a rent payment.


For more information, contact Kevin Lacy with Investar Bank at 337.656.6191.


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