How to Invest Money at a Young Age

The old saying "time is money" is absolutely true when it comes to the world of investing. Time value has a powerful effect on investments, so those who begin investing even small amounts while they are young have a huge advantage over those who invest considerably more later in life. Successful investing for young people isn't rocket science, but like virtually every other endeavor in life, you have to have a plan.

Step 1

Make a budget. It is hard to get where you want to go if you don't know where you are. A budget gives you a snapshot of where you are financially. Take a sheet of paper and divide it in half. On one side, list all of your income for the month. On the other side, list all of your expenses for the month. Hopefully, the total amount of your income exceeds the total amount of your expenses. Now that you know where you are financially, you can start your investment plan.

Step 2

Open a savings account. The first rule of investing is "pay yourself first." Determine how much you can afford to save from every source of income, whether it is a paycheck or your monthly allowance. Take that amount first, and deposit it in an interest-bearing savings account. Most banks offer low- or no-fee savings accounts for young people and students, and the money you deposit will earn compound interest. This means that not only does your deposit earn interest, but the interest earned by your deposit also earns interest. Every time you make a deposit into your savings account, you are giving yourself a pay raise.

Step 3

Increase your rate of return. Set a goal for your savings that is sufficient to cover three to six months of your living expenses. Once you have achieved that goal, it is time to begin increasing the rate of return on your additional savings. Bank money market accounts typically pay more than passbook savings accounts but usually require a larger initial deposit. Bank certificates of deposit typically pay more than money market accounts but usually require the deposit to remain in place for an extended period of time.

Step 4

Explore equities. Equities represent ownership in real property. The stock market is a common source of equity investments. Each share of stock represents a proportionate ownership of the underlying corporation. Equity investments provide investors with a greater opportunity for increase through price appreciation and the payment of dividends. They also involve a greater degree of risk than savings products that are insured by the federal government. The best investment advice when it comes to equities is don't put all your eggs in one basket. Rather than purchase single stocks, consider buying shares of a good-quality mutual fund. These pooled investments offer both diversification of investments and professional management.

Step 5

Plan for retirement. Investing is a long-haul process. Money you put in savings should be readily accessible, but you should be able to leave the money you use for investing alone for at least five years. Consider putting a portion of your investment money into a tax-advantaged retirement account such as a standard individual retirement account (IRA) or a Roth IRA. This will allow your investments to grow faster because the funds inside these accounts are not subject to current income taxation. Keep in mind that funds placed into these types of accounts incur a significant tax penalty if they are withdrawn before you turn 59½ years old.