The Best Investment to Make at 21

Get great returns on a surprising investment

Get great returns on a surprising investment

If you heard about a legal investment that gave you a guaranteed return of 17 percent or greater, you wouldn't hesitate. Even an investment with a guaranteed return of five or more percent should get your attention. Chances are that you already own this investment opportunity but you've overlooked it. If you don't, we'll show you the next best investment accounts in priority order to help you get started on the road to financial security.

Emergency Fund

Before tackling the high-return investment, you should set aside a modest amount for immediate emergencies, such as car repairs or emergency trips home. Personal finance guru and radio host, Dave Ramsey, recommends a minimum of $1,000. If you use some of this money for an emergency replenish it as soon as possible. You'll reap huge dividends in peace of mind, not to mention savings on credit card interest, from this small investment.

Debt

Let's say you have credit card debt of $3,000 at 19 percent. Every dollar you pay towards the principal is nineteen cents you won't have to pay in interest. Better yet, your return on this type of investment has no tax consequences. Before you scoff, consider that almost any other investment would leave you with a negative net return, and you'd owe additional income tax to boot. It's hard to imagine an investment that pays better returns than unsecured debt like credit cards and school loans. For most young adults, this will be the single best investment you can make.

Free Money

Free money could be right under your nose. If your employer offers matching contributions into a retirement plan, your investment return is 100 percent on the portion you contribute up to your employer's match. Don't think you're too young to plan for retirement, either; the sooner you start, the less you'll need to contribute over your lifetime. For most young people, this will be the next best investment after debt.

Using IRAs

Let's say you want to buy your first house, and you want to save for a downpayment. The IRS allows first-time home purchasers to take up to $10,000 from an Individual Retirement Account without penalty or taxes. If you're married, you and your spouse can both take advantage of this exception for a total of $20,000. Consult with a qualified tax adviser to find out whether the Traditional or the Roth IRA is best for your particular situation (see Resources).

Other Investment Accounts

Whether you put your money into an IRA or a regular brokerage account, the principles of investing remain the same: you must consider how long you have to invest (your time horizon), and how comfortable you are with your investments occasionally dropping like a rock (also known as "risk" or "volatility"). If you plan to use your money in five years or less, the stock market is probably too risky, and you'll want to keep most of your money in safer investments, like bond funds or cash. The more time you have, the more risk you can take in the stock market. Consider using all-in-one funds like target retirement or "balanced" mutual funds to make investing easy and automatic (see Resources).

About the Author

Julia Thomson began writing professionally in 1996. Her work has appeared in "Stage Directions," "Phoenix New Times" and "The Valley Callboard." Thomson has expertise in investing and personal finance, with three brokers' licenses and certification as a budget counselor. She holds a Master of Music from Indiana University.

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