It is so easy to push off making long-term investments. This is especially true if you feel like you don’t have what you need right now.
The irony in this is that you will likely always feel like you don’t have enough…and if you keep pushing off essential long-term investments, a time will come when you actually don’t have enough.
This is because we’re all wired to think a certain way about money and that rarely changes. You’re either content or you’re not. You save, or you don’t. You feel like you have enough…or you feel like you don’t.
So, in many cases, you just need to force yourself to make the investments. Luckily, that is really easy now-a-days because you can set up an automatic investment plan that will pull money straight from your checking account or even your paycheck. All you really need to do is set up the account. The rest will happen behind the scenes and you can completely forget about it. Then, when you need it most, it will be there.
So what are the critical long-term investments you should start making now? Here they are:
Individual Retirement Account (IRA)
I am always blown away when I read how many Americans will not be financially prepared for retirement. Social security may be able to help out, but it won’t be enough…and retirement is not the time that you want to be penny pinching. This is when you want and need to spend liberally on certain things. You want to make life comfortable for yourself. Travel. Relax. Smell the roses.
IRAs are retirement accounts that you set up outside of your job and they have big tax advantages that regular savings accounts don’t. There is an annual limit to how much you can contribute, which is why it’s so important to start early. If you keep pushing it off until you’re making more money, you won’t be able to catch up anyways because the limit will stop you in your tracks. You don’t need to meet the limit right away (and you probably won’t). But again, that’s why you need to start!
Another reason – and possibly the biggest – to start investing in an IRA now is that compound interest will have a more profound effect on money you deposit now, as opposed to money you deposit later (this is the case with every single investment vehicle on this list). In essence, the money you deposit now is actually worth more than the money you deposit later.
401Ks are tax-deductible retirement accounts that are offered through your employer. There are three really great (and important) reasons to start one of these ASAP:
- The limit that you can contribute every year is much higher than an IRA. This is really important because an IRA just isn’t enough on it’s own.
- Many employers will match whatever your contribution is. This is the most important reason to start a 401k right now. This is free money! And it’s YOUR money.
- 401K contributions are pulled directly from your paycheck. This is a really great thing because you will ultimately forget you’re even depositing money. It’s out of sight and out of mind!
529 College Savings Plan
529s are tax-deductible accounts that can be used to pay for the education of a specified beneficiary. In other words, a college savings account for each of your children.
There are so many important reasons to start one of these for each of your kids, but the bottom line is the most important. Because of the tax shield and compound interest, you’ll get a way bigger bang for your buck by putting your money into one of these accounts. It will also help to start being disciplined early on so that you’re better prepared when college time hits.
If you plan to help your kids get through college, you are crazy to not set one of these up ASAP. As with all of your other long-term accounts, even a small monthly payment will make a huge difference in the long run.
Related post: Why You Need to Set Up a 529 College Savings Plan for Your Kids
Health Savings Account
I never even knew what a Health Savings Account (HSA) was until we had our first child and were totally caught off guard by the medical bills (and that’s WITH good insurance). After that, we learned our lesson.
HSAs are tax deductible accounts that can be used for medical expenses. This includes things like co-pay, reaching your deductible, prescriptions, and even contact lenses. You have to pay for these things anyway, so why not save a little by taking advantage of the tax shield?
They’re great for ongoing medical expenses, but also really great for their long-term potential because these accounts will follow you into retirement. And you know what that means? It’s essentially another retirement account. If you’re lucky enough to hit your limit for your 401k and IRA, then this should be your next stop.
Related post: Why Every Family Needs a Health Savings Account
The biggest key to making the most of your long-term investments is to set up automatic deposits and to not stress yourself out about the small start you’ll inevitably have to go through. This is exactly why they are long-term investments – they take a really, really long time to grow. But once you’ve got them set up, you’ve done all the work you need to.