As we continue to dive into our series on the different buckets (Short, Medium, Long Term) of investments, today’s post will look into long-term investments. Long-term investments are a category of your investments that you are setting aside for a very long period of time. Your long-term investments won’t be needed for 20, 30 or even 40 years. You’ll put money into this bucket and park them in investment vehicles that’ll (hopefully) allow your money to grow, and grow, and grow, until it’s finally time to touch the money, and you’ll have exponentially more (i.e. the power of compound interest) than when you started. Two very common long-term investments that young professionals will utilize are: saving for retirement and buying a house.

Why are they long-term investments?

Assuming you’ve read my post on medium-term investments, you may be wondering how this bucket of investments differs from a medium term investment. Couldn’t I just make it easier and put all my money into the same bucket of investments? Great observation! The key difference here for most of the long-term investment buckets is getting a preferred tax status. Retirement plans (at least here in the US) offer a tax-deferred status. Your retirement account comes in two flavors: pay tax now and not again later (Roth) or don’t pay tax now and pay it when you pull the money out (Traditional). To take advantage of this tax-deferred status (which should be a no brainer), you’ll need to do so through a retirement plan, which can either be setup on your own (IRA, individual retirement account), or through work (401k). There can be stiff penalties for pulling your money out early, so a good rule of thumb is to only put in what you can afford to do without now. You can start pulling that money out when you’re 59 ½ so until then; keep it out of sight, out of mind.

The goal here is for you to have enough set aside in good index or growth mutual funds so that when you retire, you can afford to stop working and have plenty to support your lifestyle. You certainly can’t save enough to retire well; you need to invest to retire well.

How should I invest in them?

For retirement accounts, you’ll want to either participate in a 401(k) at work, or open an Individual Retirement Account (IRA) through your bank/brokerage. If you don’t have one, open one through Vanguard, Schwab, eTrade or TDAmeritrade. All are solid options. Once in a tax friendly account (remember your money needs to be in a retirement account to take advantage of the tax savings), start putting your money in a good index or target date retirement fund. I keep most of my retirement money in these types of funds, a 2050 and then a 2055 target date fund as well as an index fund. Either of these types of funds should provide good returns while minimizing risk and cost. Take a look at the expense ratio. A 1% vs 0.1% may not seem like that much, but over the long-run (which is what your long-term investments are), a higher cost can really eat away at your returns. Try to steer clear of the expensive funds; there are generally lower costs options available.

The recommended percentage to save for retirement is 15% of your income. I realize that may be tough for a lot of us, with bills and things to think about now, instead of putting money aside not to be touched for 30 years. However, you really need one way or another to start putting money away for retirement, and doing a little now is much easier than playing catch up later. Start with what you can, and each year try to save a little more. I personally started my career saving just 2%, and slowly saved more and more each year, as I got raises and was able to afford to do so. I’m now at 15% and I feel confident about my contributions.

From there, keep putting your money into the same good index or target date retirement funds. Each paycheck, money gets moved into my retirement account and into those types of funds. Some months the market is up and I have to pay more for it, some months the market is down and I get it for cheaper. I’m in it for the long haul and try not to worry about the actual price in the moment. Long-term I’m seeing the fund doing better and growing in value and feel confident that my money is growing.

What are some examples of them?

We’ve spoken a lot about the most common long-term investment – the retirement account. I know it’s not easy to put all that money away now, but your future self will really thank you! Don’t get too fancy with your investments, and continue the steady trend of putting money in each paycheck. If your employer doesn’t offer a 401(k) and you use an IRA instead, setup an automatic transfer twice a month to automatically have your money move into that account.

Another example of a long-term investment is your house. A house is potentially the most expensive purchase you’ll ever make, and it can be a great source of building wealth (houses tend to rise in value). To buy a house, you’ll need to set aside a good down payment, which can range anywhere from 0% to 20% down (we did 7% when we bought ours). You’ll then purchase a house and get setup with a mortgage (home loan) for the next 15, 20 or 30 years. Each month you’ll write the bank a check and slowly watch your equity (i.e. how much you own of the house) rise. If you sell your house, there’s a good chance you’ll buy another house, so you’d move the money in your first house into your second house. Although you could re-finance (get a new loan) and take equity (money) out, a house is likely also going to be a long-term investment, meaning you’re putting money aside for a long period of time.

Long-term investments play a big part of a young professional’s budget. To grow your net worth over the long run, you’ll need to invest for the long run. Make long-term investment contributions part of your regular budget each month. You’ll likely put some in savings (short-term), some in a brokerage account (medium-term) and some in a retirement account (long-term). By separating your money into these different buckets, you can set yourself up for financial success!