Here’s a simple breakdown of what type of investment account you should open if you are a millennial.

Just like anything in life, the hardest thing about investing is starting. A lot of people either become overwhelmed with options, or stress that they are going to screw it up. They end up doing two things:

1. They put it to the side and say that they’ll do it later.
2. They open a 401k through their employer, contribute to get the match (because that’s the best advice their HR person gave them), and most likely choose a retirement date fund.

I’ll break down the different types of accounts (vehicles) you could invest in. Why you would invest in the account. And the benefits of each.

First, you want to think in real-life terms. Ask yourself one question — is the money you are putting away for retirement (long term), or is this money you will need for a big expense down the road — home, child, education, wedding ring, starting a business, etc. (short term)?

Here’s my advice — I’m making several assumptions, if you are in a unique situation feel free to reach out to me.

Sign up for your employers retirement plan. Whether it’s a 401(k) or some type of IRA, your employers plan will most likely have a matching option. A typical employer matching program requires you to contribute 6% and they will contribute 3% — this is free money. The only decision you will need to make is if your employer offers a Roth 401(k) option.

As a young person, I would invest 100% into the Roth 401(k). The thought process here is that starting off you will be in a lower tax bracket than you will be as you advance in your career. In addition, when you take this money out at retirement, it is completely tax free since you already paid the tax at your lower tax bracket while you were in your 20’s (look at you being responsible!).

Now, here’s the other thing you want to think about — short term investing. At some point you will most likely get married, maybe have a kid, buy a house, or start a company. All of this will require access to cash. Pulling money from a retirement account is not a smart move — the IRS will charge you a 10% penalty.

Here’s how you can avoid that:

Open an investment account (you may also hear this called a brokerage, after-tax, individual, or joint account). You will have to do this on your own — you can do this through a financial advisor or you can do this online (Fidelity, ScotTrade, etc.). The benefit of putting money into an investment account vs. a bank account is that you can start investing in mutual funds, ETF’s, or stocks. An investment account allows you to aggressively put money away while still giving you access to it without penalty.

So, if I were you…

1. I would open a 401(k) through my employer. If they had a Roth 401(k) option I would invest 100% of my contributions into it.
2. Open an investment account and aggressively put money into it.
3. I’d keep enough money in my checking/savings account to cover 3 months expenses as an emergency buffer.

The only question now is, how do I know how much I should contribute into my retirement account versus my investment account (I will write a post on that soon).

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