How to Invest Money at 18: What to Do With Your Extra Cash

If you’re wondering how to invest money at 18, you’re already thinking about something that many people don’t seriously consider until much later in life. Even if you only have a little extra cash right now, starting young gives you something no amount of money can buy later: time.

When I was 18, investing wasn’t nearly as easy or accessible as it is today. The internet was still relatively new, there were no iPhones, and investing apps didn’t exist. Buying stocks wasn’t something teenagers could do from a phone in a few seconds.

I also didn’t personally get serious about investing (or saving money in general) until my mid to late 30s. That’s certainly not too late, especially if you stay determined and consistent, but I wish I had understood at 18 what I understand today.

Now I have three kids who are all within a few years of 18. I’ve been teaching them about investing as they become young adults, and I’ll continue doing so. The advice below is essentially the same roadmap I would want my own kids to follow when they start earning money and have some extra cash to invest.

Before you invest money at 18, make sure you’re ready

Having extra money doesn’t automatically mean all of it belongs in the stock market.

Before worrying about which stock or ETF to buy, I would first look at your debt, emergency savings, income, and basic monthly expenses. Investing works much better when you aren’t constantly being forced to pull money back out because you weren’t financially prepared for something unexpected.

Pay off high-interest debt

If you are truly 18, then that is young to have to debt… but it’s not too young these days. If for some reason you’re already carrying high-interest credit card debt or similar consumer debt, I would focus heavily on getting rid of it before aggressively investing.

Imagine paying 20% or more in credit card interest while hoping your investments earn 8% or 10%. Even if your investments perform well, you’re still fighting an expensive financial battle on the other side.

This doesn’t necessarily mean every type of debt must be completely eliminated before you invest a dollar. A reasonable car loan, student loan, or other lower-interest debt is different from carrying thousands of dollars on a high-interest credit card.

The point is to get expensive debt under control first. Hopefully, being an 18 year old, you have no debt. Keep it that way. If you do have to take on student loan debt, keep it under control and do not borrow more than you need.

Build an emergency fund

The next thing I want is cash set aside for emergencies. Personally, I like having about six months of essential living expenses available in cash. By essential expenses, I mean the things you would still have to pay if the proverbial shit hit the fan and your income suddenly disappeared.

• Rent or mortgage
• Utilities
• Insurance
• Groceries
• Transportation
• Minimum debt payments
• Other bills you absolutely cannot avoid

I would not include restaurants, vacations, entertainment, shopping, or other fun money when calculating this number. We’re talking about what it would cost to simply keep your life functioning for six months.

Depending on where you live and what your expenses look like, that could be $20,000, $30,000, $50,000, or even more.

At 18, however, your number could be much smaller. If you’re still living with your parents, have no dependents, and only have a few basic expenses, you may not need anything close to what an established household needs.

I also wouldn’t necessarily pass up a valuable employer retirement match just because your emergency fund isn’t completely finished. You can work toward multiple financial goals at the same time, if you’re out of debt. The important thing is that you’re actively building that safety net rather than pretending emergencies won’t happen.

Where I would invest my money first

Once you’ve dealt with high-interest debt and have your emergency savings established or moving in the right direction, you can start deciding where your investment money should go.

If I were starting over at 18 today, this is roughly the order I would use.

1. A workplace 401(k) with an employer match

If your job offers a 401(k) and your employer matches part of your contribution, I would start here.

For example, an employer might match your contributions up to a certain percentage of your salary. If you qualify for that match but don’t contribute enough to receive it, you’re essentially leaving part of your compensation on the table.

When I say I would max this out first, I mean I would contribute enough to receive the entire employer match.

I wouldn’t necessarily jump straight to contributing the maximum amount allowed by law before considering your other accounts. The first objective is simply making sure you’re collecting every dollar your employer is willing to contribute.

2. Fund a Roth IRA

Once I was receiving my full employer match, theoretically, my next target would be a Roth IRA. As of today, you can contribute $7,500 per year.

If you don’t have access to a workplace retirement plan at all, I would probably start here.

A Roth IRA is funded with money you’ve already paid income taxes on. If you follow the rules, qualified withdrawals in retirement can be taken tax-free, including the investment growth that accumulated along the way.

That becomes especially powerful when you’re 18 because the money potentially has several decades to grow.

You do need qualifying earned income to contribute to a Roth IRA, and there are annual contribution and income limits. But if you’re working and eligible, I would work toward contributing as much as I reasonably could each year.

You are free to buy and sell investments within a Roth IRA without creating a taxable event. The important part is withdrawing money. Your original contributions can generally be withdrawn anytime tax and penalty-free, but withdrawing investment earnings before age 59½ can trigger income taxes plus a 10% penalty. Qualified tax-free withdrawals of earnings also generally require meeting the five-year rule.

3. Go back to your 401(k) or use a Solo 401(k)

If you began investing into a Roth IRA because you did not have an employer that matched a 401k, I might look again at my other tax-advantaged retirement options.

For someone with a traditional job, that could mean increasing contributions to your workplace 401(k).

If you’re self-employed (you receive 1099s from income outside of your main job) and eligible, a Solo 401(k) could be another option.

Even if there isn’t an employer match involved, retirement accounts offer tax advantages that a normal brokerage account does not. That makes them valuable places to continue building long-term investments.

4. Start piling money into a taxable brokerage account

Once I’ve funded the retirement accounts I’m using for the year, I would start putting additional investment money into a regular taxable brokerage account.

This is the type of account you might open with a company like Fidelity, Charles Schwab, Vanguard, or another brokerage.

A taxable brokerage account doesn’t give you the same special retirement tax treatment as a 401(k) or Roth IRA. The tradeoff is flexibility. Your money isn’t specifically locked away for retirement, and there are no retirement-age requirements for accessing it.

This means you can treat this account pretty much like a normal bank account in some ways. It acts as a brokerage account when you want to purchase shares of funds or companies, but it can also act as a normal cash holding account that you can withdraw from penalty free. You will just have to pay uncle sam for your gains, in one way or another.

This is where I would continue piling money into long-term investments after taking advantage of the retirement accounts available to me. If you have any desire to quit working a bit early, before the age of 60, it would be a good idea to have this account nice and fat well before then.

What should an 18-year-old actually invest in?

Opening an investment account is only the first step. Once money reaches the account, you still have to decide what to buy.

This is where I think young investors can make things much harder than they need to be.

You don’t have to find the next Nvidia. You don’t need to constantly trade. You don’t need 40 different stocks. And you definitely don’t need to understand every complicated investment strategy before getting started.

Make index funds the foundation

Most of my investing revolves around index funds, mutual funds, and ETFs, and I think they’re a great starting point for a young investor.

A broad index fund lets you own small pieces of many companies at once. Instead of betting your financial future on one company succeeding, your money is spread across dozens, hundreds, or even thousands of businesses.

An S&P 500 index fund, like VOO, gives you exposure to many of the largest companies in the United States. A total stock market fund, like VTI, spreads your investment even further.

These aren’t exciting investments compared to finding a stock that suddenly doubles, but that’s partly the point. You can consistently add money, leave it alone, and allow the underlying businesses and the market to do their work over long periods of time.

I also own a few individual blue-chip stocks

I don’t personally invest only in index funds. I also own shares of individual companies that I strongly believe in over the next 10 years or longer.

The important part of that sentence is 10 years or longer.

If I’m buying an individual company, I’m not doing it because the stock is trending on social media this week. I want to believe the underlying business has a strong future and that I would still be comfortable owning it through market crashes, recessions, and periods when the stock temporarily falls out of favor.

Individual stocks introduce more risk than broad index funds, so I wouldn’t make them the foundation of a beginner’s portfolio. But I think there can be a place for carefully chosen, financially strong companies once you understand what you’re buying.

Stay away from options trading when you’re starting out

One thing I would strongly discourage an 18-year-old beginner from jumping into is options trading.

Options can produce huge gains very quickly. They can also produce huge losses very quickly.

Social media has made short-term trading look incredibly easy. You’ll see screenshots of someone making thousands of dollars on one trade while rarely seeing the hundreds or thousands of people who lost money trying the same thing.

At 18, you already possess an enormous financial advantage. You have time.

You don’t need to manufacture more risk trying to become rich next month. You can buy productive assets, continue adding money, and potentially let compounding work for you for 40 or 50 years.

I would much rather see my own kids build wealth slowly and consistently than gamble money trying to skip the process.

You don’t need to know everything before you start

One mistake young people can make is believing they need to completely understand investing before putting their first dollar into the market. You don’t.

I’ve learned a tremendous amount since I started investing, and I’m still learning. Your knowledge changes as your portfolio grows. You begin paying attention to different things, understanding businesses better, learning about taxes, becoming more comfortable with market volatility, and figuring out what level of risk actually works for you.

Your first portfolio probably won’t look exactly like your portfolio 10 or 20 years later. That’s fine, you can start simple and learn as you go. Become smarter about your own money over time.

Why starting at 18 matters so much

The biggest advantage an 18-year-old investor has isn’t a high income or a giant starting balance. It’s the number of years ahead.

Consider someone who invests $1,000 at age 18 and never contributes another dollar. If that money averaged 10% annual growth, it could grow to well over $100,000 by their late 60s. That’s from a single $1,000 investment. Now imagine continuing to contribute money every month for decades.

This doesn’t mean anyone should expect the market to return exactly 10% every year. Some years will be great, some will be terrible, and some will be somewhere in between. The example simply demonstrates what long periods of compound growth can potentially accomplish.

This is also why I wish I had started sooner. Beginning in my mid to late 30s still gave me plenty of time to build wealth, but I couldn’t go back and purchase those extra 15 or 20 years of compounding. Once those years are gone, they’re gone. An 18-year-old has those years sitting right in front of them. That’s why I refuse to let my children miss out on them.

A simple investing roadmap at 18

If one of my own kids came to me at 18 with extra cash and asked exactly what I thought they should do with it, my answer would look something like this. But remember, a lot of these may not even apply to an 18 year old still living at home and attending college. But if that student has a job, and makes money they can still contribute to retirement accounts and invest in the market.

1. Pay off expensive consumer debt. (most 18 year olds shouldn’t have this yet)
2. Build toward roughly six months of essential emergency savings. (if living at home, an 18 year old won’t need much)
3. If your employer offers a 401(k) match, contribute enough to receive the entire match.
4. Fund a Roth IRA if you’re eligible.
5. Continue contributing to a workplace 401(k) or Solo 401(k) if available.
6. Once your retirement accounts are funded, invest additional long-term money through a taxable brokerage account.
7. Make diversified index funds the core of your investments.
8. Add carefully selected individual stocks only if you understand and believe in the companies long term.
9. Stay away from options trading and other unnecessary speculation while you’re learning.
10. Keep contributing, stay disciplined, and think in decades instead of weeks.

The bottom line

Learning how to invest money at 18 isn’t about finding the perfect stock. It’s about building the financial habits and systems that give your money the best chance to grow over a very long period of time.

Get your debt under control. Build emergency savings. Take advantage of employer matching money and tax-advantaged retirement accounts. Invest primarily in diversified assets you can comfortably hold for years. And don’t worry if you don’t understand everything yet.

This is the basic roadmap I would want one of my own kids to follow. I would expect them to learn more as they go, make adjustments, and eventually develop an investment strategy that fits their own goals and personality.

You don’t have to become an investing expert at 18. You just don’t want to waste the enormous advantage that comes with starting that young.