Graham Stephan Believes This Is the 'Worst' Financial Mistake Young People Make. Is He Right?

Graham Stephan knows a thing or two about being successful at a young age. Just 33 years old, he's done well as a real estate investor, built a large following on social media for his personal finance content, and is reportedly a multimillionaire.

In a recent video (set to the Interstellar soundtrack, a bold choice for financial advice), Stephan was asked about the worst financial mistake he sees 20- to 30-year-olds making. He says there's one move many young adults fail to make that could help you become a millionaire.

Here's the worst financial mistake you can make as a young adult, according to Graham Stephan

Stephan says that the worst financial mistake young people make is "not setting up a Roth IRA." An IRA is an individual retirement account, and a Roth IRA is a version that lets you make tax-free withdrawals in retirement. Since they're retirement accounts, you need to wait until you're at least 59 1/2 to make withdrawals, otherwise there's a penalty.

As Stephan explains it, when you set up a Roth IRA at a young age, you have decades for that money to grow. If you have it invested, it can earn compound interest, which essentially means your money earns interest on top of interest it has already earned. Stephan says that after 40 years, an $800 investment could be worth $8,000.

That might seem like a lot, but it's actually a very conservative estimate. The average stock market return is about 10% per year (before inflation). If you invest $800 and get an 8% return, after 40 years, you'd have $19,418.71.

The longer that you have your money invested, the greater these gains can be. That's why investing while you're young is such a powerful way to build wealth.

Is not opening a Roth IRA really a financial mistake?

Stephan goes over how you can benefit by setting up a Roth IRA, but most of the things he mentions are really just benefits of investing in general. Your money can grow significantly in any of these accounts:

• Roth IRA
• Traditional IRA
• 401(k)
• Individual brokerage account

The advantage of Roth plans, which include Roth IRAs and Roth 401(k)s, is tax-free withdrawals. Traditional IRAs and 401(k)s don't have that, instead allowing you to deduct contributions on your income taxes. You aren't able to deduct Roth contributions.

As you can see, each type of retirement account has its pros and cons. The general rule is that if you think you'll be in a higher tax bracket in retirement, you should go with a Roth plan. If you think you'll be in a lower tax bracket, go with a traditional plan. Or, you could also open both a traditional and Roth IRA, and then split your contributions between them.

A Roth IRA can be a good choice while you're young, because you may still be on the low end of your earning potential. For example, let's say that:

• You're in your 20s and making $40,000 per year.
• You're eventually going to be making $80,000 per year.
• You'll need $60,000 per year in retirement.

In this case, it would probably be better to go with a Roth IRA. You effectively pay those income taxes now, while you're making $40,000 per year, to avoid income taxes later when you're withdrawing $60,000 per year.

The sooner you start investing, the better

Saying that not setting up a Roth IRA is the worst financial mistake young people make is a bit dramatic. There are plenty of bigger mistakes, such as spending frivolously and ending up in credit card debt. And you wouldn't necessarily be making a mistake if you didn't have a Roth IRA, but were investing through another type of retirement account, such as a 401(k).

Regardless, Stephan does point out something very important. Investing while you're young is one of the best financial habits you can build. The retirement account you use is your call, but it's well worth opening one and adding money to it regularly.