Congratulations, you are a newly minted college graduate! Now that college is over and you are being pushed into the real world, it is time to think about your future.
In order to do so, you need to think about investing. I know, investing can be confusing and therefore overwhelming at times.
Investment Advice for Recent College Graduates
There is a lot of information out there on investment advice for recent college graduates and much of it contradicts itself. Below is a guide to helping you manage the investing portion of your life.
Keep Living like You’re in College
You’ve probably heard this before, but I need to mention it before we get started. I know that the first paycheck you get will feel great. It did to me too. You’ll start thinking about all of the things you can buy with it. I did too. But you are better off living like a college student for as long as you can and saving all of the money you can.
You don’t need a new car. If your car is in good shape, keep driving it. A car is not a status symbol, it is transportation. I drove the car I had in college for about five years after I graduated. All of my friends were making $400 monthly payments on a car. I was saving $400 every month. Fast forward to 15 years after college and many of my friends are struggling with their finances, complaining about not having enough. Me on the other hand, I have enough money saved that if I were to lose my job, I could survive for a few years without worry.
This isn’t to toot my own horn. It’s to show you that the habits you start with after college will continue for your life. If you start spending everything you earn, odds are you always will and won’t get ahead. You will always struggle with money. You don’t want that and I don’t want that for you either.
Contribute to Your 401(k)
Now that you are living below your means, you will have excess money to save. The first thing you should do is start investing in your 401(k) plan at work. Start with 10% of your salary. If you do this from the beginning, you will learn to live on a smaller paycheck from the start. Trust me, you won’t even miss the money. If you are fortunate enough to be earning a high salary, feel free to invest more than 10%.
From there, make it a point to increase your contribution each year by at least 1%. You won’t notice the lower paycheck and you will be able to take advantage of your money compounding upon itself.
As for investments, we’ll get to that a little further down.
Start an Emergency Fund
Your next step is to create an emergency fund. You emergency fund should cover your monthly expenses for 8-10 months. Many will tell you to have 3-6 months saved in an emergency fund, but I am a little more conservative and like to have more money saved up in cash.
Create a Taxable Account (or Roth IRA if eligible)
Once you are saving for retirement through your employer’s 401(k) plan and you have an emergency fund, you can start investing in a taxable account. Don’t get too scared about the terminology. A taxable account is simply a non-retirement account. I suggest you start one because with a 401(k) and a Traditional IRA, you can’t access that money until you are 59 ½ years old or pay a penalty. With a taxable account, you can access that money any time, without penalty.
One caveat to this is a Roth IRA. You can invest in a Roth IRA and withdraw any of your contributions at any time, without penalty. If you withdraw any earnings on your money before you are 59 ½, you will have to pay a penalty. And yes, you can have a 401k and an IRA at the same time.
Regardless if you are investing this money in a Roth IRA or a taxable account, you will want to start saving money here too.
Where to Invest
The key to being a successful investor is:
- Have a Plan
- Stick to the Plan
- Find Low Cost Investments
Have a Plan
To start, you need to have a plan. This doesn’t have to be super detailed, you just have to know what you want your money for. The more details you can provide the better. For example, maybe you want $1,000,000 by age 65 so you can retire to Florida. That is a perfect start to your plan and provides some detail.
Next, you have to figure out how you are going to get there. You need to know how comfortable you are with investing in the market and determine your asset allocation. One rule of thumb is to take 120 minus your age. This is the percent you should have in bonds. So, if you are 25, you should have most of your money in stocks.
But, you might not be comfortable with this amount of risk. If you want less risk, then you need to increase the amount of bonds you own. You will need to own stock if you ever plan to retire. Unfortunately, you won’t be able to earn a high enough return from just bonds alone to meet your retirement goals.
Stick to the Plan
Let’s say you are going with 90% of your money in stocks and 10% in bonds. The key now is to stick to this allocation, regardless of what the market is doing. You are investing for the long-term. What happens next Tuesday is irrelevant to your situation since you are going to be invested for another 40 years.
The stock market has cycles. It will go up and it will go down. That is the way it works. You are going to hear a lot of “noise” from the news and magazines. Remember that the goal is to get you emotionally involved. Once you act emotionally, you are bound to lose money in the stock market.
Wall Street earns money when you trade. The more you trade, the more the machine makes. But ignoring the noise allows you to keep emotions in check and this will allow you to be a better investor. The sooner you understand this, the better off you will be.
Find Low Cost Investments
While you won’t see a bill come in the mail for fees that you pay into the mutual funds you own, you do pay fees. They are just hidden in the return of the fund. You want to invest in funds that have the lowest expense ratio possible. You should never be paying more than 1% in expenses.
A 1% expense ratio is the equivalent to a $10 fee for every $1,000 you have invested. This may not sound like much now, but when you have hundreds of thousands of dollars invested in the stock market, the fee quickly adds up. It’s your money, don’t give it up so easily.
As I mentioned earlier, the concept of investing sounds intimidating with so much information out there. But it really isn’t that complicated at all. You just have to be smart about a few things. If you can make it a point to keep your expenses low so that you have more money to invest, you are going to be in good financial shape. When you begin to invest, pick low cost investments and stay invested. Remember that the market will drop and will be volatile over the short-term, but the long-term trend is up. If you can ignore this noise, you will be a successful investor.
More for New Graduates
- 35 Best Personal Finance Books
- 29 Financial Tips for New Grads
- 10 Financial Tips for New Grads
- 51 Finance Tips for New Graduates
- Should You Rebalance Your Portfolio or Let it Ride?
- Why You Aren’t Earning What Your Mutual Fund Says You Are
- Create CD Ladders for Short Term Money Needs
- ETFs Versus Index Funds
- Roth 401k: What Is It?
- To Roth 401k or Not to Roth 401k?