Financial Planning for the Recent Graduate
Well this one is a packed lesson, so get ready. Investing is overwhelming. Currently there are more than 7,000 different mutual funds, more than 8,500 stocks listed just on the New York Stock Exchange, and those investments are just barely scratching the surface. Where do I invest? Stocks, bonds, mutual funds, ETFs, iShares, what’s a 401(k)?
The three most important things you can learn from investing is immediacy, consistency and diversification. After you’ve completed the first four steps, start investing immediately (personally, I combined step 4 and step 5, but focused more heavily on completing step 4 first). Consistently put money away (15% of your paycheck) into your retirement account every month. Diversity your portfolio, meaning spread your investment to many different styles of investments (different industries, big companies, small companies, mutual funds, stocks, bonds, cash), and you’ll really set yourself up for success when you’re ready to retire. This Investopedia article does a great job of explaining the different types of investments.
The best part about this lesson is that we’re young. We have an incredibly unfair advantage of retiring wealthy compared to people older than us. Why? Compounding interest. The younger you start investing, the less you have to invest, and the more you end up with in the end. How cool is that?! This website by Dave Ramsey shows just how much of an impact starting early has on your chances of becoming wealthy. For example, if you only put 100 dollars a month into a retirement account and it has a 10% return every year from now until the time you retire (assuming monthly compounding), after 40 years, you’ll have $637,675.96!! If you double that, and do $200 a month, you’ll end up with $1,275,355.58. Wow!
A lot of people contend that you should start investing before you pay off your debt, to which I kindly coach them: have you ever heard of a stock that earns 6.8% every year, consistently, without ever losing value? I haven’t either, but a student loan sure does a good job of consistently charging you 6.8% interest every month without fail, doesn’t it? Let's not even talk about how much you're paying the credit card company if you're paying late fees and interest on your credit card (ahem, 15-25%). Crapital One, American Depressed...man, I can't wait to get to that lesson...“But I can deduct my student loan interest on my taxes, right?” Yes, but let me give you a better scenario: Do you know what else you can deduct 100% on your taxes? Pre-tax 401(k) contributions. Plus, in 2013, filing single, you can deduct up to $5,500 in IRA contributions, whereas you can only up to $2,500 in interest for your student loans. Solution: target getting debt free, get your savings built up, then you can really focus on investing.
401(k) vs. Roth IRA
A 401(k) is funded with pre-tax dollars (meaning you’re taking money out of your paycheck before taxes are taken out and reducing your income) to fund your 401(k). This lowers your taxes for the year, but down the road when you retire (after 59 and ½ years old), you have to pay the current tax rate at the time when you withdraw your cash. Let’s be honest, taxes are going to have to go up in the future, so:
I highly recommend Roth IRAs. You contribute to a Roth IRA with take-home pay (after tax) dollars. The cool thing about a Roth IRA is a Roth grows tax-free. That means if your Roth IRA kicks butt and you have millions of dollars in your Roth IRA, you don’t have to pay the government anything when you withdraw at retirement.
If you have an employer that matches 401(k) contributions, TAKE ADVANTAGE OF IT. There is no excuse for you not to contribute something so your employee can match it or add to it. Every company is different, so ask your employer about all of the details of your company’s program so you can make the best decision about your 401(k).
Tip 1: If you're confused about investments, seek investment advice from a professional financial advisor. Make sure you find someone you feel good about and has your best interests at heart, and can teach you, rather than sell you. If you ever feel over pressured or uneasy about a financial planner, it's probably for a good reason. Don't do business with them. You won't hurt their feelings. As soon as they get off the phone with you, they're probably calling the next person down on their spreadsheet to say the same thing anyways. You can always check on their credentials for free and check to see if they've had any complaints about their business from customers, felonies, etc. http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/
Tip 2: Don't ever buy anything you don't completely understand. If you're personally investing without an advisor, make sure you check on the track record and history of the stock/fund you are buying, and read into the company that you're going to invest in.
Tip 3: Use other's research to guide your investment strategies. Websites like Zacks.com, Morningstar.com, Seeking Alpha and Investopedia.com are great resources to utilize.
Tip 4: Slow and steady wins the race. The tortoise beats the hare every time I read the book. No trick or hot stock is going to get you further ahead in the long run. Don't try to beat the market. Stay consistent with your investing month after month, whether the market is up or down. The only people that don't finish the race are the ones that stop running.
Thanks for reading. Lots of material covered, so please leave a comment below if you have any questions.
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By Ambro: Stock photo - image ID: 10066523 and image ID: 100103866, by Stuart Miles: image ID: 100146099 and image ID: 100123071, and by digitalart, published on 10 June 2011
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