Note: I am not a financial professional, just a bit of a finance fangirl.
For young people starting their careers and emerging from college with burdening student loans, financial investments can be daunting. Basic economic rules of scarcity ensure that no matter how much money you earn, there always seems to be an underlying sense of “not enough” guiding your life. Living within that space, people often neglect investing in tomorrow in favor of just trying to live (somewhat) comfortably today. However, making consistent small sacrifices today can add up to amazing financial freedom for years to come.
Start Here First:
The only consistency about emergencies is that they’ll eventually impact us all. Financial emergencies are an inevitability, but crisis can be averted if you’ve saved for these emergencies in advance. Finance professionals recommend setting aside somewhere between 2-8 months funds to cover crises.
Pay Off Debt
After ensuring you can survive a financial catastrophe, the next step is to conquer your debt. And many of us have more than one debt to our name. While it may feel satisfying to try to fully knock out the smallest sized loan first, it’s better to focus on whatever debt has the highest interest rate. Pay all the standard monthly bills, while revving into bigger payments on higher interest debts first.
Can’t Accomplish These Two Things?
People often feel paralyzed attempting to build emergency funds and conquer debt. Unfortunately, if you aren’t progressing positively on these first two goals, they’ll only get worse with passing time. The hard truth is that you need to find more money to prioritize these two goals first.
Of course, it’s healthy to audit your life to see if there are any additional lifestyle costs you can cut, but perhaps it’s time to also increase your income. I know it’s exhausting working a full-time job, but if that pay isn’t covering the basics, a side hustle may be in order. Or, perhaps the best use of your time is to actively seek out new employment that pays better. Unfortunately, company loyalty often results in being pigeon-holed without promotion. Often times, the best way to advance your career is to leave your current employer after convincing a new employer that you’re worth more. This may lead to a tough season of particularly draining workload, but unfortunately, this is the world of adulting.
Then it gets a little more fun:
Don’t Adjust Your Lifestyle After Raises
It’s funny how as broke college students we survived eating ramen noodles and riding the city bus. However, following pay increases, it’s easy to inflate your lifestyle expenses. One of the best pieces of advice I ever got was to simply direct-deposit new raise values into savings immediately. This helps keep your lifestyle at status quo, while surging more money into savings.
Retiring may seem absurdly far away, but compounding interest ensures massive long-term gains for people who begin retirement savings efforts in their 20’s. While you’re young, can you prioritize investing here instead of on new Anthro sandals? Retirement is a great place to start investing after eradicating your debt and putting away at least two months of living expenses in an emergency fund.
There are ample retirement account options: 401k, 403b, IRA, Roth IRA, Health Savings Accounts, etc. If your company provides retirement options, it’s likely as a 401k (or 403b). If you seek to establish your own retirement account, your financial advisor can help you choose the best option for your needs. However, the basic premise of any retirement account is that it’s exists to hold and grow your savings for the day you no longer work full-time.
It should be noted though that Employee Matching for retirement is a special (and wonderful) case. If your employer matches your 401k contributions, a full (or even partial) match usually is a much higher return on investment than even the burden of the highest interest rates on debt. Traditionally, the advice is to pay off debt before saving for retirement, however maximizing your employer’s matching may prove to be a more mathematically sound option.
Now for the really fun part!
Once you’ve established an emergency fund, paid off your debt, and set a regular retirement saving cadence (ideally maxing out your employer matching if possible), if you still have extra money available, you have several more liquid options to explore!
You can buy stock, build up your savings account, play with cryptocurrency, invest in property, buy bonds… The options are virtually limitless.
First, ask yourself, “Am I trying to save up for something?” If you have your eye on a new car, an exciting vacation or a house down-payment, chipping towards a specific goal can feel very productive. Because you value your goal is so much, you may want to go a more risk-averse route to ensure that your funds are secure. Savings accounts don’t currently have great interest returns, but online banks like Ally or Discover offer slightly better returns than traditional brick-and-mortar banks.
Buying Stock and Index Funds
If you’re not saving for anything specific, you may be more open to risk and desire to invest in stock. Warren Buffet famously recommended investing your stock dollars into Index Funds. These are simple funds that evenly play the stock market. When the stock market goes up, so will your funds. There are ample investors who think they can outsmart the market to find the best stocks via hedge funds (often for high fees), but Buffet famously proved that simple Index Funds consistently outperform complicated hedge funds and you keep your fees low.
Every investment contains some level of risk. The higher the possibility for large returns, the higher the risk. For example, in the world of Cryptocurrency, about six months ago Bitcoin millionaires were popping up everywhere. Today, Crypto has dramatically deflated. Conversely, low risk investments like municipal bonds won’t give you investment whiplash, but they’ll also only very slowly increase in value.
Most financial advisors recommend embracing more risk when younger, but then settling into a lower risk investment strategy as you age. However, it’s ultimately your personal decision for how much risk you’re willing to assume.
Was this quick tour of Investing 101 helpful for you? What investing tips have you found most helpful over the years?