Starting a financially fit life after college is a lot like starting an exercise routine to lose weight. You’re only going to truly benefit from it if you commit to making consistent progress towards your goals.
Here are some tips for the recent graduate and investor:
Get free money with your 401(k)
If you work for an employer that will match your contribution up to a certain limit, you’ll want to take advantage of this free money. Contribute at least as much as your employer will match. You’ll need to choose between a Traditional or Roth plan. The Traditional plan takes your 401(k) contribution from your paycheck before taxes, while the Roth takes your contribution after you’ve been taxed. Which option is best? For most new graduates, a Traditional plan is a better option because it lets you bring home the most amount of money in your paycheck possible each month, but keep in mind the disadvantage to this option is that you will be taxed later in life and you may have a higher individual tax rate at that time.
Be honest with yourself
If you want to invest in stocks, you need time to research and analyze stocks. You can’t just pick stocks out of a hat and expect to earn a return on your investment. If you aren’t willing or able to put in this research and analysis time, be honest with yourself before investing. You can let someone else do the research for you.
When you invest in both mutual funds and 401(k) plans, you can select the general investment sector, and level of risk, and allow a professional to pick individual stocks and funds for you. Unless you are going to be a financial planner or stock market professional, it’s usually advisable to go this route when investing.
Control Your Finances – Don’t Let Them Control You
Stay in control of your personal finances by creating a budget. Sure, no one wants to be tied down and strapped to a plan of how to spend or save every last penny of their income, but having a budget in place will keep you on track. Make sure to include all of your expenses, including non-monthly expenses like taxes, car maintenance, and emergencies. Remember you have both fixed and variable expenses, and your budget must be flexible enough to accommodate your variable expenses as well as your fixed expenses. Plan for the worst but be prepared for the best.
A good rule of thumb is to save 10% of your income. You should strive to keep your total debts under 20% of your annual net income, and your monthly debt repayments at 10% or less of your monthly take-home pay. If you’re able to follow these rules, even as your income increases, you’ll maintain control over your finances rather than the other way around.
Understand Time Constraints of Each Type of Investment
It’s obvious that the earlier a personal begins investing the more money they stand to earn. It’s a result of compounding interest and the money having more time to grow. As you are selecting retirement investments, the most attractive long-term investments for the recent graduate include stocks or stock mutual funds instead of money market accounts, bonds, and certificate of deposits. As you get older, you may wish to diversify your portfolio more by adding bonds, CDs and/or money market accounts, but the beginning investor is typically better off sticking to the more attractive, long-term investments and allowing compounding interest to do it’s thing over time.