New College Grads: Money to Invest?

This post is about investing long-term funds if you are just beginning the post college journey and  are not too worried about debt to income ratios.  Here’s one way to begin.

Do a little reading. I like to recommend several books. None of these are boring (you’re here aren’t you?) , they are all well written, and feel free to read small portions.

Your Money or Your Life – 9 Steps to Transforming Your Relationship with Money (first published in 1992, a NYT  best seller and recently revised)

The Wealthy Barber [The first 50 pages or so of The Wealthy Barber are a great introduction to mutual funds in general. I got my copy from the library.]

The Little Book of Common Sense Investing by John Bogle is good for a beginner. It has the story of index funds from the pioneer in the field.

I also enjoyed reading All Your Worth, by Professor Elizabeth Warren and her daughter Amelia Warren Tyagi. Here’s a review from The Simple Dollar blog.

Identify your investable funds.

Here’s what funds are not investable-just to review-funds allocated for short-term goals, such as a laptop upgrade, a used  car, a bicycle, or a trip overseas. Those funds need to be kept in a savings or money market account, or a short-term Certificate of Deposit, to shelter them from stock market ups and downs.

What are your investment goals and how far out are they?

1. short-term (less than one year)
2. medium-term (1-5 years)
3. long-term (5 or more years)

For the long-term funds: choose a taxable investment account or consider funding your first Roth IRA.   The Roth allows you to save on a tax-free basis, up to a $5000 annual limit (or the amount of your earned income, which ever is less).

For 20-somethings that have earned income either from a small business or employee wages (and you are already getting the match from your employer 401(k) plan) you can deposit your investable funds inside the tax-free structure of a Roth IRA. That way-when you remove funds later-there will be no taxes due on the income. (Please do take part in your employer’s retirement plan if they offer one.)

Roth IRA (Photo credit: Philip Taylor PT)

• Here is a good blog post on Roth IRA’s from the Get Rich Slowly blog
• Be sure to check with your tax advisor or the IRS on any deduction limits for higher earners
• Choose asset classes to invest in. (Stocks, bonds, and their sub classes-socially responsible stocks, dividend paying or smaller companies, global funds, corporate bond funds etc.)
• What will keep you awake? Check this link so you can see how different combinations of stocks and bonds have done since 1926. Source: Vanguard

How to begin – lump sum and add to the fund monthly (a great habit to get into), or select a couple of funds (there are usually minimum investment requirements) to begin with and invest $1000 in each one, for example.

Educate, Allocate, and Accumulate, that’s my motto!

Related articles

• Investing: Young? Working? Start a Roth IRA. Here’s how (usatoday.com)
• 5 Reasons to Consider a Roth IRA (money.usnews.com)
• Nine Compelling Reason to have a Roth IRA

Advertisement