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?
- short-term (less than one year)
- medium-term (1-5 years)
- 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.)
- 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!
- 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