Your first job. Such a big milestone. For the first time ever, you are financially independent. You have moved on from being a broke college student to a successful young professional. Don’t get too comfy with that big paycheck, though, it is time to start investing.
Investing Through Your Employer
When you get your first “real job,” or “big boy job” as my friend Rachel says, you get a big packet of important information. You will learn all about health insurance, dental insurance, vision insurance, long term disability insurance, short term disability insurance, life insurance, 401(k) plans, employee stock purchase plans, pensions, beneficiaries, pre-tax deductions, after-tax deductions, and a whole lot more.
For starting out with investing, your 401(k) is the most important tool you have. If you work for a non-profit, your account is called a 403(b) but works the same way.
A 401(k) is a tax deferred investment account. It allows you to save money for retirement without paying taxes until you withdraw. You make the investments directly from your paycheck and they are allocated to a mix of mutual funds based on your selections.
The funds you choose are very important. If you have no investment background, your best option is probably a “target date fund.” Those funds buy a mix of other funds to match suggested risk for your target retirement based on your age. If you have more knowledge of funds, you can diversify your fund selections as well.
The most important part of investing in a 401(k) is to really do it and take advantage of your employer match. If your employer matches 3% of your salary if you invest it in your 401(k), take 100% advantage. If you don’t, you are leaving free money on the table.
Investing on Your Own
If you are taking advantage of your 401(k), getting all of your employer match, and feel comfortable that your retirement goals are on track, you can invest in other places. The first place you should look is a Roth IRA. A Roth IRA is a tax advantaged account that favors younger investors.
In a Roth IRA, you invest after taxes, but your withdrawals in retirement have no taxes. If your account value goes up, as it almost surely will over a long investment horizon, you pay the taxes up front on a lower amount and get the capital gains tax free.
Some folks, such as my friend Sam at Financial Samurai, suggests you don’t invest anything outside of your 401(k) until you hit your annual max on that account, currently $17,000 per year. Others, such as my friend Beating Broke, say you should take your 100% employer match and put anything over that into a Roth IRA until it is maxed, currently $5,000 for most readers of this blog, and then go back to your 401(k).
Whatever your preference, make sure to take advantage of tax advantaged accounts first and worry about other investments later.
You can open a Roth IRA account at any major online investment provider. If you overfund a Roth and want to retire early, head to this post at Modest Money about using a Roth IRA conversion ladder.
Investing in Stocks
If you are bold, you can invest in individual stocks instead of a fund, which is a bucket of stocks managed on your behalf. Just make sure you know the risks of “picking stocks” compared with investing in a diversified investment like an S&P 500 index fund.
With a fund, if one company has poor performance, your investment goes down a little. If you own one stock, and that company has poor performance, you can lose a lot more.
When buying individual stocks, it is important to know how to do a fundamental analysis and know when it is best to buy and sell stock. Don’t get wrapped up too much in technical analysis and timing the market. Follow the Warren Buffet strategy and find undervalued companies to invest in for the long term.
The Most Important Rule
Keep investing! Put at minimum 10% of your salary into investments every month. If you can do more, by all means do it. I save 15% of my paycheck automatically each month through my employer’s 401(k) and my Roth IRA. By putting money away every month, you will build a solid foundation for your future.
What advice do you have for new investors? What have you learned and what would you have done differently? Please share your thoughts in the comments.
This post was originally published on July 30, 2012 and updated on January 13, 2021.
6 thoughts on “How Should a Young Person Get Started with Investing”
I’m with Beating Broke on using the Roth IRA. Traditional retirement investing is built on the concept that you will have a lower tax rate in retirement than while working. I don’t see that happening in the US!
Part of that depends on your income level too. If you are earning less in retirement, your tax rate will be lower. However, I am in the camp that all of that investment growth over your career would result in higher total taxable dollars, so the Roth saves you money in the long run.
I think my main advice would be to start big. If you can afford to put 25% of your income into retirement savings. If you’ve never seen it you won’t ever miss it!
That is great advice. I started around 15% and increase it every time I get a raise. I try to live on the same income and put extra toward retirement.
I say one should consider living at home with parents if possible. Who cares about a year or two of less freedom. You can save a ton of money, which will serve as a nice base for your investments. You have to have money saved before investing any!
I spent about a year at home after college and saved up a lot in that time. It is not practical for everyone, but it is a big money saver.
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