Five Investments Tips for Recent College Graduates
Investing and trading are like smoking. Both are addictive and can change the quality of your life. For the recent college graduate, here are five tips to starting a financially-healthy life:
1. Max out your 401(k)
This is the best way to get FREE money. Most employers will match your contribution up to a certain limit. There is one main choice in this area: Traditional or Roth. A traditional plan will take the deduction out of your paycheck before taxes; a Roth plan after. If you are just getting out into the world on your own and are strapped for cash, a traditional plan is advisable. It allows you to take home the maximum amount of money each month. The downside to this is that you will be taxed later in life when your individual tax rate may be higher.
Here’s a quick example: Your paycheck is $1,000, contribution rate is 10%, and tax rate is 20%.
Individual Retirement Account- Traditional: ($1,000 – ($1,000 * 10%) = $900 – ($900 * 20% tax) = $720 take home pay
Individual Retirement Account – Roth: ($1,000 – ($1,000 * 20 %) = $800 – ($800 * 20 % tax) = $640 take home pay
2. Know Yourself
Picking individual stocks to invest in requires time for researching and analyzing different stocks. If you are not willing or able to put in the necessary time for research, let someone else do it for you. There are several avenues you can take in the mutual fund and 401(k) world. This will allow you to pick the general investment sectors, areas of the world, and risk level you want to invest in, but a professional will take over from there.
3. Make a Personal Saving-Spending Budget
From the largest multinational firm to the individual investor, CASH IS KING. If I had a dollar every time I heard that in college, I would have a lot more money to invest with now. The best way to stay in the driving seat of your finances is to create a personal spending budget. Be sure to factor in such things as taxes, increases in prices (i.e. gasoline), and other possible changes due to economic factors (i.e. inflation). In other words, practice conservatism-plan on the worst, and be prepared for the best.
4. Act with Wisdom
Though you are recently exiting college and are "green" in the ways of the world, this should not stop you from acting as a seasoned investor. First, be sure to stay informed. Whether you direct the aggressiveness of your 401(k) by selecting the fund or manage your own online trading portfolio, you should stay informed. Try to pay attention to the world you know and use your age as an advantage. As a young adult, you are naturally more aware of such things as the fashion and technology popular items and trends. If you get the vibe that the newest Apple iPod will do better than the early generation iPods, this may be a good investment strategy for you. Finally, diversify your portfolio. If one sector of the market falls out and all of your money is there, you will lose a significant amount of portfolio value. Diversification will lessen your overall risk and make rough days in the market not as rough on your portfolio.
5. Buy A Home…Do NOT Rent
If you just finished school or are about to do so, it is a great time to be a first-time home buyer. Currently, many housing markets are experiencing a decrease in home values. The reasons for this downturn should not be as important to you as the opportunity to own property. Different analysts are saying different things, but it appears that the next 12 months will be a great time to buy. Be sure to check into incentives for first time homeowners. These incentives will assist you in getting a home loan and may require less of a cash down payment. Remember, CASH IS KING.
And remember, addiction can be a good thing.
Blake Hern is a young investor and risk advisory associate at KMPG, a global audit, tax and advisory firm in Mountain View, Calif.