Congratulations! You’re a college graduate and the world is your oyster. Transitioning to life as an independent adult means leaving the structure and preset expectations school provides, which can be both daunting and exciting at the same time. For years you had parents/teachers/professors/coaches telling you what you needed to do to reach the next step in life. Now, it’s up to you to decide what that next step looks like and how you’ll get there.
One of the biggest factors informing your decisions about where to live, what to do for work, etc. is money. Not only do you need to take stock of your current financial situation but it’s important to think about the long-term. And, while you won’t know exactly what life will look like in 10, 20, 50 years, your goals will help you create opportunities to achieve financial independence and live the life you want. So what can you do now to set yourself up for success?
Studies show that most young adults don’t start investing early enough. According to a survey done by Bankrate, only 18% of adults under age 25 invest in the stock market. Young people are often strapped for cash during college and early working years and it’s difficult to turn their attention away from the right now and towards the long-term. Often, young people wait to invest until they graduate from college and/or have a higher income. Logically, this makes sense: how can you save money when you can barely afford your rent and cell phone bill? The problem with waiting is that you miss out on one of the biggest drivers of investment returns: compound interest, or the time value of money. Compounding returns can be astounding over time but few young people are aware of its potential.
To give a simple example, Graduate A invests $1,000/year for 10 years starting at age 22 while Graduate B invests the same $1,000/year for 10 years starting at age 32.
Assuming they invest in equities and they earn an 8% annualized rate of return, you can see that Graduate A has more than twice as much saved at age 42 than Graduate B, thanks to an extra 10 years of investment growth. Within the context of the current life expectancy in the U.S. of 79 years, those additional 10 years of growth become significant.
It’s clear that starting to save at a younger age will give you more flexibility and opportunity in life but what if you don’t have any extra cash to set aside? Many people think that they need to have a certain amount saved before they start investing but there ways to get started with a small amount of savings.
Graduation gifts are a great opportunity to get started. If you have people in your life who would like to celebrate your recent graduation by giving you money, use the funds to open up an individual brokerage account or Roth IRA. If you’re lucky enough to have people ask what you would like as a gift, look into an investment app such as GiveAShare or Stockpile, both of which allow someone to purchase stock in your name.
Here’s some more info about how you might start investing for your future:
- Opening and Funding a Roth IRA
You must have earned income to fund a Roth IRA but you can save up to $5,500 per year in this type of account and the funds will grow tax free. There are specific rules attached to retirement accounts, so be sure to familiarize yourself with them in advance of opening the account. If you’re living on a tight budget but your parent or grandparent wants to gift you money, ask them to help you start a Roth IRA. They’ll likely be impressed with your forward thinking and you’ll have a jump start on retirement savings.
- Fund a Robo Investment Account
You might choose to fund what’s called a “robo” investment account. These online investment platforms provide tools to help investors assess and understand their risk profile and provide low-cost, well diversified portfolios. They typically have an auto-rebalance feature, so even if you don’t put additional money in after the initial funding, the account will continue to be invested in a risk appropriate manner according to on-going market conditions.
- Buying Shares of Stock
You can buy as little as one share of stock, or even a fraction of a share through apps such as GiveAShare or Stockpile. With GiveAShare, you get a framed stock certificate and the stock is registered in your name, meaning you are entitled to dividends. GiveAShare is not a brokerage firm, so the share(s) will eventually need to be transferred into an account before you can sell them. Stockpile allows you to purchase a gift card or e-gift in a specific dollar amount, making it a great gift idea to give your loved ones. They are a brokerage firm, so the shares will be held in an account in your name. In either case, it’s a great way to start investing early.
Have more questions? We’d be happy to answer and help get you off to the right start.