It’s a thrilling feeling when you’ve got the job and the steady paychecks start rolling in after graduation. If you’re lucky, those paychecks cover more than just your essential expenses. With some extra cash in your bank account, you might be considering investing some of it.
Before you rush off to buy some Dogecoin or AMC stock, here are a few things you could keep in mind.
Don’t wait for an emergency to think about an emergency fund.
Life happens, and it pays to be prepared for the unexpected. Before you invest, make sure you’ve built up some savings for just-in-case scenarios such as your car needing repairs or losing your job. There’s no magic number with how much to have in your emergency fund — it will depend on your specific situation and comfort level, but having money to cover three months of your expenses is a good starting point. A no-fee, high-yield savings account can be a good place to park your emergency fund.
Weigh paying off your student loans faster versus investing.
If you’re like most Americans, you probably left college with loans to pay off. You should definitely budget for your monthly student loan payments. But if you have extra money, you might wonder if you’d be better off putting that money toward your student loans or investing it. To help make that decision, look at the interest rates on your loans and compare them with what you think you’d make investing. Let’s say you think your investments could net you a 6% return and your interest rates on your loans are all less than 5%. Here, investing could be a better option for you, netting you more money in the long run.
Boring is OK.
If you only read Reddit and Twitter, it’s easy to get the impression that everyone is buying crypto and shorting stocks. And although you could see huge gains with a strategy like this, it’s risky — especially when passive funds, like an S&P 500 index fund, have consistently outperformed actively managed funds more than 80% of the time. Last year the S&P 500 index finished with gains of 16.3% and the Nasdaq composite, which features many tech stocks, saw gains above 40%. Past performance isn’t a guarantee of future performance, but a passive (and some might say “boring”), long-term investing strategy can pay off.
Never pass up a company match.
If you’re lucky enough to work for a company that offers a 401(k) match, be sure to take advantage of it before you pursue other investing opportunities. A 401(k) contribution match is essentially free money and who doesn’t want that? Here’s how it works. Let’s say you make $50,000 a year and elect to put 2% of your salary into your 401(k) — that’s $1,000 you’re investing. If your company offers a contribution match of up to 2%, they will add another $1,000 to your 401(k). That’s the easiest grand you’ll make all year.
It’s OK to start small.
You don’t need a lot of money to start investing. Many online brokers and investment apps make it easy to start small. Stash, Robinhood, and Acorns are three apps you can check out if you’re just starting. All three let you open an account with no minimum requirements and offer fractional share investing. Fractional shares are simply portions of a stock and allow you to buy into companies that might be out of reach if you had to buy an entire stock at the full price. For example, let’s say a stock is trading at $100, but you only have $5 to invest this month. You can use your $5 to buy fractional shares of that $100 stock so you’ll own 5% of one share of the stock.
Beware of fees.
With investing, there are quite a few fees you should know, including:
- Expense ratio: A percentage of your investment in mutual funds, index funds, and exchange-traded funds charged annually.
- Management or advisory fee: A fee paid to your financial advisor or a robo-advisor that’s typically structured as a percentage of your assets they manage.
- Trade commission: A fee that’s charged when you buy or sell stocks. Fortunately, many investment platforms have dropped trading commissions over the past few years after Robinhood came on the scene offering commission-free trades.
It’s important to understand and compare fees because they can affect your portfolio’s performance. Generally, you’ll find the highest fees with more hands-on investing options like using a financial advisor or buying mutual funds.
Whatever you decide with investing, you’ve got time on your side. Through the magic of compound interest, even a small investment today can compound and add up to something much more substantial in the years to come.
BIO: FinanceBuzz’sVP of Content, Tracy Odell, also held the same position at Student Loan Hero and has expertise in this subject, as well as all things related to college finances.