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Finances After Graduation Podcast Episodes
Savings and Investments
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Pete and Alex discuss savings and investments, how they differ, and the appropriate time to start investing.
One of the most common questions we get from students is, “When should I start investing?” It’s not too surprising when you think about it; investing is one of those words that people throw around because they know it’s important, but they don’t really know why. They also tend to not know the difference between it and savings.
Investments tend to be the sexier thing to talk about in finance. You rarely ever hear of people talk about all the money they make with their bank’s savings account. You only hear of people making lots of money by “playing the market.” If savings accounts aren’t going to make you much money, then why would you put money in them instead of investments?
Savings accounts are your short-term funds. What you put in savings is supposed to be your emergency fund, as well as money that you are saving every month--via your budget--
to spend on something down the road. Your savings is much more accessible than your investments, meaning the withdrawal process is easier. Still, that doesn’t mean you should dip into savings when you need some extra cash. As Pete says, your savings is there to prevent you from going into economic hardship (i.e., the money that’s there has been saved for the things you want).
Perhaps the most important lesson from the savings portion of the episode is that you should always pay yourself first. This means that whenever you get your paycheck, you put your savings into your savings account, and then you can spend the rest. This also means that you should always budget based off your net income (how much you make after taxes and student loan payments) minus savings, rather than wait to allocate your savings last. Doing this will help you learn how to live with less, meaning your baseline for needs will be lowered, and you will spend less money each month. All of this is similar to the way we’ve suggested you treat your student loan payments; treat them like a bill every month that has to be paid. Another important rule to follow is that you always should allocate at least 10% of your take home pay to your savings.
And once that 10% has been applied enough so that you have 3 - 6 months of emergency expenses, you can then--if you’d like--start to dabble in investing.
Investing can be an incredibly intimidating premise. You are about to take your money and entrust an external entity (e.g., economy, business, etc.,) to help your money grow to help fund something a long time from now. Not only that, but the number of options you have to invest in are, essentially, limitless. So how do you even know where to begin?
As Pete and Alex discuss, there are now websites that will do the investing for you for a small fee. If you aren’t comfortable with your level of investing skills, these may be the way to go. You can also turn toward a investment broker/financial advisor and ask them for help. Or you can go it alone and invest via an online brokerage. The important thing is that you do what you’re most comfortable with and that you do your research before you make any decisions about how to invest.
One of the things that you will have to decide is how much risk you’re willing to put up with when it comes to investing. If you’re planning on investing to make lots of money relatively fast, you’re going to have to be willing to put up with more risk. You must also remember that despite the fact that the market over time trends up, that does not mean that any investment you make is a sure thing. Back in the 90s, you may have thought Blockbuster Video was the future and here to stay, or maybe you thought Borders would be king of the bookselling world--or that there still would be a bookselling world. Despite the fact that the markets have been--for the most part--trending upward since then, you would have lost whatever money you invested in those companies.
When it comes to investing, the smartest thing you can do is to take advantage of whatever your employer’s retirement plan provides. If your company provides a 401k matching program, you should be taking advantage of that by putting the highest amount you can to meet the match. Your goal should be to get at least 10% of your salary into your retirement fund every month, even if your employer’s program won’t get you to that level. As Pete and Alex say, “Nobody ever regrets putting lots of money into their retirement account...be aggressive with the amount of money you invest, not in what you invest.”
The bottom line is savings and investing are crucial to your short-term and long-term financial viability. While investing is a very important part of having a solid financial life, savings is the foundation that allows you to get to the investing stage. If you are able to navigate both of these crucial personal finance skills, you will be putting yourself in the best possible position for financial success throughout your life.