How to Maximize Your Money as a Post-Grad, 20-Something-Year-Old
By Yana Kouretas
For many of us, post-grad goes something like this: find a job, move to a new city or settle in at home, and begin to find hobbies, friends, and interests outside of work. We have more opportunities than ever to travel, be spontaneous, and try new things.
At the same time, we’re on our own, and naturally, money is top of mind. We’re now responsible for paying bills, rent, health insurance, etc. We want our Netflix subscription, but we also need enough money left over for groceries and rent.
So, which route should you prioritize? A dose of recklessness with a side of irresponsible fun? Or, an emptier calendar but an acute determination and drive to meet all of your financial goals? The answer is that it doesn’t have to be one or the other. It also doesn’t have to be all or nothing. You’re allowed to be adventurous and try new things while making responsible decisions with your money.
There should be no pressure or expectation to be financially free at this point in your life. You’re just getting started, and you will make mistakes along the way.
But the good thing is that time is on our side when it comes to investing, saving money, and setting ourselves up to meet our financial goals. And we have plenty of it—time—at this point in our lives. You may be staring at a smaller-than-desired number in your bank account, but if you make the right choices now, the number could look much different in just a matter of years....or even months.
We want to put your fears to rest and show you that making decisions with your money, post-grad, shouldn’t be complicated. Here is a brief guide on the steps you should take and the accounts you should open to start maximizing your paycheck properly.
*Courtesy of Pinterest
High Yield Savings Account: Build up a Buffer
In just a few moments, we’ll take you through the necessary investment accounts to set up. But for now, you’ll also want to have some liquidity, or money that isn’t tied up somewhere. People in their 20s typically encounter big life events or circumstances that can cost a lot of money—possibly buying a new car or home, moving, etc. Assuming you don’t have credit card debt, this is the time to build up some extra savings, in the event that you need to cover a large cost.
You’re probably thinking: this sounds like a normal savings account. But, it's not recommended to have your money just sitting in a checking account, with little incentive and only a small amount of growth. Instead, plug your money into a high-yield savings account. It’s low-risk, offers easy access to your money, and provides a higher interest rate, meaning your money will grow faster than a traditional savings account.
We’ve previously discussed the ever-important emergency fund. This is the kind of account you’d want that money to sit in, to tide you over if you encounter a financial setback. Money experts recommend you start by saving one month’s take home pay to start. Eventually, you should build up to three to six month’s income.
Pro-tip: If you have debt, like student loans, it is still recommended to set up an emergency fund to give you a cushion and prevent you from falling further behind if an unforeseen expense comes up.
A Deep Dive into Retirement Account(s)
Let’s get back to the investment accounts. First—and possibly most importantly—retirement.
There are several different approaches to retirement: no one route is universal. However, a tried and true rule of thumb is to start early and slowly chip away. If your employer permits, make sure you have a 401(k) set up with them, while meeting their monthly minimum match rate. It’s basically free money that helps speed up the growth of your savings, tax-deferred. And, it comes right out of your paycheck, so you don’t even have to think about it.
On the other hand, you can use a Roth IRA—which you set up yourself, through an investment brokerage—alongside the 401(k), or on its own. Here, you choose what kind of monthly contribution you'd like to make. You won’t receive matching funds, as you would with a 401(k), however, you’ll most likely have a wider portfolio of investment options to choose from.
The difference: contributions to your 401(k) are made with pre-tax money, and the tax is made upon withdrawal, while contributions to a Roth IRA are made with post-tax income, allowing your withdrawals to be tax-free.
Most experts recommend you stash away 15% of your annual income in a retirement account, including any employer contribution. That sounds like a heavy chunk of change, especially if you’ve just entered post-grad and you’re balancing the weight of these new financial obligations. So, don’t stretch yourself too thin to meet these retirement goals. Make sure you’re steady on your two feet first. And if you want to give it a shot—you can start smaller than 15%. Your retirement account will still do its job, even if you’re putting away $20-50 a month. It’s better than nothing!
The nice part about retirement accounts is that it’s not enticing to withdraw money from them, because you’ll literally take a hit financially—withdrawals before you reach age 59 ½ will be penalized at 10%. So, you really have to sit back and let time do its thing on this one.
Opening up Other Investment Accounts for Non-retirement Goals
Once you’ve built up an emergency fund, you have a stock of extra cash, you’ve been consistently contributing to retirement, and you’ve either paid off debt or are working towards paying it off if you have any, now would be the time to consider opening investment accounts to work toward goals beyond retirement. If you have extra money left over each month, and you want to put it somewhere it will grow and be accessible, it’s worth it to look into a brokerage account. Unlike a retirement account, it offers more flexibility, no contribution limits, and no withdrawal penalties.
A brokerage account is an investment account where you can buy and sell investment pieces, like stocks, bonds, mutual funds, and ETFs. If it sounds broad, that's because it is.
A brokerage account can aid you in trading stocks, long-term investing, retirement savings, and other savings goals.
Not to toot our own horn, but we did write a whole blog on investing.
For your convenience, here’s a snippet, but be sure to check it out!
Once you’ve identified your goals and you know how you want to invest, you need to pick what you want to invest in. Each option comes with some degree of risk, so you’ll need to understand how that is aligned with your goals.
Stocks:
When you think of investing, you probably think of the stock market. It’s not the only kind of investment, but it is the most popular long-term investment option.
A stock is a share of ownership in a single company
Stocks are bought for a share price, which can vary from single digits to a couple of thousand dollars, depending on the company and how they’re faring in the stock market.
You can manage your stock purchases yourself, use a financial advisor, or a robo-advisor.
Find a company(s) that you believe could grow in value over time, then purchase its stock through a brokerage account, which will allow you to actively manage your investment.
However, you can also buy stocks through a mutual fund, which is usually managed by professionals. We’ll detail that shortly.
How to make money from stocks:
If the share price goes up after you purchase it. Here’s what that really means:
When other investors like what they see with the company and are happy with the price offered to buy shares, they'll buy the stock. If enough do this, the share price will increase. When that happens, that means the price has appreciated, and you can sell them to net a capital gain. A.K.A, you’ll get more money to put in your pocket.
Bonds:
These are essentially a loan to a company or the government, which agrees to pay you back in a certain number of years. In the meantime, you get interest.
Generally considered less risky than stocks, because you know exactly when you’ll be paid back and how much you’ll earn.
Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered to be less risky investments.
Bonds earn lower long-term returns, so they should only make up a small part of your long-term investment portfolio.
Buying bonds on the bond market can be more complicated than buying stocks, as there is a baseline amount required to begin investing. The face value of most bonds is $1,000, but there are ways to buy bonds for less. The easiest ways to purchase bonds are through a broker, an ETF, or directly from the U.S. government.
Bond rates are determined by central bank interest rates (the Federal Reserve).
Mutual Funds:
This is a mix of different kinds of investments packaged together
It’s basically a big investment pool where many people put their money together and hand it to a professional advisor who buys stocks, bonds, and other investments on your behalf. In return, you’ll get shares proportional to how much you put in the pool.
The diversification makes them less risky than individual stocks
Index funds (a type of mutual fund) follow the performance of a specific stock market index, like the S&P 500.
These funds take investors with as little as $500 to start, and many have no minimum. Even with a small investment, you can own pieces of hundreds of different companies.
Exchange-Traded Funds:
Similar to a mutual fund, ETFs are composed of many individual investments bundled together.
ETFs trade throughout the day like a stock and are purchased for a share price. This also means their value rises and falls during the day.
An ETF's share price is often lower than the minimum investment requirement of a mutual fund, which makes ETFs a good option for new investors or small budgets. Index funds can also be ETFs.