The First 3 Investments You Should Make Right After Graduation
While you were in college most — if not all — of your money probably went to covering education costs, food and an occasional luxury. Now that you’ve graduated and begun a career, you can focus on new priorities, such as investing to secure your long-term finances.
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Here are the first three ways to invest:
1. High-Yield Savings Account
With traditional savings accounts paying just 0.46% interest as of February 20, 2024, new grads have little incentive to sock away money at their neighborhood bank. However, you can easily earn 10 times that amount with the high-yield savings accounts offered by many online banks.
A high-yield account is a no-risk way to create an emergency fund to tide you over if you have a financial setback. Experts recommend saving up one month’s take-home pay to start, and then gradually building up three to six months’ income.
2. Retirement Account
Thanks to compounding returns, early contributions to a retirement account have an outsize effect on your account balance at retirement. Every dollar you contribute at age 25, for example, can grow to $4.80 by the time you’re 65, according to Vanguard. Wait just five years and your dollar will be worth just $3.95 at age 65 — nearly 18% less.
Experts recommend investing 15% of your income in a retirement account. An employer-sponsored 401(k) is often the best way for a new grad to start, but if your employer doesn’t offer one, consider opening an individual retirement account instead.
Employer-Sponsored 401(k):
A traditional 401(k) is a tax-advantaged way to save for retirement. Once you opt in, your employer will defer your contributions automatically from your pre-tax income — each $1 you contribute reduces your taxable income by $1, so you save on taxes. You can invest the money in any of the assets the plan offers — mutual stock and bond funds are a common choice because they automatically diversify your portfolio. The money grows tax-deferred, so you won’t have to pay tax on your nest egg until you withdraw funds during retirement.
A major benefit of 401(k) plans is that employers often match at least some portion of employees’ contributions. That free money helps your savings grow faster.
Traditional IRA:
A traditional IRA is a type of retirement investment account you set up yourself through an investment brokerage. Contribution come from pre-tax income, and they grow tax-deferred. You pay income tax on withdrawals you make after you retire.
Although you can’t get matching funds with an IRA like you can with a 401(k), you’ll likely have a larger selection of investments to choose from.
3. Pay Off High-Interest Debt
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The average credit card charges 22.75% interest, according to the Federal Reserve. That means paying down high-interest debt is about the most lucrative investment you can make. As your balances shrink, you’ll have more money available for additional investment goals, such as buying a home or investing in securities outside of your retirement account.
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