5 Investing Tips for New Grads

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Key points

  • New grads have a leg up on most investors who don’t start saving until later.
  • Maximize gains by prioritizing debt payments and starting soon.
  • Minimize losses by avoiding leverage and diversifying.

New grads may struggle to invest while repaying debt related to their education. But it’s doable, and those who start saving early have an advantage over most investors, who start investing much later in life. (For reference, the average American under 35 only has $13,000 saved for retirement.)

Investing as early as possible gives new grads more time for compound gains to grow their savings. Here are five investing tips for new grads (from the POV of a recent college graduate) in order of most to least importance.

1. Prioritize debt payments

While investments generate compounded returns, unpaid debt accrues compounded losses. If borrowers delay repaying their debts, they risk eroding a substantial portion of their investment earnings. The quicker graduates eliminate their debt, the faster they can grow their savings.

Track investments and debt payments to keep money moving on schedule. Missing a debt payment can hurt your credit score and cost you extra late fees.

2. Avoid leverage

Investing in the stock market with borrowed money, regardless of debt-free status, is risky. New grads are typically recent to the stock market and work lower-paying jobs. Leverage could add further instability to one’s finances.

Leverage compounds worse-case scenarios and encourages high-risk bets. As a new grad, I lost thousands in the stock market because I failed to recognize the risks posed by borrowing on margin. The best brokers for beginners help recent grads learn how to invest fast and easily.

3. Set a financial goal

Before investing seriously, consider setting a financial goal. Setting a goal gives you something to work toward and a benchmark to measure your progress. Common goals for new grads include the following:

  • Invest in an emergency fund. Save three to six months’ worth of living expenses.
  • Invest in housing. Save for a down payment on a house or an apartment.
  • Invest toward retirement. Many employers offer 401(k) matches to new grads.

Financial goals are great, but sticking to them requires good money habits. James Clear, author of Atomic Habits, offers simple, practical advice on forming good, sticky habits (and breaking bad habits, like impulse spending).

4. Start soon

Extremely successful and well-known investor Peter Lynch once said, “In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.” The sooner you start, the more you save.

New grads have more time to put their money to work by saving it than their parents. For example: Assuming an 8% annual gain, a 25-year-old who invests $10,000 every year until age 50 would be worth $731,744. But had they started at 35, they’d only be worth $271,838.

Time is an incredible advantage should new grads choose to take advantage of the stock market. Financial guru Suze Orman recommends young folks save for retirement via tax-advantaged individual retirement accounts (IRAs).

5. Diversify

Disasters like the COVID-19 pandemic can make or break your portfolio. Grads new to investing may want to consider diversifying into bonds, ETFs, or savings accounts to make temporary downturns less frustrating. (Frustration frequently leads to rash investing decisions.)

Plus, a well-diversified stock portfolio can maximize your chance of earning a return on investment. Experts at The Motley Fool suggest holding 25 or more stocks in a brokerage for five years for the best results. Consider diversifying in a manner that aligns with your financial goals.

New grads have a once-in-a-lifetime opportunity to invest early, giving money decades to grow. Combined with smart financial goals, it’s a chance worth taking.

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