If you’re a recent high school or college graduate and have been thinking about starting to invest, now’s the time to actually do something about it. If you begin investing now (even a little bit) you’ll be creating a pattern that will put you on the path toward financial independence.
Sure, you have other obligations and probably a generous amount of student loans, but it’s important to realize the habits you form now will guide the rest of your life.
What can you do today, with limited circumstances and even more limited funds?
1. Become a Creditor, Not a Debtor
This is a foundational decision; one you should make right now. Some people are debtors all their lives. Often it’s because they never chose to be otherwise. But you must choose.
If you don’t decide here and now that you will be a “creditor” with surplus money to invest, you will almost certainly default to being just another person stuck in debt. You’ll spend your whole life working and paying bills but never having any money to speak of.
Investing flows from this decision. If you choose to be a creditor, you will avoid debt and accumulate money to invest. That’s the track you want to be on, and it all starts with a decision you can make today.
2. Start Small
Once you decide to be a creditor, it’s important to follow up the decision with action. This will make the decision real. You don’t have to do anything dramatic.
A journey of a thousand miles begins with a single step.
You’ve heard this saying before, and that’s the general idea.
Once you land your first job, sign up for the employer sponsored retirement plan. Direct deposit just a little bit of money out of each paycheck — $25 or $50 a month will do. You’ll be able to increase your contributions later, and since it’ll be payroll deducted you’ll never miss it.
If your employer doesn’t have a plan, set up an IRA or other investment account, and direct deposit your money into that. You’re building momentum here, so anything you do is a step in the right direction.
3. Keep Your Investments Simple
You know all those get-rich-quick investment schemes? Ignore them! The more complicated an investment strategy is, the greater the chance it won’t work.
You don’t need to invest in anything more complicated than index funds and a little bit of cash. There will be plenty of time to explore investment options in the years ahead, and it’s always more constructive when you have a larger portfolio anyway.
4. Expand Your Options
As time goes by, you can begin looking into different investment vehicles, but these don’t have to be anything fancy either. Moving some money into growth and income funds or emerging market funds is fine.
Eventually you can begin moving into individual stocks — if and when you’re ready. Once you do, take that slow too. Start with one or two stocks, see how you do with those, then add more as your confidence and success builds.
5. Watch Your Non-Investment Activities
No matter how successful you are at investing, no matter how much of your paycheck you’re able to dedicate to investing, all of your investing success can come unglued if you aren’t disciplined with your other non-investment financial activities.
There’s nothing fancy here either, it’s all the financial stuff your parents and grandparents would tell you:
- Always live at least a little bit beneath your means — this will provide the cash flow you need to keep feeding your fledgling investment portfolio.
- Always have some “mattress money” (a.k.a. an emergency fund) to cover income disruptions and unexpected contingencies.
- Don’t be the borrower — it will be self-defeating if your debts rise in concert with your investment portfolio. It’s all about net worth.
- Never buy anything brand new you can get secondhand — it will help you with the debt issue.
- Don’t waste your money trying to keep up with the Joneses — you need to live your life not theirs.
And while you’re at it, be careful about lending money to friends. They have a way of becoming non-friends when money is on the line, and then you’ll be out both the friend and your money.
6. Never Quit Investing
Once you get on the investment track it’s important to do your best to stay on it. Investing gets easier with time, but you have to give yourself that time. Consistency is also an ally when it comes to investing. Steady funding of your investment portfolio in combination with proper asset allocation is a winning strategy. Think of it as creating an automatic-pilot investing program.
It’s also important to understand that investing is a game of ups and downs. The ups put you on top of the world, but the downs can mess with your mind. Be ready to ride out the downs and even to continue funding your portfolio while they’re playing out. Down markets are always a good time to accumulate cash to take advantage of discount prices at the bottom of the market.
In 10 or 20 years, when your investment portfolio is fat with investment gains, you’ll understand why you got started investing as a new grad — even if you don’t quite get it right now.