5 investment tips for fresh graduates

the main points

  • Most recent graduates enjoy the attention of most investors who don’t start saving until much later.
  • Maximize gains by prioritizing debt payments and starting soon.
  • Minimize losses by avoiding leverage and diversification.

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Recent graduates may struggle to invest while paying down debt related to their education. But it is doable, and those who start saving early have an advantage over most investors, who start investing later in life. (For reference, the average American under the age of 35 has only $13,000 saved for retirement.)

Investing as early as possible gives recent graduates more time for compounding earnings to grow their savings. Here are five investment tips for recent graduates (from a recent college graduate’s perspective) in order from most to least important.

1. Arranging debt repayment priorities

While investments generate compound returns, unpaid debts compound losses multiply. If borrowers fall behind in paying their debts, they risk eroding a large portion of their investment earnings. The sooner graduates get out of debt, the faster their savings will grow.

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Track investments and debt payments to keep money flowing on schedule. Failure to pay debt can hurt your credit score and cost you additional late fees.

2. Avoid leverage

Investing in the stock market with borrowed money, regardless of debt-free status, is very risky. Recent graduates are usually recent to the stock market and work in low paying jobs. Financial leverage can add more instability to one’s finances.

Leverage aggregates worst-case scenarios and encourages high-stakes bets. As a freshman, 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 graduates learn how to invest quickly and easily.

3. Set a financial goal

Before investing seriously, consider setting a financial goal. Goal setting gives you something to work towards and a benchmark to measure your progress. Common goals for recent graduates include:

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

Financial goals are great, but sticking to them takes good money habits. James Clear, author Atomic habitsoffers simple, practical advice on forming good, sticky habits (and breaking bad ones, like impulsive spending).

4. Start soon

The highly 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 money you put to work by saving and investing it.” The earlier you start, the more you save.

Recent graduates have more time to put their money to work by saving than their parents do. For example: Assuming an annual profit of 8%, a 25-year-old investing $10,000 each year until age 50 would be worth $731,744. But had they started at 35, they would be worth only $271,838.

Time is an incredible advantage if recent graduates choose to take advantage of the stock market. Financial expert Suze Orman recommends that young adults save for retirement through tax-advantaged Individual Retirement Accounts (IRAs).

5. Diversify

Disasters such as the COVID-19 pandemic can damage or destroy your portfolio. Recent investment grads may want to consider diversifying into bonds, ETFs, or savings accounts to make temporary downturns less frustrating. (Frustration often leads to impulsive investment decisions.)

In addition, a well-diversified stock portfolio can increase your chance of earning a return on investment. The experts at The Motley Fool suggest owning 25 or more stocks in the brokerage for five years to get the best results. Consider diversifying in a way that aligns with your financial goals.

Fresh graduates have a once-in-a-lifetime opportunity to invest early, giving the money decades to grow. Combined with smart financial goals, it is an opportunity worth taking.

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