Let’s say you just got your first full time job, maybe just out of high school or college. Your first savings should probably be in a savings account or money market. Pick an amount such as $20/week and start saving. Don’t worry too much about your gains as this should be ready cash for when you have an emergency. You are an acorn.
What amount can you switch to actually investing? You should probably have 3 to 6 months in emergency funds that you don’t touch. If you are tempted to use it, consider what your alternatives are and try to do anything else but take your emergency fund. If it becomes too expensive to save your $20 per week, find things to make it easier to save this amount. But don’t reduce it. The only thing you should do with this amount is increase it. Ultimately you want to save 15% or more of your pre-tax income, which I know is easier said than done.
But it can be done. Just think about what you would do to get by if you were in the same situation without the savings. You would find a way. So find a way and save. Then find a way and don’t touch it.
There are emergencies where you will have to tap your emergency money. But it really should be the worst of your worst problems.
Once you are beyond the 3 to 6 months of emergency money, you can invest. You are 18 or 22 so your first priority for invest should be your retirement. Sounds like the opposite of true, but it’s not. As much as you feel you need that new car or new house, you probably don’t. Those are the two expense categories that should inflate last.
Except of course if you need that new house. When do you need it? If you’re renting you should find a way not to rent for the same amount of money, if that’s even a possibility. If it’s not, wait until you have that 20% down payment. Then you won’t have mortgage insurance and you’ll own more of the house, making it much easier to afford.
As far as a car goes, there’s almost always a way to own a car for not too much money or to go without one entirely.
The remainder of expenses are a little tougher but you can bring them down over time.
I still haven’t talked much about investing. Assuming you are employed with a 401K of some sort, your #1 priority (even before emergency savings) is to get the company match. If it’s 50% of the first 6%, contribute 6% to get free money. Then save 9% of your pre-tax earnings into your emergency fund (or more). You must also invest your contributions so pick the most aggressive growth fund you can find and put all your money into it. You have a long time to go for retirement so don’t even bother to look at your investing results for a long time.
If you have your emergency fund fully funded, save the entire 15% (or more) of your pre-tax earnings into your 401k even if you don’t get a match on the whole thing. Again, invest in the most aggressive growth fund your company has. Don’t pay attention to it because you have a long time to invest.
What if you don’t have a 401K? You can put your savings in an IRA and invest it within an IRA. Since you have free rein to invest in whatever you want, I would start with something like the QQQ, which is an index fund over the Nasdaq 100. QQQ earns just below 20% on average but does go up and down, so you want to try not to look too much.
I will tell you that I did invest in the following way for my children who are in their 30’s. Note that I contribute and I invest for them:
TMF 10%
TQQQ 20%
UPRO 70%
I figure this will earn an average of 30% but will be very volatile. So every time my middle son seems too worried about it, I tell him that he is 35 and has 30 more years until retirement. Lots of years for growth and recovery.
Note also that I don’t want to sell any of the funds for tax purposes (I’m trying to save them some money). So I don’t reinvest dividends and I only buy shares of these funds, usually whatever is lower than it should be.
Are you an oak? Let’s talk about you in the next post.