Early Career Investing Basics
The reluctant first thing you should consider when you enter the workforce full-time is that the paycheck you receive won’t always be there. Some day, you will stop working either because you want to or because you have to. Planning for your last working day should start with your first working day.
That’s why you must contribute to a government antipoverty program for seniors called Social Security. It’s up to you to create resources you can use later in life to supplement Social Security. A percentage of your paycheck should be invested toward your future for that purpose–investment assets you can convert to income to stack on top of Social Security to live better.
Let the Investing Begin
It may seem strange that you should sacrifice part of your early career paycheck toward an investment you won’t use for 50 years (or so) but that’s exactly why you need to start investing now.
Time, it turns out, is your investing ally and you have lots of it ahead of you.
Each year your assets grow creates a higher foundation for further growth. If you start with $100 and this year it grows to $105, next year’s growth will build on top of $105 and so on, fluctuating with the market. That’s called compounded growth (think “growth-on-growth”). Over 50 years, the combination of your contributions and many years of growth can magnify your accumulated resources substantially.
That’s why even though the “future you” may seem so distant as to be a stranger, you need to start investing for that person early in your career. He or she is counting on “today’s you”. No one else is going to do that for you.
Your Investment Vehicle: It’s Probably Your Employer’s Retirement Plan
You may, actually, not have much practical choice early in your career. That’s because your employer, especially a large employer, is likely to provide a retirement plan to you as part of your benefits package.
The biggest appeal of that retirement plan option is a likely employer matching contribution to your retirement account. That is, your employer may match your own contribution to your retirement up to 3% (influenced by IRS rules). That’s a 100% return on your first 3% contribution from your paycheck and you may contribute more, if you’d like to that account. That may not leave much room for additional contributions, especially early in your career. That’s why your investment vehicle–your employer’s retirement investment option may be your default option, at least initially.
Basic Investing Choices
- Taxes – The choice is to pay now (Roth-type plan) or pay later (a pretax plan, like a 401k). With federal income tax rates at near historic lows and federal debt at near historic highs, you might seek a Roth-type plan. Pay tax on your investments now and not have to worry about paying tax on that money ever again.
- Risk Tolerance – By law, if you buy investments through a broker that broker needs to match your investment risk with your risk tolerance. The more aligned your comfort with risk and the risk your investments are taking, the more likely you’ll be to stick with your long term investment strategy. Your plan will use investments that match your risk profile.
- Financial Goals – You’ll need a goal. When is your targeted retirement date? Yes it’s a long way away but pick a date. You need a date to make basic assumptions about annual investment returns and what percentage you’ll need to contribute from your paycheck to reach a goal that gives you enough income to retire. Not doing this is the equivalent of driving without any particular destination. You may never be able to retire that way!
- Monitor and Keep It Simple – As you change jobs you may want to rollover your former employer’s retirement plan into either your current employer’s plan or to your own (Roth) IRA that doesn’t change when you change employers. This may not be a problem early in your career but Americans change jobs every 4-5 years so it can become a problem.
Participation and contribution are the key actions you should take. Having a financial goal is like having a destination set in your mapping app: you’ll know you have a destination for your investment journey.