A while back, I got an email from a reader who wanted to know how I’d invest if I recently graduated from college. This is an interesting question.
On one hand, we are doing pretty well financially so that means I did a lot of things right. However, I also made plenty of mistakes when I was young because
I had to learn by myself through trial and error. It would have been much better if I had someone to guide me. Even a short investing guide like this would have been extremely helpful. Anyway, I’ll answer the question to the best of my ability and you can add to it as well. Here is the email.
I really enjoyed reading a few articles on your blog today as I stumbled across it. I’m 23, married, and a year out of college. I’ve always been intrigued by the idea of retiring early and having my money work for me. If you could put yourself in my shoes, what would you do to retire even quicker than 40? I also like the idea of creating passive income but don’t have the money to “buy” it. Are there any low investment passive income ideas you have? I’m not afraid of working hard.
Lots of Potential, but no money
When I was 23, I didn’t have much money to invest. I drove a 15-year-old Toyota Cressida, lived in a cheap apartment, and didn’t have a partner to help me reach my goals. At that point, the best thing going for me was a steady engineering job. My income was pretty good for a young guy and I was able to start investing in my company’s 401k plan right away. That was the first time I had any money to invest and investing in the 401k is a good first step. However, my first advice is a little different.
Invest in yourself first
When you’re 23, the best thing you can invest in is yourself. You probably aren’t making a lot of money and you need to ramp up your income as quickly as possible. Passive income is awesome, but you won’t get it rolling for quite a while. If you have $1,000 to invest in the stock market, you’d make maybe $70 in dividend income and appreciation. That’s peanuts.
At 23, you need to concentrate on building wealth first. For most people, this means making more money from your main job. This can be achieved in many ways.
- If your career has good earning potential, then work as hard as you can to get raises and promotions.
- Improve your skillset. You can take classes, get advanced degrees, earn certifications, and/or just learn a lot at work. Make yourself more valuable to the employer and you will have more leverage to negotiate with.
- It’s just as important to make connections and learn how to communicate effectively. Find a mentor who can help you. Learn how to make connections and become friends with smart people you admire. Also, figure out how to ask for a raise. (I totally failed at improving my soft skills.) A great resource is your alma mater’s career center. Mrs. RB40 wishes she had taken advantage of the great tools that her university had when she had the chance.
- Figure out a way to stay interested in your career. If you run into problems, then try moving to another company or changing jobs within the same field. Some of my friends changed from engineering to technical marketing and it worked out quite well. Don’t stay in a job you hate because of money, it’s toxic. (Another mistake I made.)
- Change employer if you can get higher pay. The old way of staying with one employer for a long time doesn’t work anymore. It’s easier to get a good raise by changing companies now.
However, not all jobs have good earning potential. If you’re a teacher, accountant, paramedic, reporter, or other professionals with a relatively low median salary, then you need to think creatively and hustle hard.
- Start a business on the side. This one is tough, but it can pay off big if you’re lucky. Recently, a reader commented that he started a small business, hired 2 people to run it, and now he is living off the residual income. That’s the way to go if you can figure it out.
- Change to a more lucrative career. This would be tough, especially if you are in a job you love, but it might be the only way to earn more.
- Start a blog. I’m very lucky that I started Retire by 40 in 2010. This blog is generating a nice side income. It will enable us to put off withdrawal for quite a few years. Not everyone will be able to make money from their blog, but it’s the gateway to the online economy. Many bloggers created courses, wrote books, became freelance writers, started a FBA business, and many other things. Blogging is a great side project and anyone can start blogging. Here is my tutorial on How to Start a Blog and Why You Should.
- Side hustles. Actually, I’m not too excited with side hustles unless they have the potential to grow into a business. For example, walking a dog might generate a few extra bucks, but you’re just trading time for a little money. I’d invest my time in something that could grow or teach you new skills. Don’t do manual labor just to make a few bucks.
- Extreme frugality. I don’t like this because most people won’t be able to sustain that level of frugality for the long haul. It’s an option if you don’t make much money, though. Life is no fun when you’re super frugal.
Basically, you need to make money first before you can invest a meaningful amount. When you’re young, you have a lot of potentials, so use your time wisely.
Minimize lifestyle inflation
Next, it is very important to minimize lifestyle inflation. When people make more income, they spend more too. You need to avoid this trap and invest the extra money instead of ratcheting up your lifestyle. One of the best ways to keep your lifestyle in check is to track all your expenses. That way you where the money went. A lot of things people spend money on aren’t adding much to their lives. This paragraph is short, but it is a very important point. Everyone needs to put saving and investing first before spending on unnecessary stuff.
Become a real estate investor
Once you make more income and have some savings, then it’s time to start investing in earnest. When I was 23, I had a good income, but very little savings. How should you invest when you have just $1,000 extra per month? (The $1,000 is just an example.) In this situation, the best thing to invest in is a house. Why?
- You can borrow money to buy a house. If you have a good income, a bank will jump at the chance to lend you some money.
- You can generate some income by renting out a bedroom or two. This might be tough if you’re married, but maybe you can go the AirBnb route. We purchased a house soon after we got married and we had some roommates over the years. They were hard-working engineers, so they were never home anyway. Young engineers make great tenants.
- You can turn this first home into a rental later. That’s the easiest way to start investing in a rental property.
I would go for a starter home and avoid borrowing too much money. I’m not sure about now, but back then, the bank would approve a huge loan. A lot of people will get the biggest house they can and they’ll overextend financially. That isn’t the right way to invest. If you really want to start generating passive income, then buy a starter home first. You can turn it into a rental when you’re ready to move into a bigger home.
Another really good option is to buy a fixer-upper. You’ll learn many essential DIY skills and you can add a lot of sweat equity to the home.
***Readers suggestion*** – Buy a duplex or a multiplex instead of a house. You can rent a unit out and really become a landlord. It’s harder to get financing, but you might be able to do it. I suggest buying in a good area.
Some people think being a landlord isn’t the right fit for them, but you won’t know until you try. It’s best to try it early on and see if you can do it. If you don’t like being a landlord, then you can move on to try something else. Many successful real estate investors retired early with their rental income.
*2022 Update – The housing price is crazy now. Young people might need to wait for the housing market to cool down a bit before buying a home.
Invest in the stock market
The stock market is great once you have more money to invest. The stock market is more passive than real estate and it has a great track record over a long investing horizon. Our dividend portfolio is my favorite investment because it pays out regularly and it doesn’t require a lot of maintenance.
When you’re young, you don’t have much money to invest, but it is still very important to start investing in the stock market right away. This is primarily due to 2 reasons.
- Compound interest. Basically, you earn more money every year with the investment you made. This is a very powerful tool when you’re young. At 23, your investment will compound for many years. If you invest $1,000, it will turn into over $20,000 after 40 years. (At 8% appreciation.) Invest $1,000 every month and you’ll have over $3 million at 63. The earlier you invest, the more it will grow.
- Learn how to invest through experience. We learn best from experience. Everyone needs to go through a few market cycles before they find their investing style. If you’re younger than 30, you don’t even know what a stock market crash is like. Once you go through a few major crashes (50%?), then you’ll learn from the experience and become a better investor.
Even if you don’t have a lot of extra money, you still should invest in the stock market. The easiest way to do this is to invest in your company’s 401k. At least, you should contribute up to the company matching so you don’t leave any money on the table. Then keep increasing your contribution until you maxed out your 401k every year. I guarantee that you’ll be a millionaire before you retire.
If your employer doesn’t offer a 401k, then investing with Vanguard is a really great start. Vanguard offers many low-cost passive funds and you can’t go wrong with them.
Investing when you’re young
To summarize, here are my best investing tips for young 20-something out there.
- Invest in yourself and increase your active income.
- Invest in a house and turn it into a rental.
- Start investing in the stock market so you will become a better investor.
When you’re young and hungry, work on increasing your active income. You have a lot of energy and you don’t have a lot of obligations yet. Once you have kids, then it will be a lot harder to put energy into your career or side business. Good luck!
What do you think? What’s your advice to our young readers?
Sign up for a free account at Personal Capital to help manage your investments. I log in almost every day to check on my accounts and cash flow. It’s a great site for DIY investors.
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