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Unbiased Financial Advice for College Graduates?
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Nick, Our firm matches investors to financial advisors and financial planners. We provide a free, unbiased search tool at http://www.claroconnect.com which allows you to screen advisors by location, qualifications, fees and more. If you don't find an advisor in your area on our service, email us and we will research advisors for you.
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- David Mayo
Nick,
Before investing any dollars, they must review their current monthly expenses to determine what they can afford to save. If they begin saving for future goals and end up needing to use credit cards with high interest rates they just might be doing themselves a disservice.
Once they have a figure in mind to save I would have the individual analyze their short term and long term goals. If they are planning to buy a home - I would suggest a Roth IRA or a non-qualified brokerage account to save up for a down payment. If their focus is on retirement savings then the first place anyone should position dollars is with their company retirement plan IF they have a company match. That "free" money will be a great benefit after years of compounding interest.
In addition to saving, they must also review their current group benefits to determine if they need any supplemental disability insurance or life insurance. When people are young and healthy is the best time to apply for insurance because it is the most affordable.
I hope this helps,
Sean
1) If your employer offers a matching 401(k), your best investment is to contribute up to the match. Some employers offer a Roth 401(k) option; if so, you are generally better off taking it.
2) Contribute the maximum allowable amount to your Roth IRA (currently $5,000 for 2010). As a young person with a relatively low income, your tax rate on post-tax contributions will be low, while your opportunities for tax savings in the long run will be great.
Unlike most other retirement vehicles, you may withdraw the money you contribute to your Roth IRA at any time. When you are ready to make a down payment on your first house, you can also withdraw some of the interest earned without penalty. Though you don't want to touch these funds if you can help it, this feature makes keeping a large emergency cash reserve in your checking account less important than it otherwise might be.
3) In general, you want to have most of your money in stocks while you are younger, then gradually convert to more secure bonds/cash as you get closer to retirement. A ballpark formula might be : [Percentage of Savings in Stock Funds] = 120 - [Your Age]. The remainder would be in bonds and cash.
4) Do not attempt to purchase individual stocks (or even mutual funds where the broker purchases individual stocks). Stocks investments should always be in passive mutual funds (also called index funds). The link below explains passive investing in more detail. Academic research shows year after year that passive funds consistently outperform actively managed portfolios while charging you less to do so.
Set aside six to twelve months living expenses in cash reserve, such as a money market. Split available cash flow between a Roth IRA and after tax investments. The assumption here is that you have debt under control, and expect to be debt free in the next twelve to eighteen months. Also, keep any mortgage to no more than two times annual income.
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My advice, even though you are just out of school, will include an education fund. If you are like me, the last thing you want to think about after graduating is more school. But bear with me. My workshops and consulting stress the importance building passive income streams as well as saving.
I recommend 1) keep your household/living expenses below 55% of your take home pay; 2) Save 10% for play - to do all the fun stuff, vacations, movies, etc; 3) Save 10% for ongoing education (classes, seminars, books, etc on finances or whatever); 4) Save & invest 10% for retirement and emergencies; 5) Donate 5% to charity and 6) Which is actually the 1st thing to do - Pay Yourself First. Invest 10% into 3 areas that will create passive income for you now, not just in retirement.
Of course, you will start small at first but the momentum will build. Patience is a huge part of financial success. Those three areas to invest in are real estate, stocks and business. Focus on the one you are the most passionate about but invest in all three for a solid foundation.
Why? You can't count on a paycheck to create wealth. You can't live a life of thrift in hopes of being happy 40 years from now when you retire. So if you want to have options, create streams of passive income that will one day provide much more than your paycheck.
Most people are aware of how to invest in inexpensive stocks - whether you do it yourself or get an adviser. But how do you invest small amounts in real estate and business? Think outside the box. Research your options. For example, in real estate, you can buy tax liens or deeds; put in an option on a property and sell it for a profit; or invest in a real estate investment trust (REIT). In business, you could invest in a business as a silent partner; lease vending machines for areas in need of them; or start an online business that requires little effort on your part or allows you to subcontract out work.
My point is, there are numerous ways to get money working for you. Be cautioned that it is not easy and the best way to lose your money is to be careless, uninformed and absent. Leaving the decisions in the hands of others is fine if you understand the ramifications of the decisions they are making for you and agree with their style and reasoning.
I hired and fired a financial consulting firm a few years ago. During our extensive initial meeting I detailed out the areas I wanted to invest in, my values and how they are not in line with some profitable investment opportunities, and my time line. What I received back in a few weeks as a plan was appalling. It did not address any of my concerns or interests but rather suggested that I invest in THEIR most popular funds.
I quickly received an $800 refund. We don't all have the time to manage our money in every respect but if you focus on the things that you are passionate about, you will find more time than you think you have. Plus, you'll enjoy doing the research and ongoing education necessary to make great decisions (hence the education fund).
I also suggest reading up on Warren Buffett. Why not follow in the footsteps of those who we know have figured out the game?
Sorry but there is no easy answer. Financial wealth requires being personally responsible and taking action based on making informed decisions. You won't always be right but if you avoid investment fads and listen to the advice of real experts who have already made and kept their fortunes, you'll do just fine.
Good luck. I wish I knew then what I know now. You really have time on your side. Put it to work for you.
Links:
http://www.jestoday.com