Like many millennials, I’m starting a new job this fall. So I talked to several financial planning specialists to find out the best ways to invest my earnings: Nick Holeman, a certified financial planner at Betterment, an online investment adviser; Arielle O’Shea, a personal finance writer for website NerdWallet; Maria Bruno, a senior retirement strategist at mutual fund giant Vanguard; and Greg McBride, chief financial analyst at Bankrate, and data and research firm.
Here are their best tips on how to grow your money:
Step 1: Budget and save.
According to Pew Research, 76 percent of Americans are living paycheck to paycheck, and many people near retirement age haven’t saved anything. Don’t do this. Analyze your habits for a couple months to find out how much you spend and on what.
Advertisement
Bruno and McBride suggest you then start salting away money for an emergency fund, retirement, and a dedicated savings account. If you don’t have enough money left at the end of the month for these savings, cut your spending. If you start earning more or spending less, just increase your savings and still live within budget. This will avoid letting luxuries turn into necessities – a.k.a. lifestyle creep. If there’s extra money at the end of the month, transfer that into savings, too!
Step 2: Max out employer-matched 401(k)s.
O’Shea and Bruno recommend that you max out your retirement savings first, putting away as much as you can. Contributions are made pretax, meaning they reduce the amount of your taxable income. If your company matches some or all of your contribution, that’s free money and a good reason to participate. Holeman says that many employers will automatically enroll you in a target date fund, which uses a mix of assets based on your age and tolerance for risk. Use it! Later you can do research or work with an adviser to select a lineup of funds more tailored to your preferences. Only after you are contributing enough to get the full match should you worry about other savings.
Advertisement
Step 3: Consider when to pay off loans.
Start investing in employer-matched 401(k)s before paying off your loans completely. With low-interest student loans or tax-favored mortgages, paying down debt can wait until after you’ve invested some of your money. Holeman says you’ll earn about a 6-8 percent return on the S&P 500, so if you have a debt that’s 6 percent or higher, then pay that first. Otherwise, wait. After that, pay off consumer debt immediately. Credit card debt has high interest and balloons quickly. And once you’ve paid it off, never rack it up again.
Step 4: Max out Roth IRAs.
Holeman emphasized how important Roth IRAs are for young investors with low income, but a high-earning potential. There’s no tax advantage today, but when you pull out the money in retirement, all the growth on your investments is tax-free. After maxing out employer-matched 401(k)s, invest in Roth IRAs, and if your employer doesn’t match, use Roth IRA’s first.
Step 5: Establish a cash emergency fund.
All the advisers I talked to highlighted the importance of keeping about three to six months’ expenses in liquid cash in your bank account. Don’t be daunted at how much this seems; you just need to start somewhere! Even $500-$1000 in the bank will help with sudden issues like car repairs. Bruno pointed out that Roth IRAs can double as an emergency fund, because though you can’t pull out your gains until you retire, you can pull out your original investment tax-free at any time.
Advertisement
Step 6: Create a savings account.
Put the rest of your nonspending, nonemergency funds in savings accounts. According to O’Shea, everyone is a good candidate for a roboadviser, which are automated investment programs that help you allocate assets. Three of the best online financial advisers on the market are Wealthfront, Betterment, and Vanguard, which all have easy to use online savings apps that you can put thousands of dollars in. McBride says to also utilize apps (like Acorns) that transfer spare change on every purchase to savings.
Wealthfront will manage your first $10,000 for free and is a great way to test the waters. It also has good tax efficiency. According to NerdWallet, Betterment is better for IRAs. Betterment also has better customer service and a unique user platform that allows investors to have different buckets of money for different goals. Vanguard is a much older company and one of the world’s largest investment companies. Their online apps are not as intuitive, but they have a host of human advisers to help out and they have a lot more experience growing money.
You can set up separate accounts for retirement, college savings, and house savings on Vanguard, but they require separate accounts. Betterment has a sleek user interface that allows you to easily put money in different goals categories with different risk portfolios. Vanguard and Betterment have helpful advisers and good customer service; Wealthfront makes it a lot harder to talk to a real person.
Advertisement
Step 7: Analyze your goals and create different risk portfolios.
Long-term goals, like retirement or kids:
When you’re young, Holeman says you can afford more risk, because you won’t be touching the money for a while. Shoot for 90 percent stock and 10 percent bonds (or a 9/10 risk profile).
Medium-term goals, like grad school, a first home, or a car:
O’Shea says to not think of property as the best investment, because you usually earn more on retirement savings and houses are complicated to buy and invest properly. Do own your own home, though, because mortgage is tax-deductible and an investment, unlike rent.
While saving up for medium-term goals perhaps a decade in the future, think of 50-60 percent stock (or a 5/10 risk profile). Decrease the risk as the goal gets closer.
Short-term goals, like an engagement ring or a vacation:
You want this money soon, so think of 15 percent stock or at most a 2/10 risk profile.
Step 8: Save taxes.
First, O’Shea encourages investing in tax-favored accounts (like 401(k)s) and by using insurance and plans your employer will match. Second, consider buying a house, because mortgage is a tax-deductible loan, unlike credit card debt. Third, donate! Setting aside money in your own donor-advised fund or donating directly is tax deductible. And if you donate stocks you’ve made a lot of money on, you can take the tax write-off for the value you’ve donated, without paying capital gains tax on the increase in your investment’s value.
Advertisement
Isvari Mohan can be reached at voice@isvari.com. Follow her on Twitter @IsvariM.