This blog post has been provided by Christopher Piekarz, Marketing and Administrative Intern, Summer, 2018
You just graduated from college and have your first full-time job lined up. If you’re lucky, your new employer may put some of your income into a 401k and/or Roth IRA. However, as an entry level employee, that is very unlikely. So, when should you start investing your money for the future?
The sooner you invest, the more time your investment has to grow. Take, for example, a $10,000 investment in the stock market. Over the last 60 years, the U.S. stock market has had an average annual return of 7%. Considering that, if you invest $10,000 for 30 years, you would expect your money to grow to approximately $76,000 if the market’s rate of return remains constant. However, if you invest for an extra 10 years, your money will nearly double to $150,000! This is because your returns are continually invested in the stock market. As stocks grow and companies issue dividends, your money grows at an exponential rate. While your returns may vary depending on the stocks in which you invest, the amount of time your money has to increase is the one of the most important factors when investing.
So, now you know that the earlier you invest, the more potential you have for growth. The next question is: how much of your income should you set aside for investments? As a recent college grad, you probably don’t have tens of thousands of dollars at your disposal to be invested. That’s alright! Just investing a small portion of your paycheck can generate a huge payout in the future.
The first thing you want to make sure of is that you have enough money to cover your expenses. Maintaining approximately 3 months-worth of expenses in your checking account to pay your bills, loans, and other costs is a good start. Be careful not to place all your money into your checking account. You will be inclined to spend more than you should as you probably access this account on a daily basis.
The rest of your paycheck should be deposited into a savings account which you do not touch unless you absolutely must. The goal here is to accumulate enough reserve money which can be easily accessed in the case of an emergency. While your savings account will generate some interest, the average APY (Annual Percentage Yield/Interest) on savings accounts is 0.06% which is a rather minuscule amount compared to other investment options available. To get the most out of your money, do not keep large sums of money in a savings account. Most financial experts suggest maintaining a balance of approximate 9-12 months of expenses in a savings account, while investing the rest in better alternatives such as stocks and bonds. Doing so leaves you with money to spend in the case of a financial emergency without having to prematurely pull your investments from the market.
As your income and expenses change throughout the years, it is in your best interest to reanalyze your budget every 3 to 6 months to ensure that your money is being allocated properly.
With the help of these financial budgeting fundamentals, we hope you can begin setting yourself up for a healthy financial future!
If you have any questions or you’re seeking financial advice, please feel free to contact us at 845-986-1177. We are your business, home, auto, and life insurance solutions provider, partner, and adviser, serving Warwick, Greenwood Lake, Florida, Goshen, Pine Island, Middletown, Chester, Monroe, Newburgh, Orange County, and the Hudson Valley and Tri-State Area.