In my post Live Like a College Student, I encouraged new grads to continue being frugal and to save money. But what if you’re already frugal? I know a few friends and relatives in their 20s who aren’t living the high life and have a healthy savings rate, but unfortunately, the money is sitting idly in a bank account. So what should they be doing with their money instead?
“But I’m scared of the stock market,” you say
Rather than leaving a large amount of your savings in a bank account, make your money work for you. Many people, especially millenials, fear the stock market. While it is understandable to be apprehensive being that you observed the 2008 stock market crash and subsequent recession wreck havoc on many people’s finances. The media has also done a great job in scaring people. However, you have to invest your money if you want to build wealth. Hiding the bulk of your savings in your mattress or in a savings account won’t do that. In fact, the value of your money will be eroded by inflation. No one can predict what the stock market will do, but it’s very likely that another stock market crash will occur. But that’s okay because the stock market has historically given investors about an 8% return. Remember, you’re young and you’re a long-term investor. The next time there is a stock market crash, just think of it as stocks going on sale and a buying opportunity.
But I don’t know how to invest?,” you ask.
Other than being scared of investing, a lot of people are also intimidated because they don’t know the first thing about investing. Don’t worry if you don’t know much about investing or have any inclination to learn. You can set up a “lazy portfolio” and it’ll probably perform better than your friends who “think” they can beat the stock market. Or if you want to be even more hands-off, just invest in an “all-in-one” fund.
Some, on the other hand, think they know more about investing than they really do and “invest” in individual stocks. For most people, they’re better off sticking with index funds. Like many of my peers when I was in my 20s, I thought I could beat the market by predicting which stocks would soar. Well my track record is pretty poor, and I would have done a lot better just investing in an index fund.
Automate your savings
Automating your savings makes saving money easy. By having money automatically sent from your paycheck to your 401k/IRA account/etc, you take the stress out of saving. Even better, every time you receive a raise, increase the amount you save. I have received steady increases in pay the last few years, but my paycheck has stayed about the same. This prevents lifestyle inflation as you’ll never miss the money since it is out of sight, out of mind.
As for your 401k, don’t settle for saving up to the match. Save much more than that if you have decent options in your 401k (if not, invest in an IRA account). At my first job, my employer matched up to 5%, and I thought I was a rockstar when I increased my contribution to 7%. That’s just not going to cut it. But of course, at a minimum, invest up to what your company matches. Don’t make the mistake of many Boeing employees who have collectively turned down $98 million in matching funds by not contributing up to the match.
Real Estate: Should I buy or rent?
For most people in their 20s, just starting in their careers, it’s probably better to rent rather than buy a place. You want the flexibility just in case your career takes you someplace else. You don’t want to be forced to sell your home as there are transactional costs and you might get caught in a down market. Plus, you’re young, who wants to be stuck maintaining the yard and taking care of other home-related projects? However, there are some instances where I do think it would make sense to buy a house at that stage of your life.
I have a friend who purchased a duplex a few years after he graduated from college. He rented out one unit and also rented a room to a friend in his unit. The rental income that he received paid for his mortgage. He was living rent-free! Now, years later, the property has also appreciated so it’s been a great investment for him. So, I think it makes sense to purchase a house in your 20s if you’re purchasing the property as an investment and it will cash flow. It definitely depends on where you live. It makes sense to buy in some areas in the country, whereas it makes more sense to continue renting in other parts. Check out the Rent vs Buy calculator to help you make your decision.
Increase your income
Invest in yourself and acquire marketable skills to increase your salary. While in some circumstances you may need to go to graduate school, you don’t necessarily have to quit your job to acquire new skills, as it’s possible to learn new skills online. Check out Udemy or Treehouse. Another way to increase your income is to have a “side hustle” or part-time job. Check out this site for a list of 50 side hustle ideas.
What other advice would you give to someone just starting out on their financial journey? What advice would you give your 22 year old self about finances?