Q: I’m a recent grad who just started working professionally. I have some student loan debt ($12,000) but I expect to pay that off within a few years. I don’t earn a lot of money but I’d like to start investing. Unfortunately, my employer doesn’t offer a 401k plan. Should I invest in stocks, CDs, mutual funds, IRAs or something else entirely? Any advice would be appreciated.Response:
A: You are really smart to be on top of these issues now. Good for you! If you start saving and investing in your 20’s, you have the opportunity to accumulate substantial wealth over the course of your life.
Since you are not covered by a 401k program, I would suggest getting started with a Roth IRA. Your contributions to a Roth IRA are not tax deductible, but the earnings over time are tax free. Thus, since you are young, you have the opportunity to accumulate substantial tax-free earnings over your lifetime. You can contribute up to $5,000 per year in a Roth IRA.
You can choose a number of different investment alternatives for your Roth IRA. Your investment choices really depend on your risk and return preferences and your time horizon. With an IRA you cannot deduct the money until you are 59 ½, so it is a long term investment. You, as an investor, need to evaluate your own risk and return preferences to determine if you want to invest in something very safe like CDs, Treasuries, or money market accounts, or in something that has more risk such as stocks, bonds, mutual funds, or annuities.
A general rule of thumb is that older people weight their portfolios toward safer types of investments so they will not lose money needed for retirement. Conversely, younger people may be more likely to weight their portfolios toward investments that have higher volatility but also provide a higher return over time. You need to figure out what you are comfortable with.
To get started, I would suggest that you educate yourself on some of the basics of savings, kinds of investments and tips on preparing for retirement. A great resource is The Hartford’s Playbook for Life, an easy-to-understand guidebook also available for free online that can help you navigate some of these topics.
In addition to details on the basics of saving and investing, the Web site provides links to additional resources you may also want to visit. Do your homework before you start investing, but by all means, start investing now while you are young.
Answer provided by Dr. Susan Coleman, Professor of Finance at the University of Hartford and Educational Advisor to The Hartford’s Playbook for Life program. To download or request a Playbook for Life and get more tips on everything from taxes to insurance to evaluating job offers, visit www.playbook.thehartford.com.