If you’re graduating from college this month, you may be excited to enter the working world and start earning a steady paycheck. After all, that could spell the difference between eating instant noodles every night versus food you actually enjoy eating (not to say that instant noodles can’t be delicious).
Once you start working full-time, you may be inclined to invest a portion of your earnings. And that’s a great thing to do from a young age, because it gives you lots of time to benefit from compounded returns in your brokerage account or IRA. But before you start investing, there’s one important thing you have to do.
The upside of investing as a recent graduate
Many people don’t start investing until their 30s, 40s, or beyond. The benefit of starting to invest at an earlier age is getting to grow your money more efficiently via compounded returns.
Let’s say you invest $10,000 in stocks at age 32. Over the past 50 years, the stock market has rewarded investors with an average annual 10% return, so a mix of stocks in your portfolio could produce the same result. And if so, by age 62, you could end up with almost $175,000.
That’s undeniably impressive. But watch what happens when you start to save and invest 10 years earlier.
If you’re graduating at age 22 and are able to invest $10,000 this year, then by age 62, you could end up sitting on roughly $452,000. That’s a difference of $277,000 in gains. So if you’re able to start investing right away after graduating college, it’s a move that can certainly pay off big time.
Before you invest your earnings, save for emergencies
It’s easy to see why you may be excited about the idea of investing as soon as you enter the working world. But before you throw money into a brokerage account or IRA, there’s an important step to take — make sure you’re all set with emergency savings.
While it’s a great thing to invest for the future, first, you need to make sure you’re equipped to tackle unplanned expenses in the present. So to that end, before you invest, make sure you have enough money in your savings account to cover three to six months of essential bills — expenses like rent, car payments, food, medication, and utilities.
Once you’ve reached that point, by all means — invest. But you shouldn’t just bank on tapping your investment portfolio when you need money.
The stock market can be very fickle. And you don’t want a situation where you need $1,200 to fix your car and your only choice is to take it out of your stock portfolio while the market is down, thereby locking in losses.
So before you invest as a new member of the workforce, make sure your emergency fund can cover at least three full months of bills. From there, if you’re able to invest, you only stand to benefit from it.
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