While investing may not be on the top of your mind when you’re just out of college, it should be. Whether you just earned a degree in Mathematics and Finance from the University of Alberta in Edmonton or a Computer Science degree from the University of Toronto, the sooner you start the better. Even small amounts add up big over time. While not all investments are going to be as lucrative, if you’d invested even just $1,000 in Amazon in 2008, today it would be worth more than $19,300, as CNBC calculates.
Of course, the trouble is not only squeezing money from your budget to invest but figuring out where to invest it.
401(k) with Matching Contributions
The best thing you can do as a recent college grad is to take advantage of your employer’s 401(k) program, especially if the company matches what you put in. These contributions come out of your paycheck before taxes which means you don’t have to pay taxes on that money until you take distributions from the account after reaching retirement. Employer matching dollars is like free money, why wouldn’t you take advantage of that?
Unfortunately, about one-third of workers today don’t have access to a 401(k) plan through their employer. If you’re one of them, the next best bet is a Roth IRA. You can contribute as much as $5,500 a year, and all contributions you make are after-tax, which means when you reach retirement, distributions will be tax-free. That can be ideal for a young person because the tax rate you pay is likely to be lower now than what it will be in the future when earnings are higher.
If you’re lucky enough to have a modified adjusted gross income as a single tax filer of over $120,000 right out of college, you won’t be able to open a Roth IRA, but you can think about opening a traditional IRA instead. It uses pre-tax money to save for retirement, similar to a 401(k), which means you’ll get the tax deduction today.
Start Small Through Smartphone Investment Apps
When you don’t have a lot to invest, it doesn’t make sense to pay large broker fees. The good news is that there are some great smartphone investment apps you can take advantage of like Acorns. Founder Jeff Cruttenden came up with the idea while in college – the app counts whatever you spend from debit card and credit card purchases and then rounds that up to the nearest dollar. That change is then invested in six different funds based on the risk tolerance you input. Another option is Wealthsimple – you enter your goals and risk tolerance and it selects the best investments based on that.
Referred to as “robo-advisers” these are a great way to have an automated system take care of everything for you. And, as it’s all done online, there’s no need to make appointments or drive to an office.
ETFs are a type of security that tracks index, assets, commodity or bonds. As you invest in multiple stocks rather than just one, you’ll get the benefits of diversification. ETFs typically have low expense ratios, a big plus for those who don’t have a ton of money to invest.