One of the more daunting tasks of being a young professional is investing. Once you get over the baby steps of: getting a budget, having an emergency fund, saving for retirement, and controlling your debt, you’ll then probably start thinking more about investing your money. Knowing where to do it, how to get started, or even how to figure out if you’re doing a good job at it or not, it’s all a lot to think about and consider. There’s a TON of noise out there, with way too many people trying to give you their opinions or to try to sell you their product/service. I personally don’t have it all figured out but do have a few ideas around approaching investing that I’d love to share! 

When I think I’ll need the money again 

The first thing I like to ask myself is around when I think I’ll need the money again. I talked extensively about this in my article “Short, Medium, Long-Term Investments” but the TDLR summary is that; if I think I’ll need it within the next year or two (i.e. for bigger purchases like buying a car or for an upcoming daycare expense), I put it in a high yield savings account. If I don’t think I’ll need it in the next year or two, I would then consider putting it in my retirement account. I use the “next year or two” as a guideline as putting money in the stock market comes with some risk, my money could go up (hopefully), but it might also go down. Since I foresee myself needing that money in the next year or two, I tend to keep it in a savings account, where it is guaranteed and I know I won’t lose any of that money that I’ll be needing shortly. I do save 16% (well, 10% of my own money and 6% match from my employer) through work in my 401(k), but I also have an IRA (individual retirement account), in which I can contribute up to $6,000/year. This is a newer bucket in which I’m trying to contribute more in this year, but I figure if I do have some money for investing and I don’t foresee it being needed in the medium term future, I’ve been trying to get better about putting in a retirement account. Once there, it will grow until I pull it out (when I’m 59 or older), and I can pull it out tax free, and not having paid tax on the 30 years of gains. Not a bad deal!

The last bucket is what I call my medium term bucket, so money I feel I’d like to be able to access prior to being 59, but not necessarily money I think I’d need in the next year or two. Previously any money I didn’t think I needed in the next year or two was all just placed in my regular brokerage account, but as stated previously, now I am trying to do a better job of splitting it up between my non-retirement brokerage and my retirement IRA account. 

Returns based on each bucket

The whole idea behind when I think I’ll need the money again is all about managing risk. If I think I need the money within the next 1-2 years, I’ll generally be more apt to keeping it somewhere that it won’t lose any value, i.e. a savings account. I say 1-2 years as at least in my mind, putting it somewhere riskier (like the stock market) could have a good year, or could have a bad year (or two). Savings accounts are very safe, the bank guarantees its value, and even if the bank fails, here in the US banks are backed by the government who guarantee it’s value (up to $250K). However, with no risk comes low reward, and the interest rate I earn is pennies. Even my high-yield-savings accounts are only paying 0.4%. 

However, if I don’t think I’ll need my money in the near term future, I can afford to take more risk with it, and as such, I expect a better return on it. Of course there will be good years and not so good years as the stock market does well (or not), but over in the long-run, it’s always been an upward positive trend. That’s why I feel more comfortable with keeping my money there >2 years. 

Historically, the US stock market has averaged about an 8% return each year. That’s a solid benchmark that I like to gauge my financial success on. I’m a big believer that I won’t get rich by winning the lottery, or making it ‘big’ in some industry, but instead by being smart with my money and investing it slowly and letting it sit for a long period of time. 8% is what I aim for with my stocks and index funds. If it’s below 8%, am I really being smart with it? If it’s above 8%, even better, but am I being too risky with my money?  

The simpler the better 

I am a big believer in index funds. Index funds are boring (Why I’m ok with my investments being boring). Yes I’ve missed out on a few big market gains by not taking more chances (still kicking myself for not buying bitcoin at $250) but going back to my benchmark, 8% is what I’m after! Slow and steady growth. Index funds have historically provided that slow and steady growth, after all they’re essentially a basket of most of the stocks that trade on the stock market. They have low fees and don’t really require me to put much thought into them at all!

I’ve found in my own investing life that it’s when I get fancy (like the time I bought stock in a glassmaker that I was hoping would supply the glass for the iPhone6…it didn’t and the stock crashed) that I get burned. Even the best stock pickers aren’t right all the time, so why try! I’m a lot more disciplined in my older-young-money-finance age and am keeping my investments simpler! 

Summary

I work hard for my money, and I expect it to work hard for me as well. Although I know that there will be good years for stock market returns and not so good years, I on average use the 8% return as my benchmark. I also keep my investments pretty boring, either in a high yield savings account or an index fund through my brokerage and I’m ok with it that way! Invest smart, invest for the long-term and continually invest!

New to investing? Not sure how to get started? Be sure to check out my step-by-step guide for how to actually get started.