Here recently I’ve had the chance to sit down with a few readers of the blog and do a little personal finance session with them. We talk about the fundamentals of personal finance, talk about different types of accounts, how to budget and try to get them on a plan! It’s been a lot of fun and I’ve recognized that there are a ton of little tips and tricks that many young professionals don’t know about or that can be overly confusing. It’s super cool for me to be able in my own way perhaps to help them out a bit and have them start developing some good financial habits now that’ll hopefully pay off in the future!

I recently sat down with a fresh out of college in their first job reader of the blog and we covered a few things! I walked them through some of my philosophies on managing money (i.e. the why) and then we opened an IRA account together. We’ll have a follow-up in a few weeks to start the actual investing process (it can be tricky at first) but for now I thought I’d share some of the high level things we talked about to perhaps inspire you on your own journey!

Idea #1 Put your money where it’ll work the hardest

I think something that can confuse or elude young professionals is the idea that investing is something they should be doing with their money. I talk to a lot of young professionals that are overwhelmed with the idea of investing or that feel that it’s too risky and they don’t want to start or don’t know how to start. 

I’m here to tell you that really investing is just another tool to help you grow your money. I’m a big believer that your money should work hard for you…I mean you work super hard to earn it…so it might as well return the favor! It’s all a balance of risk vs. reward with the more risk you take on the more reward you can earn, but of course it’s important to balance the risk you take. 

Many young professionals are familiar with the idea of a savings account – an account you open through your bank where you keep your money. It’ll pay interest and you can watch your money grow over time. Having a savings account is a great idea, but to my idea – I recommend opening a high yield savings account. You can read this article where I got on my soapbox on this topic but simply but if I can earn 10x the interest in a similar FDIC government insured account, why would I not? 

The same goes with paying fees (I dislike doing that) or earning a lower return (i.e. trying to pick individual stocks vs. an index fund). I think a little bit of education and planning can help you do more with your money!

Idea #2 Short term vs. Medium term vs. Long term investments

I find a lot of young professionals (and I definitely fell into this category) can sometimes struggle to define financial goals for themselves. Save for retirement? Sure I guess. Pay off debt? Yeah that sounds good. Buy a house? Are you kidding me, have you seen house prices recently?!? 

I then walked this reader through how I think of setting goals and thinking of the timeframe for them, and then how I put that money to work appropriately:

Short term: these are goals for which you think you’ll need the money in 0-2 years. Things like going to grad school (and wanting to have some cash to pay for it), things like putting a downpayment on a house, or buying a car. Building an emergency fund. If you expect to do these things in the next 0-2 years, I would call them short term goals. 

Investing in the stock market is riskier than putting your money in a savings account, but on average the return will be better in the stock market. On average the stock market has returned 10% annually for the last 100 years. Now think back to high school or college math on what an average is. It’s not like the stock market consistently grows 10% each year, some years it’s way more (i.e. in the past year or two my favorite index fund, $VTI has returned approximately 20%.) Some years (like 2022) it’s way less, you just don’t know. Over time though your returns will average out to 10%, so if you don’t have a lot of time, I would not recommend risking it in the stock market. Of course it would be amazing if you got lucky and your investment grew 20% but because you are planning to _______ with your money I would hate for you to lose 20%. So, for short term money goals, I recommend a high yield savings account.

Next we discussed long term investments, i.e. retirement. The government incentivizes through tax breaks the things it wants you to do, and the government does not want a bunch of poor old people that they now have to take care of. So the government offers tax breaks if you save for retirement and you can do that through a 401(k) through your work and/or a IRA (individual retirement account). I don’t mind paying taxes as I appreciate living in a free and stable country, but if I can legally pay less taxes, sign me up! 

This reader has a 401(k) through work where they are contributing a small percent to it. I love that and am happy they are doing it! I started my first job saving 2% for retirement, and gradually increased that number as I got raises. For this reader I recommended an IRA and we opened one through Vanguard. Vanguard has low low fees which as I’ve mentioned, I like. I think it’s good to have an IRA at least open, as this gives you options and I like options. If this reader ever leaves their full time job, they can roll their old 401(k) into their IRA account. Also IRAs typically will have lower fees for funds that you choose to invest in. 401(k)s get funded with pre-paycheck dollars. It can feel tough to commit to contributing more to a 401(k) which means less money in your paycheck. So, I like the idea of a IRA – gives you the opportunity to contribute more if and when you have more leftover in your budget from time to time. Or you don’t have to fund it very often, that’s fine too! But I like the idea of having an IRA as another option and funding it as you’re able! In 2024 you can contribute up to $7,000 into an IRA and $23,000 into a 401(k). 

Ok so you’ve got your short term goals and your long term goals. In between (and you probably guessed this) you’ve got your medium term goals. This particular reader would like to buy a house one day but that is probably more than 2 years out but less than the time they are 59.5 years old. So in this case, time is on your side so I would recommend putting some (or all) of that money into a brokerage account. A brokerage account looks and feels very similar to an IRA, in fact for this reader we’ll open both a brokerage and an IRA through Vanguard. It’s just the type of account which means it’s separate for tax purposes. Since you don’t expect to use this money for at least 2 years, I like having it in the stock market which on average (remember no guarantees but it’s an average) it’ll grow 10% vs the 4% a high yield savings account will pay!

Summary

We covered the basis of having your money work hard for you and also thinking through what your goals are and when you’ll use the money. From there we opened up a IRA through Vanguard and will also open up a high yield savings account and a brokerage account! 3 tools for the 3 different buckets of short term, medium term and long term investments! 

Looking to have your own consultation? I’m not a certified planner (and there are definitely those out there) nor a lawyer nor an expert but I have been running this blog for 11 years and have done a decent job managing my own money! I love chatting and would love to connect! Feel free to email me: ben AT youngmoneyfinance.com and we’ll chat!