Post College: Getting Started
One of the most common questions for investors, particularly young investors is, “should I pay off debt or invest?” That question is often asked by those that have accrued a lot of debt through student loans. I subscribe to the idea that individuals should do both; service their student loan(s) and begin building their fiscal foundation. I should preface the rest of this article by noting that I did not take the traditional route to a post-secondary education and did not acquire any student loan debt, so I do not speak from first hand experience.
I joined the U.S. Army at age 17 and during my 21-years of service I utilized Tuition Assistance (a program whereby the Army pays for 75% of college costs while on active duty) for my undergraduate degree. I used the Montgomery G.I. Bill for my first Masters degree, following retirement; and I am currently using the Post 9/11 G.I. Bill for my second Masters degree.
While there is no doubt that former students, now in their 20s or early 30s, would have a difficult time making significant contributions to retirement plans, they should not neglect building a foundation as soon as possible. While they likely cannot maximize contributions at this stage, they can certainly get the foundation in place and start developing good habits. I always recommend people do something simple such as open an IRA account and start funding it.
Individuals can do it on their own, online, with companies like Fidelity in 15 minutes. And even though they may not have $2,500 to purchase their first mutual fund (the normal minimal initial contribution), they can always set up automatic monthly contributions (the last time I looked, Fidelity requires $100 minimum for use of this feature) which are deposited into a money market account.If they cannot afford $100/month? They can also just manually transfer one time contributions (e.g. $20, $25, $35). Once that $2,500 is reached, the first fund can be purchased. Of course, after that, smaller amounts can be used to buy new shares.
This is the approach I recommended to my 20 something younger cousin (a recent college graduate) about eight months ago when she asked for some guidance when she realized she had some extra money available at the end of each month. However, her present employer does not offer a 401(k) and she wanted to do something to get a foundation in place. Remember, Someone does not need to jump full throttled into retirement investing right away. However, they can service their debt and start educating themselves with regards to personal finance concepts, get their retirement portfolio in place, and start slowly building their nest-egg. The sooner a young person starts investing, the sooner they can start utilizing the power of compound interest.
Notes: I am not affiliated with Fidelity in any way; I am simply familiar with the company. I am fairly certain that other financial services company – particularly similar companies like Vanguard – offer similar capabilities with regards to establishing and funding an IRA account.
Are you, or someone you know, saddled with debt from student loans? Are servicing the loan and contributing to a savings/retirement plan at the same time?