As recent graduates begin to enter the workforce, one of the best things they can do is start setting financial plans and goals. Part of these plans should be how to approach investing, as well as best practices to follow.
If you don’t know where to start, here are three smart investment moves for recent graduates.
1. Contribute to a Roth IRA
One of the great things about a Roth IRA is that it essentially works like a regular brokerage account with significant tax advantages. Unlike a 401(k) plan, which offers you limited investment options, you can invest in any company or exchange-traded fund (ETF) you want in your Roth IRA. And because you’re contributing after-tax money to a Roth IRA, you can make tax-free withdrawals in retirement.
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Having your money grow and compound tax-free can easily save you thousands of dollars in taxes when you potentially sell the investments in retirement. If you have $100,000 in a fund in both a Roth IRA and a brokerage account and you want to sell it, the difference could be up to $15,000 in taxes if your capital gains rate is 15% (the rate for singles earning between $40,401 and $445,850).
Roth IRAs also have an income limit for eligibility. So if you’re early in your career, it’s best to take advantage of the tax benefits of a Roth IRA because there may come a time when you exceed the income limit.
2. Start buying stocks that pay dividends
An underappreciated source of income, especially during retirement, is dividend payments. To set yourself up for worthwhile payouts in retirement, you need to start building stocks that pay dividends. The sooner you start, the better, because compound interest and time will work wonders.
As you start investing in companies or funds that pay dividends, you should also enroll in the Dividend Reinvestment Program (DRIP) offered, which takes the dividends you receive and automatically uses them to buy more shares of the company or fund. who paid them. .
If you put $500 a month into an investment that returns 10% a year, the difference in total amount you’d have between that and an investment that adds a 2.5% dividend yield would be more than $600,000 over 30 years. With a 2.5% dividend yield, these are the various annual dividend payments you would receive with different account totals.
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With those payments, you could receive more than $2,000, $3,100, and $4,100, respectively, each month during your retirement.
3. Use dollar cost averaging
Unfortunately, it’s easy to let your emotions control some of your investment decisions; It happens to the best of us. One of the ways you can try to avoid this is by using dollar cost averaging. With dollar cost averaging, you make regular investments at constant intervals, regardless of the stock price at the time. It’s essentially how 401(k) plans work. Each paycheck, you make contributions to the account and it is invested regardless of whether the assets are “expensive” or “cheap” at the time.
You can choose to break down your investment schedule as you see fit. It can be weekly, biweekly, monthly, quarterly, or any other time interval that works for you. The most important thing is that you get used to making regular investments and that it becomes a natural part of your financial plans. The $1 million, $1.5 million, and $2 million totals above may seem like a lot, but with dollar cost averaging, time, and compound interest, it’s pretty easy for many people to achieve.
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