What can you do with money?

March 15, 2008 9:27 AM

Help! I'm about to have more money than I know what to do with! I'm starting a career, and right from the beginning I want to make good financial choices, invest, et cetera so that I'm setting myself up for continued wealth rather than just wasting all my money. What resources are there to teach me how to do that?

I've been a student my whole life, but now I'm finally on the job market. My overeducation seems to have paid off: it now looks promising that I'm going to land a fantastic job that, among other things, pays very well. I'm still pretty young (29) with a partner but no kids, so I figure it's probably reasonable of me to keep my spending to about the same level it is now and save the extra money. I know I should probably be putting it in mutual funds and things like that (and if I had debt I'd pay that off, but fortunately my partner and I are both debt-free), but beyond that I'm not sure how to proceed.

So: are there any books about how to get started investing when you start your career? If you know of other resources or have tips or advice, that's appreciated too, but I'm really looking for something that's relatively in-depth like a book.

posted by jacobm to work & money (16 answers total)

If your company offers a 401k match, participate in that. It's free money.
posted by Frank Grimes at 9:30 AM on March 15, 2008

Seconding 401k, even if there isn't a match. We have a functional equivalent in Canada and at the current rate of contribution I'm projecting a very, very comfortable retirement. Can't help much with other investment tips but I'll be interested to see the other answers.
posted by saraswati at 9:42 AM on March 15, 2008

1. Save and invest at least 20% of your take-home pay.

2. Stick with plain vanilla investment products, unless you have a professional background that endows you with the tools and expertise to invest in specialized investments.
posted by Gordion Knott at 9:43 AM on March 15, 2008

I've read a lot of investing books, and honestly, one of the best resources that I found when I was in the same position (not quite as educated, but starting out in a job after school) was the Fool's School, which is on the Motley Fool website. They sell newsletters / investment guides, but honestly, all of their free guides on investing (as well as insurance and other personal finance stuff) are the best part of the website, and managed to hit that really sweet spot between big-picture, here's-why-to-invest and the nitty-gritty steps that you actually need to take. For example, their guide to mutual funds talk about not only mutual funds versus other investments, but the things you should be looking at (fees, percent of fund in cash, turnover) and where to find them when evaluating mutual funds.

I also like some of David Bach's stuff (my favorite is Smart Women Finish Rich, which may or may not appeal to you, but all of his books strike me as containing the same info for different audiences), and it's probably because he also seems to hit a good balance between big-picture, here's the types of things to set up and why, and also talks about the concrete steps that you need to take (how do you open a brokerage account? where do you buy a mutual fund, and how?) that a lot of personal finance books skip.
posted by iminurmefi at 9:59 AM on March 15, 2008

I don't have a lot of good recommendations for books (although I can't recommend Your Money or Your Life enough, but that's broader than "investment strategies")-- but I would suggest you start following some personal finance blogs. Check out the pfblogs.org aggregator and try to find ones you like from there. (Or if you want to get a sense based on popularity, check out this ranking or this one. There've also been some recommendations in previous AskMe questions.)

There's a wide range of quality in blogs, of course, but the best ones are a tremendous resource on an ongoing basis. (And if you're still looking for books, lots of bloggers do book reviews, so you can get their indepth evaluations of various books and feedback from their commenters as well.)
posted by EmilyClimbs at 10:12 AM on March 15, 2008

If you're making good money, you'll max out that 401K pretty quickly. The market is dropping. I'm not sure how much further it has to go, but the time to buy in is when it's at a low point. When you don't know much about investing, a good indexed fund is the easiest way to get started. Be leery about any brokerage houses/brokers/investors/banks right now. There is going to be a lot of fallout from the current financial crisis. You will need to do some research, and none of us can advise you where, specifically, to put your money. You're young. You have time to absorb some risk, but now is an exceptionally risky time to get going. If you don't have the stomach for a lot of losses right off the bat, you might want to park your money someplace safe. Whatever that is. Even munis are looking kind of iffy. T-Bills? CD's? You won't get much return there, but you won't lose anything, either

If you can stand the risk, look at some indexed funds. If the market falls, they will fall, but when they market goes up, they will, too.
posted by clarkstonian at 10:14 AM on March 15, 2008 [1 favorite]

I would recommend a solution that takes a few minutes to plan but requires little effort to execute. They key here is to start automating your savings and then live paycheck-to-paycheck. Try to save 30% of your gross pay.

I am assuming you have an advanced degree, do not own a home and make something like $100k.

Also, another relevant post is here.

First, set up your accounts:
1. Set up a checking account, where your checks will be deposited.
2. Set up a brokerage account.
3. Set up a Roth IRA.
4. Set up a 401(k).

Second, set up automated savings:
1. On fidelity.com or wherever your company has their 401(k), sign up to give the max to your 401(k) every month. This is probably something like 40% of your paycheck.
2. Divide $5k by the number of pay periods between your first paycheck and your last paycheck of 2008. Call the result X. Set up an automatic transfer of $X from your checking account to your IRA the day after payday (I use the 2nd and 16th of every month). This will effortlessly save $5k a year. Starting in 2009, divide the new max by 24 and adjust your
3. Set up an automatic transfer from your checking account to a brokerage account for a small amount, like $250, the day after payday. After you have maxed out your 401(k), increase this amount so that the below formula is true:
(401(k) + Roth + Brokerage)/ Gross Pay = 30%

Third, make smart investment choices with your money. Plan for the 30-35 year timeframe (with one exception noted below).
1. 25% in an International ETF / Mutual Fund
2. 25% in a Value ETF / Mutual Fund
3. 25% in an ETF that tracks the Dow Jones or S&P 500
4. 25% in a Treasury notes for a house down payment in a few years (20% of $100k)

Now, time permitting, educate yourself with books like How to Buy Stocks.
posted by charlesv at 10:28 AM on March 15, 2008 [6 favorites]

You are in a great situation. Congrats! Always remember to live well within your means. I like to look at my income as flowing into three "pools".

1- Immediate access pool:

Expenses- bills, life, rent, etc. In a checking account, preferably in an interest earning account.

Short term savings - layoff fund, rainy day fund, vacation fund. This stuff would be in a savings type account, that would hopefully earn a bit more interest.

2 - Medium term access:

Down payment on a house fund, dream vacation in 5 years fund, etc. I will know when I'll need access, so this can go into CDs and other term investments.

3 - Long term access:

Retirement accounts and other long term wealth building stuff. These are great wealth builders, but they have restrictions on when you can take them out. If you plan on retiring at the normal times, this ought to be all you need. If you are thinking about retiring early, you'll need a second type of investment that doesn't have those age restrictions so you'll be able to get the money without penalty when you retire at 50.

My personal goal is to get to a point to where I'm living off of my own interest. A lot of retirement planning has you building wealth toward retirement, and then using it up until you die. That's great if you manage to live only as long as you planned for. I'm sort of terrified of living longer than I expected and being stuck eating government cheese when I'm 90. So what if I die with a lot of money? I will have lived the way I wanted to, and I'll leave it to my family or my cat or charity.

Final piece of advice- your home isn't really an investment, in the classic sense. It won't generate money for you later. You always need a place to live, so you can't just sell it when you retire. Maybe you can downgrade and pull a little money out, but you will still need to buy another house. But that house will have appreciated along with yours. So the only way a home is an investment is that when it's paid off, you will no longer have a house payment. That's an excellent cash flow reducer, but not an income generator. Second homes and rental properties ARE good investments, because you don't need them, and you can sell them for cash. Or move into the second home and sell the first.

Good luck!
posted by gjc at 10:33 AM on March 15, 2008

I can recommend Ernst & Young's book , it's something you'll keep as a reference for years but adopting it's principals early will help you move forward.
posted by iamabot at 10:33 AM on March 15, 2008 [1 favorite]

The Wealthy Barber. Cheesy writing, but really good financial sense - it explains really simply what to do with money.

I'm a recent-grad-in-the-workplace and my husband is a student (who worked quite a bit beforehand). I got the book from him and it answers the questions that you seem to be asking very well.
posted by olya at 11:32 AM on March 15, 2008

I think much of the advice up to this point has been decent; I'll simply add a few things.

First, and most important, it is not true that "educating" yourself about stocks, bonds, real estate, etc. will make you more money by being able to outperform low-cost, no-effort investment options. Statistically an individual investor who tries to pick his/her own stocks will do worse over time versus simply buying an S&P index fund (or total stock market index) with a low expense ratio. I work on wall street and (most of) the smartest people I know keep the majority of their investments in index funds. Personally I split my savings equally between an S&P index and an international index, so I spend about 5 minutes a month managing my money.

Along the same lines, timing the market (ie buying and selling based on your perception of the market's value) is foolish for non-professionals. Again, statistically, you will do much better over time if you simply buy and hold, or better yet, dollar-cost average - put the same amount in the market every month.

My only other advice is to max out your 401K, look into setting up an IRA and/or Roth IRA, and make sure that you have sufficient cash in a high-yielding money market account (make sure that it is FDIC insured, though, because the recent crisis has made people realize that even money market funds at "safe" banks are sometimes not FDIC insured) so that if you lose your job or are unable to work, you can cover your expenses for 3-6 months.
posted by btkuhn at 11:46 AM on March 15, 2008 [1 favorite]

I highly recommend you spend some time reading the iwillteachyoutoberich.com site. He recently added a nice Table of Contents.
posted by J-Garr at 6:05 PM on March 15, 2008

I think you are pretty smart to take the approach of managing your money now rather than spending in gaudy celebration. However, I should point out all those folk who went into plumbing or drywall have been earning dollars for the last decade while you have been studying, and worse, if you are american, they probably got some wealth out of the property boom (even if they might be handing back some gains these days).
So your high income needs to compensate for this lost time. On the bright side, when they have damaged backs and broken knees when you are 50 with another decade or two of good ideas work left it will even out, but you should be sure to sock away savings now - early on- to give you the opportunity of catching up if you want to retire early in the peace too.
There is no mystery, just save, the comments upstream give good advice, and save regularly.
posted by bystander at 5:06 AM on March 16, 2008

Congrats, jacobm. It sounds like your hard work has paid off, and you find yourself in an excellent financial position. Your situation is made all the better because you've avoided debt and because you're willing to keep your lifestyle at its current level. These sorts of choices are conducive to building wealth.

I've spent the past couple years reading and writing about personal finance. Previous commenters in this thread have given lots of great advice, and I don't have much to add. By all means take advantage of a company 401(k) match (if you have one) in order to get "free" money. Max out your IRA contributions every year. (Here's my guide to the Roth IRA.) Open a high-yield savings account [selflink]. And, as you've already suggested, resist lifestyle inflation, that tendency to spend more money when you earn more money. Lifestyle inflation is the silent killer of wealth.

At my site, I've written about a variety of personal finance books. Not all of them are appropriate for your situation. I think you would be best served by The Bogleheads' Guide to investing. Ignore the strange title — this book is filled with excellent, practical personal finance advice. A second book to consider is The Random Walk Guide to Investing. Again, another funny name for a fantastic book.

Whatever you do, make slow, considered choices. You're off to a fantastic start, and with a little care, you'll be able to provide well for your future.
posted by jdroth at 8:45 AM on March 16, 2008 [2 favorites]

Personal Finance for Dummies is an excellent introduction to financial literacy. It will help you grasp the big picture of personal finance (including spending, credit and debt, insurance, etc. in addition to investing) and then you can go from there to more specific books for the type of investing you want to do.
posted by Jacqueline at 2:52 AM on March 17, 2008

Get Ernst & Young's Personal Financial Planning Guide. If you do nothing more than read the first chapter, it will pay for itself thousands of times over during the course of your life.
posted by driveler at 9:57 PM on March 17, 2008