If you have just graduated from college or are about to graduate, now is the perfect time to start learning about investing. As you prepare to enter the workforce, you should consider your financial future — not just in the next 5 or even 10 years, but long-term.
The problem is that most people equate financial health with saving. But saving money isn't enough. Current interest rates for a savings account are below 1%. When you consider that the average inflation rate is over 3% worldwide, you will probably be losing money if you park it in a savings account.
This is why investing is so critical to building wealth and reaching your financial goals.
Setting Your Investment Goals
Keep in mind that not everyone's goals or income will be the same and there is no one right way to invest. Before digging into the details, take the time to consider what your goals are.
For example, if you have a large family and expect to support your parents as they age, then that will impact your future goals. If you want to save to purchase a house or start a business, then you may want to rely on less risky investment management models.
Understanding your investment goals will help you:
- Assess your risk tolerance
- Determine how much you should save
- Determine how much liquidity you need
- Better diversify your investments
Understanding Asset Classes
Asset classes are groups of investments that are broken up by convertibility (how easily they can be converted into cash), physicality (whether they are physical, like an ingot of a precious metal, or real estate; or on paper, like futures), and whether they are required in the daily operation of a business.
The most common types of asset classes are:
- Stocks: Owning a small portion of a publicly-traded company.
- Bonds: Debt securities, essentially a loan that you own a portion of.
- Money Market Account: An interest-bearing account (not the same as a money market mutual fund).
- Savings accounts: The most liquid type of asset — simply storing money in a bank account for a small amount of interest.
- Real estate
- Commodities: These include “hard” commodities like precious metals and “soft” commodities like soybeans and cocoa.
Understanding the different of assets is critical to making sure your investments meet your goals.
Next, you need to think about how you will manage your investments. Here are a few general principles to keep in mind.
- Expense ratios: These are annual fees charged to manage your assets. Normally, expense ratios are used with mutual funds and exchange-traded funds (ETFs). Similar issues apply to most kinds of assets. High expense ratios can drastically impact your investments as they take a percentage of your investments every year.
- Liquidity: Some investments, like major currencies, are more liquid, while other investments, like a certificate of deposit (CD), tend to be less liquid. Make sure you understand any fees charged if you need to access your money quickly.
- Risk assessment: How soon will you need the money? If you are living off your investments, you will have them in something like bonds. But if you don't need the money for many years, you might pick something more volatile. How big of an impact will losing your investment have on your future? Make sure you've considered your aversion to risk and understand that all investments have some level of risk.
If you are a recent or soon-to-be graduate, now is the time to take stock of your financial goals and make a plan for the future.
This short guide provides the basics you need to make a plan. To learn more, check out Graduate Finance in 2021 The Complete Guide.