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Career Planning

Just Graduated? Time in the Market is Your Friend

You might not have a lot of investable assets, but don’t undervalue what you do have: time.

Articles by Jon

By Jon Stein
CEO & Founder, Betterment  |  Published: June 9, 2014

Don't delay saving: over time, a dollar invested today is worth more than a dollar invested tomorrow.

Look at your financial goals and decide if it's worth it to accelerate pay-off on your student loans or invest.

college graduation moneyWhen I was an undergrad studying economics, my professors drilled into me one important lesson about investing: The best portfolio is one that has a little piece of every investment — sometimes called a market portfolio.

So what did I do after graduating? Exactly the opposite. I was working in financial services and thought I knew enough to buy stocks on my own. So I picked Enron, which seemed to be on sale. That was a fail.

It was my first investing loss in the market but it taught me two lessons: We as humans are prone to making bad decisions when it comes to investing (we think we are smarter than we are) and we can’t beat the market.

This foray was, in part, why I went on to get my MBA and become a Certified Financial Analyst charterholder—to hone my idea for Betterment. I believed investing should and could be more effective, with fewer distractions, with the smart application of technology. Today, Betterment provides the easiest and lowest cost way to invest in a diversified market portfolio.

As a new graduate, this might feel like a counter-intuitive time to think about investing, especially if you’re paying $1,000 or more in student loans every month. Yet don’t undervalue what you do have: time. Compounding is an investor’s best friend. So that means invest early and often, no matter if it’s only $50 or $100 per month.

Here are three things to consider as you get started with investing:

Pay Student Loan Debt Versus Investing

If you have a low interest student loan (think less than 5%), then it might make sense to start investing before accelerating pay-off. Accelerating pay-off means making more than the standard or minimum payment. Of course, it’s recommended that you always make at least the minimum payment on any debt, because not doing so will negatively impact your credit score.

Paying your loan off is like getting a guaranteed rate of return equivalent to the rate on your loan. Guarantees are good, but they come at a cost that you need to judge based on your other goals.

For example, by investing towards a safety net fund, you give yourself options in case of unexpected expenses—like car repairs or a medical emergency. Or, by investing toward a long-term goal like retirement or a house down payment, you may come out ahead because more years in the market give you more time for compound interest to work its magic.

However, student loans in more recent years tend to be higher (~6% to 8%). In this case, first determine if you can refinance to a lower rate; otherwise, you are best to pay off your student loan first and invest as a second priority.

Don’t Ignore Your 401k

By law, employers must offer at least three fund options, but that number can be much bigger—some employers have dozens of funds available from which to select. Don’t let the overwhelming number of choices deter you from making smart choices from the start.

If you’re not sure which funds are best for you, you could do a lot worse than choosing a broad stock market fund (like an S&P index fund) and a bond index fund. Don’t be afraid to take risk—your time in the market over the next few decades will smooth out your returns. (If you’re looking for allocation advice and it’s not available through your 401k provider, we offer allocation advice for free at Betterment, which you can replicate in your 401k.)

If managing individual funds is not for you, consider putting your money into a target-date fund, a kind of account that combines a diverse group of funds into one point of entry, and the allocation is set by your estimated retirement date, for example 2055.

Even though target-date funds (or lifecycle funds) do have flaws, and the two-fund system is limited, choosing any vehicle that gets you saving is better than waiting “to learn more” and losing out on potential market returns.  You can always re-evaluate your strategy in the future.

Take Advantage of a Roth IRA

We are big fans of Roth IRAs because you pay taxes today—rather than deferring those taxes to when you’re retired and your future tax bracket is unknown. If you’re in a professional-track career, it’s very possible that your tax bracket may be considerably higher at age 60 than today it is today in your 20s. If you can afford it, max out a Roth IRA with $5,500 per year, for tax-free growth, in addition to your 401k.

If you already have savings in a 401k from pre-grad school job, consider moving that money into an IRA with a rollover. A traditional IRA works fine—but how about taking advantage of your grad-student tax bracket (i.e. low income) to convert to a Roth? You can move your money into a traditional IRA, and then convert to a Roth IRA; this is known as a Roth conversion.

When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. The information on this page is being provided for general informational purposes and is not intended to be an individualized recommendation that you take any particular action.

Factors that you should consider in evaluating a potential rollover include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account and consult tax and other advisors with any questions about your personal situation.

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