investing

Best Investing Moves When You're Starting Out

It's tough to get started saving when you have debt hanging over you. But once you get access to a retirement plan, make sure to fund it.

If you’ve never invested before, you should start once you land your first job with access to a retirement plan. But make sure you balance your saving and investing with the need to pay off debt.

Pay down your debt

The top item on your financial to-do list is to pay off any credit card debt you have accumulated. “Credit card debt can be the most punitive if you miss a payment,” says Jennifer Dempsey Fox, an executive vice president at PNC Asset Management Group. “Pay off your debt with the highest interest rate as quickly as possible, and make minimum monthly payments on the rest until you are caught up,” she says. You should always make the minimum payments on your student loans, but note that paying those down more aggressively can wait until you’ve tackled the next two items on your to-do list.

Create an emergency fund

Next, build up six months’ worth of living expenses in a high-interest savings account. You’ll typically find the fattest yields at online banks (see The Best Bank for You). For example, Dollar Savings Direct, an online bank, paid a 1.4% annual yield on savings accounts as of September.

Invest in your 401(k)

At a minimum, contribute enough to your employer’s plan to capture the full match. If your plan includes an auto-escalation feature, your contribution percentage will automatically increase each year, up to a certain level. Whether or not your plan has this feature, you should reevaluate the amount you contribute annually and anytime you get a raise, until you’re contributing the maximum (currently $18,000 per year).

Keep your investments simple

If your main goal at this stage is saving for retirement, you don’t need more than one fund. The first one-fund portfolio we suggest is a target-date mutual fund. Target funds hold a basket of funds and reduce risk as you get older by decreasing their allocation to stocks and boosting their holdings in bonds and cash-type investments. The year in our recommended target fund’s name indicates that it is suitable for someone planning to retire around 2060. At last word, the fund had 86% of its assets in stocks and the rest in bonds and cash. We like the T. Rowe Price Retirement funds because of their high stock allocations and the quality of the underlying funds they hold. If they are not available in your plan, look for Fidelity Freedom funds or Vanguard Target Retirement funds, which are also great options.

The second one-fund portfolio is an exchange-traded fund that is fully invested in stocks. That makes it more aggressive than a target-date fund but not too risky for long-term investors in their twenties or thirties. Vanguard Total World Stock ETF is a truly global fund, with 52% of its assets in U.S. stocks and the rest in foreign shares.

Portfolio option 1

100% T. Rowe Price Retirement 2060 (symbol TRRLX)

Portfolio option 2

100% Vanguard Total World Stock ETF (VT)

Track your finances with apps

A good budgeting app should ease some of the stress of managing so many competing obligations. Mint, which imports transactions and charts your spending, is a fine place to start. YNAB, which stands for “You Need a Budget,” has many devoted users. It is free for one year for students but otherwise charges $50 annually. For more investment analysis, try Personal Capital, which includes features for analyzing your asset allocation and investment fees.

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