Although many graduates spend years studying some combination of maths, business and economics. Many struggle with how to begin the process of saving and investing, people can become bamboozled by finance jargon. Some get burnt by an early negative experience with investing/trading stocks/currencies etc.
In this first part of an article series on personal investing I will focus on the “pension” and setting up your personal investing account.
For most graduates who join a reputable company in the private sector, they will have a private pension. This is a no brainer, your employer will put money Into your pension, say 5% of your gross salary for example. You will then have the option typically to add your own contribution and your employer will match this up to a certain level (eg 3% matched). This is very attractive as it’s tax free, so the amount your putting in is quite minimal versus receiving it at your marginal income tax rate.
In the U.K. for example, all the contributions and gains/dividends accumulated are shielded from tax, once you reach 55, you can take out up to 25% tax free and drawdown the rest over time as an income substitute if you decide to retire or reduce your workload.
Although some people are risk averse to the volatile nature of stocks, investing in a broad based portfolio of stocks in the long run has historically almost always produced solid returns, including income received from dividends. Thus, starting a pension in your 20s or early 30s allows more time for the value of your pension portfolio to benefit from compound growth,
Another aspect of beginning to invest is what to do with your excess cash. If you have $10k of spare cash in a year you could buy a nice car. But in terms of investing this is massive mistake, a vehicle depreciates rapidly in value within a few years, as well as having significant running costs (insurance, gas, tax, repairs, parking). Instead of this you could set up a personal investment account with a leading investment company, some of the top players include, Blackrock, Vanguard, Fidelity etc.
If you are UK based, their is a scheme called ISA, it allows individuals to invest up to £20k a year in stocks and bonds without any tax liability on the gains and income derived (dividends/interest). This is separate from a pension and can be accessed at any time, unlike a pension which is only accessible later in life. Investing £10k into a stock portfolio over time historically could be worth £13k after 5 years. Compare that to investing in a car, which costs a lot to run and may only be worth £4-5k (depreciation) after 5 years. Similar schemes are available in Canada (TFSA – $7K per annum contribution) and the USA (Roth IRA).
I can already tell this article is getting too long and if I keep writing it will lead to information overload! So I’ll leave it their for part 1. Part 2 in this article series will go into more detail on actually investing, such as stocks versus bonds, time horizon, ETFs and investing fees.