Investing Advice for Fresh Grads
In about a month, I will be starting my IB analyst job. I never invested or even had a credit card throughout college, and the amount of money I will be making over the next two years is pretty mind-boggling. I want to manage this money as best I can and grow it in a responsible way.
That being said, I have no idea where to start with budgeting/investing and wanted to see if anyone on this forum might have some advice for a 22-year old fresh college grad. I'll be joining a BB in NYC that has a 401k matching plan, but then also saw online that investing in a Roth is better. So basically I'm just very confused and want to have a solid plan to start following so I am not having to think about this while being stressed about work in a few months. I also don't even know what kind of credit card to get to start growing credit.
Any/all advice would be much appreciated. Thank you in advance
Roth is amazing and in my opinion the best, pick the right stocks and you have a crazy opportunity to make tax free gains over the long-term. As for what stocks to pick, I'm sure you know what I'm gonna say.
Roth does seem awesome (I've seen the stories about Thiel's $5bil Roth), but I'm worried about surpassing the income limit with my salary. Given that the max per-year contribution is only $6k, would it really be worth starting one up if I'll only be able to contribute for a few years? I also don't know how the limit works - does the IB bonus technically count as "earned income"?
Yes, bonuses are treated as earned income. As for how to structure your contributions, once you hit the limit:
spend it otherwise you'll burn out
IMO Roth is better BUT isn't worth it in IB because you will break the income limit ($144k) next year, and then you have 2 401ks which is just a hassle. You may see a "backdoor Roth" recommended online - the government is trying to eliminate these, and they are a bit complicated to do, so IMO just check the box when you start for your traditional 401k and forget about it. It's most important that you meet the whole company match (i.e. if they will match 6%, make sure you are selecting at least 6%)
Put your money in something easy, "set it and forget it" like the SPY. I personally just dump $X into SPY every 2 months or whenever I remember, and it's easy because I do not think about it or worry about my investments at all. If you want to trade, maybe leave 10% of your investing money for more impulse-y / "fun" stocks, but don't dump too much of your money into any one stock unless it's a diversified ETF like SPY. Check your bank's trading restrictions (will be well covered in trading) but traditionally it's hard to trade single name stocks at a BB, you are often limited to ETFs only and often have to pre-clear trades.
Do you have any credit score at all? Were you on your parents cards perhaps? If you don't have any credit score at all you may need to get a starter credit card (would stay within a good credit card family i.e. Citi, Chase, Amex, not those random startups you see). Otherwise I'd just go for a low or no fee card that has some points build - Chase Freedom Unlimited, Amex Everday card are solid cards with no fee.
You will probably want to upgrade to nicer credit cards (i.e. Amex gold, Chase Sapphire) a few years down the line but you need a very good credit score to qualify for those, and sounds like the perks with those cards aren't your main priority right now.
Rent will eat up a lot of your budget in NYC. Recommend finding a budgeting Excel online and figuring out what your expenses might look like. NYC is ridiculously expensive right now, give yourself some leeway to have fun, but avoid blowing big money on anything stupid (i.e. no splitting tables or buying bottles at clubs right now... just pregame at home or get 1-2 drinks out) until you have 2-3 months of expense knowledge to figure out how much you have to dedicate to each category.
I would definitely prefer to max out the Roth ASAP, but yeah I also am worried about the income cutoff. In my 401k I don't think I can invest at my own discretion and have to follow one of my BB's specified investment plans. Would you say that it's still worth investing in the 401k? Some family friends have told me that the top priority at my age should just be to max that thing out as quickly as I can but I'm still having some second thoughts especially given the investment restrictions.
I'm not a big trading guy at all. "Set it and forget it" is absolutely something that I want to do, but I do think that I probably shouldn't be asking for investment advice in this forum given the fact that most users who would comment advice are the same as or younger than me. But yes, ETFs are probably going to be my go-to given the trading restrictions in the BB.
Looking into credit cards is also something that I am planning on doing before work starts. Perks are not the goal here - I won't have time for much of anything outside of work so the focus during my analyst stint will really just be building a strong credit score. I'll most likely just get one of those starter cards focused on credit-building like you mentioned.
Absolutely agree with the point on rent. Fortunately I went to school in NYC, know how to cut budget accordingly here by now, and have a really great deal on my apartment for the next 1.5yrs (1550/mo all-in) - hopefully this saves me a bit on expenses. The Excel budgeting sheet is a great suggestion. That'll probably be incredibly important as I start budgeting with my salary. Do you have a suggestion for a set percentage to bank for savings? A couple people I know in the industry have always said to invest 100% of my bonus but I don't have much direction outside of that.
Thank you very much for the suggestions! I know they gave me some solid direction and will hopefully do the same for other incoming analysts checking this thread
401k:
1. Absolutely max this out up to the match. If your bank gives 6%, this is a free extra 6% bonus. I don't think maxing it up to the ~$20k limit is necessary right out of college.
2. The "investment plans" aren't bad at all for a set and forget person because they automatically de-risk as you get older - the 401k is a nice nest egg that you basically can forget about. Look up BlackRock LifePath 2060, that's a common one for your age and is a great fund for your 401k.
3. I would max up to whatever your company matches, add a bit more in 6 months if you're feeling comfortable with your budget, and then save additional money in your own Fidelity (or similar) account for a house down payment, travel, just expenses you'll need before age 59.
Trading:
Forgot to mention, but you can only be in company-approved trading accounts (i.e. anyone with a Robinhood account will have to liquidate) and you have to go into your trading account and designate your employer to recieve duplicate statements. I think every bank allows Fidelity, but wait for the compliance training where you will get a list. Just something to be aware of before opening an account.
Savings
IMO I'd back into this out of your budget - I don't have a great feel for 1st year analyst savings anymore, lots have changed since those days. That's an unbelievable rent number, and living in NYC already you have an idea of what your social expenses cost. Start with fairly high estimates for all other expenses and back down if you don't need as much money.
Chase Freedom Unlimited rocks. I will also throw in Capital One as an option, as they are a bit more risk seeking with who they'll lend to
combining the Freedom Unlimited with the Sapphire Reserve is popular and stacks nicely.
Off the bat, don't worry too much about all the savings and investments. You're still wet behind the ears and only 22. No one's going to give you grief for wanting to live it up a little for the first year or two and god forbid, just enjoy being a fresh grad who landed the whale of a profession.
I'd follow the above advice to get started on some more background type things, but after a couple of months and with a sense of security about the job, I'd go meet a financial advisor (the proper kind. Not some Northwestern Mutual skid). Figure out a three to five year plan, ten year plan, and start thinking of a potential end game for "someday".
Thank you! Yes, finding a good advisor is going to be top priority once I'm a few months into the job and have a better understanding of my earnings vs expenses
$ave dat money
Not sure why some people are saying saving isn't a priority. IMO, now is the time to set good habits. I'm a 1st year and here's how I'm prioritizing.
1. 3 months rent and expenses in checking
2. Maxed Roth IRA
3. Max out the 401k to 20.5k
4. Taxable brokerage to accumulate 100 shares of VOO and start selling covered calls. (I am aware that backtests show conflicting results about whether this actually outperforms or not).
5. Everything else. Haven't gotten here yet so will explore later. Thinking about potentially real estate.
Thoughts?
Unless your rent and expenses are way below NYC market, most people can't afford to save more than like $20k of their salary, so this isn't realistic to achieve all of this for the next year. You will be able to achieve some of these things if you save your entire bonus (I personally think save 80% and use 20% to buy yourself something nice or take a trip... you will grind for that bonus, trust me).
I would do some of these things concurrently (i.e. give 8% to your 401k and not the max off the bat, catch it up with your bonus payment if you want to. save 80% of the remaining to your rent/expenses account and start getting the other 20% in the market on VOO)
Except you’re missing that the full $20.5k in a traditional 401k would only be like $11k hitting your bank account in NYC due to such a high marginal tax rate.
I don’t personally think it makes sense to make non tax advantages investments before the tax advantaged ones. That’s like getting an instant guaranteed return of 20-30% in the form of saving on taxes.
Real estate is good but not an entry level thing. For something easier, look at REITs (super liquid) or crowdfunding of some kind (Fundrise, etc.). Real estate is great when you can do it full time and take more risk, but you have a job and need to prioritize that, so unfortunately you'll be paying some kind of premium for that.
The flip side is tenancy in common or some other kind of partnership ownership with someone who can basically act as the GP (the one actually making the deals) and you're basically a LP, but I personally have less experience with this. There are definitely people on here who have experience with that, I'd be curious for them to chime in.
Tagging thebrofessor here to see if he might have any advice on this. Between savings suggestions for a new IB analyst in NYC and the decision on retirement investments among traditional 401k/Roth 401k/mega backdoor Roth, any suggestions from the legend would be very much appreciated
I'm 99% sure I've posted this before but let me do it again and bookmark it so everyone's aware. my order of operations with finances (meaning don't do 3 until you've done 2, don't do 5 until you've done 4, etc.)
as far as traditional/roth, I'm 100% roth because of the national debt and my fear that the only way to pay this shit off is to raise taxes on everybody for everything. that, plus my observations of retirees' trepidation with spending their own money because every dollar coming out is pretax
feel free to follow up with more Q's
Want to add that as a first year analyst starting now, you should 100% do Roth. This is your stub year - for tax purposes, this year you're only making 50k or whatever - a low marginal tax rate.
I always advocate for more Roth early in your career when you're not in the top marginal tax bracket and then if you want to go with something more like 50/50 (or weight higher Roth).
OP, for step 7, the specifics for you would be to open a Vanguard, Fidelity or Schwab account and invest your remaining cash (after your tax advantaged investments, emergency fund and normal expenses) into broad market ETFs or passive mutual funds - VTI, SPY, VOO, etc. Set it and ignore. Once you realize how much you can invest, you can set up to direct deposit into your investment account and turn on auto investing to ensure you aren't changing your strategy based on the market
Thanks for taking the time to write this out! This is exactly the kind of structured plan I've been looking for.
To clarify, this is a Roth 401k you are talking about in point 4?
Also - is there a reason you'd prioritize investing the max into multiple retirement accounts before moving money into a traditional brokerage w/ ETFs? I was initially thinking of splitting money in a set ratio between retirement and brokerage.
Just started a new position and was weighing traditional 401k vs. Roth, definitely leaning Roth now. Thanks for the advice.
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