Financial Stocks/Starting Out
I am about to graduate from college. What percentage of my income do you recommend I save each month, and should I buy individual stocks or mutual funds?
Thanks for your reply.
Thanks for the question!
The real answer is as much as you can do systematically, and add to it each month. There is a balance, because if you try to save to much then you cannot stick to it, begin to break your plans and budget, and eventually give up. This happens to the majority of people that try to begin to save for the future.
10% of your salary is a great place to start. More is better of course, but 10% is very good and better than the vast majority of people in this country.
I would suggest buying mutual funds and etf's (Exchange Traded Funds). Buying individual stocks requires alot of research and time, most investors who try it do not beat the market. So, to avoid the risk, cost, and time involved, buying an index funds that tracks the S&P 500 or other major index is the best solution for most investors. An example is ticker symbol SPY. It is an etf that can be bought and sold just like a stock, and tracks that S&P500 index, which I believe the be the best index for this.
I would also suggest buying a similar index fund that tracks bonds, such as ticker symbol AGG. Depending upon how much risk you want, you can change how much is in the bond fund and in the stock fund. If you are young, risk is ok because there is plenty of time for your funds to recover if there is a bad year or two. So typically 80% in the SPY and 20% in the AGG would be a place to start. As you get older, you would increase the percentage in AGG and decrease the percentage in SPY, until you are retired. Then the percentage would be roughly reversed with the majority in AGG and minority in SPY.
You don't need to change the amount in each often, once every 5 years or so. The stock fund will on average grow much faster, so it is worth the extra risk in the long term.
You should set all of this up in a ROTH Ira or Standard Ira account. ROTH is best if you don't make too much money to qualify. The limits are very high, so can probably do this with a ROTH account. There are very significant tax benefits in the long run.
If your work offers a 401k plan, that is good to. Put into the 401k plan the most that your company will match, and set up an ira account yourself for the rest of your investing.
I hope that this helps gets you started. Please do not hesitate to follow up with me if I can offer anything additional.