How to start investing as a young professional
Many circumstances, or change in circumstances, call you to review your money habits. One such circumstance is getting your first job. This does not necessarily have to be your first job out of the box, but perhaps the first job where you would have a reasonable disposable income. How much one can afford to invest is determined by their disposable income.
The phrase ‘ reasonable disposable’ can create quite a cushion to hide from the responsibility to invest, however, there are people who are not even earning a decent enough living wage to meet their present needs.
That said and done, here are a few tips on how to begin your journey as a young professional. The first and most important tip is of course to get started. The rest ensues.
1) Establish a goal: Investing with a particular goal in mind is pure bliss. When you know the ‘ why, the ‘ how’ follows almost naturally since you are motivated by an end goal. This could be to afford a down payment on a house in the future, to afford a comfortable retirement, to invest in a business and the like.
Doing this takes the pinch out of investing and lets you know how much you need to start putting away to achieve your goal. Take a look at the table below for an illustration:
The right- hand column shows the amount you need to put away monthly to achieve the same goal of P500,000.00. You will notice that the longer you wait, the steeper the contribution becomes, hence the emphasis on the need to start now.
2) Get an emergency fund: While it is exciting to delve immediately into the world of investments, an important preemptive step is to establish an emergency fund.
This is simply a cash buffer that caters for shortterm eventualities so you do not have to dip into your investments when you begin that journey. Investments are typically not as liquid as savings and may impose some restrictions for taking your cash out early, therefore, it is important to get a savings account or a money market fund ASAP.
3) Get your hands into equities: Investing in your 20’ s is one of life’s best gifts. At this age, you have adequate time to restructure your portfolio and recover from bad shocks if they do come. So, get at least 60% of your portfolio into instruments with an above average return and especially equities.
Equities expose you to higher levels of risk but can also fetch you good returns to bolster your portfolio.
Another thing to remember about asset allocation at this age is to not get over- excited and put all your money into high- risk investments. Remember, diversification is your best friend and a good spread between equities, bonds and other instruments will help your portfolio withstand turbulence.
4) Look into your employer’s retirement plan: Do you like free money? Who does not? The best example yet of free money is your employer’s pension fund ( or retirement plan). Sometimes it is mandatory to join your employer’s retirement scheme, but even if it is not, it is a good idea to join it as your employer will typically be obliged to contribute some money towards YOUR retirement plan. This is free money you definitely do not want to pass up.
Happy investing!
This article was authored by Kgori Capital, a leading asset management firm.