Investment advice for recent college grads?
April 16, 2010 by
Filed under investment advice
What sort of financial investments would you recommend for a recent college graduate who is still heavily in debt due to student loans? Is financial investment altogether a bad idea in such a situation, or are there certain investments that can safely be made while simultaneously paying off debt?
In response to Gorilla’s question: The majority of my debt is in a subsidized Stafford Loan, which I believe is at an interest rate of 6.8%
Paying your debt asap is important especially if the interest rate is high.
Small-cap funds US and International would be a good investment for someone that is young.
As you will see, to be worth it, you need to invest in something that gives a pretty good yield over time… forget about 5~6% certificate of deposit.
Let’s say you owe 10k$ (6.8%).
Few scenarios over 10 years:
Amount to pay per year = 10000$ * (0.068 * (1 + 0.068)^years) / ((1+0.068)^years – 1)
Investment value after years = (annuity * (1 + 0.068)^years – 1) / 0.068
1) you pay your debt in 5 years (2425$/year). For the remaining 5 years you put 2425$ in investment at 12%. You end up with 15405$ in investment and no debt.
at 10% yield: 14800$
at 8% yield: 14200$
2) you pay your debt in 10 years (1410$/year) then you have 1015$ for investment at 12%. You have 17800$ in investment and no debt.
at 10% yield : 16200$.
at 8% yield : 14700$
To be fair I should use a lower yield over 5 years (let’s say 8%) than over 10 years (let’s say 10%). In this specific example, it seems that it would pay off (not a huge amount though) to start investing now as long as your yield is above 7~8% or that 10 years yield better in avg. than 5 years (which is supposed here). I also assume you are not selling the funds during that period of time as this will trigger taxes.
The other criteria is risk. Paying your debt bear no risk at all, while owning assets (mutual funds or else) does. This is a personal choice.
If this interest bear some tax advantages that #2 is getting even better than this, but you might want to ignore this for simplicity.
From here, you are on your own, so just use the formulas and create your own scenarios with real numbers and assumptions you are comfortable with.
As to what mutual funds to invest specifically, you might want to subscribe to http://www.aaii.com/ for 40~50$/year you will get lots of good mutual funds advices.
Save at least half your salary and get a second job and a third job.
One after your first job and one on the weekends when you are not working like waiter at a restaurant, disc jockey, bouncer, bartender, stripper or whatever.