Investing 101: A Starter Guide for Young Professionals

A friend recently told me that “retirement feels so far away that I don’t know what to do now for it.” That timeline can be intimidating — scary, even — for young professionals who are decades away from retirement. Sometimes, it can feel like if you don’t do everything exactly right, right now, that you’ll be left behind.

The reality is, if you’re able to do a little work up front with your budget and retirement plan, you’ll set the stage for a successful retirement down the line. Investing is a long-term endeavor, so it’s essential to set clear goals and timelines. By investing early, you give your assets the chance to grow for a longer period of time.

If you have specific financial goals — for example, homeownership — it’s also important to start thinking early about how and when you want to meet those financial milestones. Your investment horizon will influence your asset allocation and risk tolerance, helping you choose appropriate investment strategies.

One thing I always reassure my friends is that now is the best time to start your financial journey. But for those still unsure of where to begin, here are a few tips on how to get started:

Understand the Vocabulary

A common hurdle for early career professionals is understanding the vocabulary that comes along with investing. Terms like “portfolio diversification,” “mutual funds” and “exchange traded funds” can be intimidating and scare away new investors. The reality is that these terms don’t need to be difficult to understand and can be a great option for many people. Here’s a breakdown that makes the terms easy to differentiate and understand:

• Mutual Funds (MFs): Pools of money collected from many investors to invest in securities like stocks, bonds or money market instruments. 
• Exchange-Traded Funds: ETFs are like mutual funds but traded on stock exchanges like individual stocks. 
• Diversification: Diversifying your stock portfolio by spreading your investments across different asset classes (e.g., stocks, bonds, real estate) can reduce risk and the impact of any single investment's performance on your overall portfolio. 
• Asset allocation: Asset allocation is an investment strategy where a portfolio's investments are divided among different asset classes like stocks, bonds and cash, based on the investor’s financial goals, risk tolerance and investment timeline, to balance potential risks and returns. 
• Risk tolerance: Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand in their investment portfolio. 

Create a Budget

Before diving into investments, it's crucial to establish a budget and wrap your brain around your income, expenses and savings capacity. After evaluating your income and expenditures, you’re able to determine how much you can comfortably allocate towards investments without compromising your day-to-day financial stability.

Something I like to remind my friends is that you can change how much you invest whenever you want. In the slower months when you can set more money aside, I recommend bumping your investment contributions up. In the more expensive months, it’s always ok to pull back. Any amount you invest will pay off, so don’t be afraid to start small. There’s no benefit to waiting to start investing until you can afford to invest larger amounts of money, and in fact, starting small and early can help you to set up good financial habits.

Know Your Options

Once you have established a budget, you’re ready to start thinking seriously about retirement savings. There are a number of different retirement plans available to most people, but here’s a breakdown of the difference between employer-sponsored and individual retirement plans (IRAs):

• Employer-Sponsored Retirement Plans

  It’s important to familiarize yourself with your employer-sponsored plans. Your employer will likely offer a sponsored plan, such as a 401(k) or 403(b). As a young professional, with a presumably lower income, this can be one of the easiest — and most tax-efficient — ways to invest money. It’s important to understand the details, including any employer match contributions. Maximizing employer matches can also significantly boost your long-term financial security.

• Individual Retirement Accounts 
  
  In addition to employer-sponsored plans, many people choose to open an individual retirement account like IRAs or Roth IRAs. These can supplement your employer-sponsored account while also providing some diversification, and if you don't have access to an employer-sponsored plan, an IRA gives you the chance to still save in a tax-advantaged account.

Investing as a young professional can set the stage for long-term financial security. By starting early, understanding your options and leveraging your resources, you can build a strong financial foundation for your future. Investing isn’t just about growing your money — it's about aligning your financial decisions with your long-term goals and aspirations. With these basics in hand, you're well-equipped to embark on your investing journey with confidence. Trust me, you’ll thank yourself in forty years!