This is the fifth post in a (semi-)regular series about getting started in the working world. It will be tailored to my personal experience, so some parts may not completely apply to your situation. I hope it will be a good intro for young professionals just entering the working world (or a refresher for those of us who’ve been through it for a few years!).
See the other posts in this series:
Once you have a fully stocked emergency fund, what do you do next?
The answer is easy: keep saving!
But where? Luckily, my favorite blogger of all time (Mr. Money Mustache) has an answer for that. And his answer was far better than anything I had thought of, so I’ll paraphrase here and then you should go check out his post for more info!
MMM’s recommended order of where to stash your extra ca$h money is:
1. high-interest debt, like from credit cards
2. maxing out your 401k
3. other loans like car/student
4. extra principal on home loan
5. index funds
6. high-interest cash account
Luckily, I don’t have credit card, car, or student debt. So my extra money should be going first to my 401k and then to an index fund (MMM recommends a Vanguard index fund like VFINX).
As I admitted here, I finally increased my 401k contribution to try to max it out for the year. But after maxing out my 401k, if I have anything left, I’ll put it into index funds from Vanguard.
I like index funds because you don’t have to be an investing whiz- you are buying shares in an index market, rather than an individual company’s stock. I know there’s always people who make billions of dollars by buying individual stocks and selling at their peak, but I’m not a fan of doing it that way. Too stressful trying to pick which stocks will be profitable and figuring out when to buy/sell/hold.
I use Vanguard because it has relatively low fees and is pretty easy to use. Also, it’s recommended a lot in the personal finance community and I believe everything I read, so I chose it. True story.
Last summer when I started cleaning up my finances, I threw some money into VFINX shares (warning: you need a minimum of $3k to invest). From what I remember, it was pretty easy to set up the account and make the investment. Per the Vanguard website, VFINX “invests in 500 of the largest U.S. companies, which span many different industries and account for about three-fourths of the U.S. stock market’s value”.
Once you have over $10k in VFINX shares, your shares will automatically transfer over to VFIAX- which is the “admiral shares” side of the fund. The admiral shares have an even lower expense ratio- 0.05% rather than 0.17%- meaning more money for you! I got a letter in the mail once my VFINX shares totaled $10k letting me know that I’d be switched over to VFIAX within a month or so. (and it also gave me an option to log on and switch myself at my earliest convenience- which I did as soon as I read that letter!)
From my experiences, Vanguard has been awesome and I most certainly recommend that you open an account as soon as you’re ready to make the leap to investing.
Have you invested in stocks/index funds? Or do you prefer to stash your money somewhere else?