Recently at a talk I gave I was asked the question (I paraphrase) “For a young person starting out, how should they invest?”. It’s a good and very important question. The answer I gave was not what was expected, but here are my thoughts.
First, for a young person the single most important thing to learn about money is the 13% rule. Spend 87% of what they make and have a ball with it. But save the other 13%. If they learn to save 13% of their income and stay out of debt they will have few money problems throughout their lives.
When it comes to investing, the most important investment a young person can make is in themselves. Few investments will ever match what an education will do for them. Or a car to get them to a better paying job. A nice conservative suit for job interviews. And probably the single best investment, a box of ‘thank you’ cards. That $5 investment can yield many thousands.
That 13% should probably be invested in savings accounts, money markets or CDs. There is so much demand for money early on it should be safe and fairly liquid.
Then if they are really enterprising and have an IRA account or other really long term money, that’s when they should consider something like a broadly diversified mutual fund with low fees. But most young people won’t have that type of money for some years.
If they start out this way, they’ll avoid most of life’s money problems and have cash available when it really counts.