I recently got an email from a recent college graduate looking for my take on investing tips post-graduation. Of course, I am not a qualified financial advisor and this should not be taken as advice but here are some tips and considerations in deciding where to put your new-found money.
Firstly, if you’re reading this as a recent grad with money to spare, congrats on graduating and securing your first job! I remember the first time I started making more money than I needed to live and just started wading my way into the world of investments. It can be overwhelming and scary.
I remember first starting to read about stocks and bonds and had the impression that to invest in the stock market required all kinds of time, skill and risk which I felt was beyond me at that time. If only I’d known then what I know now. If you’re here reading this, I hope you can get over the fear that I had and just make a start. The sooner you start investing, the more comfortable you become and the more you learn.
Of course all investing carries risk of loss so don’t invest anything you can’t live without, or can’t afford to leave invested to allow time for the markets to recover.
Now into my tips:
Build an emergency fund
If you don’t have it already, try to first build up enough cash at hand to cover 3-6 months of living expenses. This is a nice peace of mind cushion to have if you lose your job or need to make life changes and have a bit of breathing room.
Don’t JUST invest in a pension if at all
I know this will be a bit controversial but, once you have an emergency fund and are starting to build up more than that, as you are young, my personal preference would be to avoid investing primarily in a pension (if at all) as you will likely want to access larger sums of your investments for early life goals like a wedding, a mortgage or time off for children, if any of that is in your cards.
Currently, in Ireland, the money you put into a pension is only accessible at retirement age. This age can vary depending on the pension but at the moment it’s looking like age 55. While locking money away can be a good thing to protect it from yourself, not having access to it if you need it for other life goals has to be a factor in your decision.
Also putting it in a pension while on a lower tax band only defers your taxes rather than giving you better tax relief once you are in the higher tax bracket as you progress through your career. The way a pension works is that you get a tax break on contributions now but you will pay your marginal tax rate when you withdraw. So this is a tax deferral rather than tax savings. The biggest benefit, if you are in a lower tax band, is the tax-free growth until withdrawal but high fees and low performance can completely negate this benefit if you do not keep an eye on these in your pension.
If your employer offers pension matching, it may be worth your while to take advantage of that but you’ll need to dig into what the pension is invested in and what the fees are. Fees can be hidden under all kinds of names like annual management charge, fund management charge, allocation rate, commission and so on.
My analysis has found that a pension needs to be making a real rate of return of 5.95% in order to outweigh investing on your own outside of a pension. I also have a post here to help you determine if the employer matching is worth it based on the returns after fees and inflation. The real rate of return is the historical performance of your fund minus the fees minus inflation. The historical 30-year inflation rate for Ireland has been 1.9%.
Another thing to note is that you can only invest 15% of your gross salary until age 30 but employer matching does not contribute to this cap. So if you are earning 30k, you can invest 4.5k. If your employer contributes matching on top of that, it does not take you over the contribution limit for tax relief.
If you will be investing more than 15% of your gross salary, you will need another after tax investment solution like an online brokerage, if you’re comfortable investing on your own.
Unfortunately, Ireland does not have the tax-free investment vehicles like Canada’s tax-free-savings account (TFSA) or the UK’s ISA or US ROTH IRA.
Open a brokerage account
That really leaves a brokerage account like Degiro or Trading212, in there you can invest in individual stocks, investment trusts, bonds, or exchange-traded funds (ETFs) as an example. You can read more about each of these investment options in this post.
Determine your asset allocation
In terms of asset allocation, a typical rule of thumb for risk allocation is to carry bonds in the percentage of your age, so for example a 22-year-old would carry 22% bonds and 78% stocks/equity ETFs. The logic behind this is because you have a lot of time to leave your money invested before you need to withdraw.
There are also quizzes you can take to help you decide your own risk tolerance as well such as this one.
Buy 1 stock/ETF/bond
Starting to invest can be really scary. It took me 2 years before I bought just 1 ETF. I suffered from analysis paralysis. I wanted to know everything there was to know before I started. This does not have to be the case. Make a start and buy just 1 stock/ETF or bond. This can get you started for very little money. I first bought 1 ETF for 50€ and watched it for 3 months before I bought anything else. Taking this baby step can be a great way to get started and get you comfortable seeing the value go up and down.
Once you start investing, you will get more and more comfortable with market volatility and the process of investing. If you hadn’t come across this article yet, there are some good details included on how to get started investing.
Also check out this article in particular the point around lifestyle inflation. As you are starting out your career, be aware of the impact of increasing your spending as your salary increases.
Example of growth
Now to see how investing can grow your money over time.
Assumptions:
- Gross salary: 30k
- Net take home: 25.4k
- Annual Expenses: 12k
- After-tax investments: 13.4k
- Invested after purchase fees of 1 purchase/month: 13.02k
- Invest in a simple ETF portfolio with performance of 7.95% (average historical performance of 10% minus 0.15% fees minus 1.9% inflation)
- Dividends of 1% taxed at 21% tax rate (non-accumulating)
Growth after 15 years by the time you are 37.
Your portfolio will have grown to 426k allowing you to withdraw 17k/year to live on indefinitely without touching the principle if you use a safe withdrawal rate of 4%.
This does not take into account any pay rises but also does not take any withdrawals into account should you need it for a house, wedding etc.
If you had invested this in a pension, while the portfolio value might be higher, you would not have access to it for another 18 years.
Detailed calculations below:
| Age | Year | Fund | Annual Savings | Gain | Exit tax | Dividends (after tax) | Total | 4% withdrawal |
| 22 | 1 | € – | € 13,020 | € 1,035 | € 103 | € 14,158 | € 566 | |
| 23 | 2 | € 14,158 | € 13,020 | € 2,161 | € 215 | € 29,552 | € 1,182 | |
| 24 | 3 | € 29,552 | € 13,020 | € 3,384 | € 336 | € 46,293 | € 1,852 | |
| 25 | 4 | € 46,293 | € 13,020 | € 4,715 | € 469 | € 64,496 | € 2,580 | |
| 26 | 5 | € 64,496 | € 13,020 | € 6,163 | € 612 | € 84,291 | € 3,372 | |
| 27 | 6 | € 84,291 | € 13,020 | € 7,736 | € 769 | € 105,815 | € 4,233 | |
| 28 | 7 | € 105,815 | € 13,020 | € 9,447 | € 939 | € 129,221 | € 5,169 | |
| 29 | 8 | € 129,221 | € 13,020 | € 11,308 | € 424 | € 1,124 | € 154,248 | € 6,170 |
| 30 | 9 | € 154,248 | € 13,020 | € 13,298 | € 886 | € 1,321 | € 181,001 | € 7,240 |
| 31 | 10 | € 181,001 | € 13,020 | € 15,425 | € 1,388 | € 1,533 | € 209,590 | € 8,384 |
| 32 | 11 | € 209,590 | € 13,020 | € 17,697 | € 1,933 | € 1,759 | € 240,133 | € 9,605 |
| 33 | 12 | € 240,133 | € 13,020 | € 20,126 | € 2,527 | € 2,000 | € 272,751 | € 10,910 |
| 34 | 13 | € 272,751 | € 13,020 | € 22,719 | € 3,172 | € 2,258 | € 307,575 | € 12,303 |
| 35 | 14 | € 307,575 | € 13,020 | € 25,487 | € 3,873 | € 2,533 | € 344,741 | € 13,790 |
| 36 | 15 | € 344,741 | € 13,020 | € 28,442 | € 4,636 | € 2,826 | € 384,393 | € 15,376 |
| 37 | 16 | € 384,393 | € 13,020 | € 31,594 | € 5,452 | € 3,140 | € 426,694 | € 17,068 |
Worksheets
If you’d like to play around with more scenarios and assumption you can gain access to my worksheets and calculators in my paid member’s area. These worksheet templates can help you on your financial journey.
It includes an expense tracker which is the very basis of most financial planning, it also includes a portfolio builder and a financial independence calculator where you can input a number of assumptions and see how long it will take for your investments to grow to a level where the passive income will be enough to cover your annual expenses.
I will be working on a youtube series on how to use these tools so stay tuned for that if that would be something of interest. The first one of the series can be found here.
All the best on your journey. If you have any other specific questions that would be of use to postgrads, please do comment below and I will look to update the article.