Tuesday, June 02, 2009

What Should A Young Couple Invest In?

A reader writes in with this question:

My fiance and I are getting married in Oct 2009. We have been together for 8 years now and we are both students. I am 23 and he is 22. We are both working on our masters degree and have accumulated students loans from our undergrad degrees. We do not have any children and live in a condo ($750 per month).

I do not work because I am totally/perm disabled from a car accident when I was 15 years old, however my fiance works at 2 different jobs and we average about $30,000 per year. We have been looking into retirement and savings plans for a while but there are so many to choose from that it makes my head spin.

My question to you is, what should we invest in? 22 and 23 years old, getting married, both students, no children, no credit cards/loans other than student loans and our bills average us about $2000 per month?

Before I say anything, of course I have to remind everyone that I am in no way a financial professional and I can't really give investment advice. But I'll throw out a few things that I might consider if I was in your situation!

The traditional advice for young people is to invest aggressively, meaning in a mix of investments that is as much as 90% in stocks, with a few more conservative fixed-income or bond investments balancing out the portfolio. Because you have such a long time before you can retire, you can ride out the ups and downs of the market, and theoretically should get returns over time that outpace inflation. Nowadays, some of the assumptions behind this kind of investing make people more nervous-- past history does not predict future results, and the stock market has been so crazy over the last year, who knows where it will go next. We could be in a recession/depression for years and maybe people who hoard their cash will end up doing just fine if there's no inflation. But over the next 40-45 years til this couple retires, a lot could change, and it's still probably a good idea to be invested in stocks over the long term.

So I'd say that if your employer has a 401k plan, make sure you are taking advantage of it, especially if the employer matches some portion of your contributions. You can start by putting in a small percentage of your pay, but keep an eye on that over time and try to increase it later. Pick a few funds that have varying degrees of risk so you don't have all your eggs in one basket. The choices of funds are perhaps what is making your head spin, but don't let it intimidate you. Most 401k providers have information that will rank the funds according to level of risk-- pick a couple from the top, one from the middle and one from the bottom and chances are you won't go too far wrong. Just do it and then take a hands-off attitude-- don't worry about watching it too closely at first. Just let that money start slowly accumulating, and worry about things like rebalancing your portfolio a few years later. You've got plenty of time.

But aside from that, here's the other thing you might want to think about as a risk-free investment: how about trying to pay off those student loans early? I'm not sure what kind of interest rates you might be paying and whether there's any possibility of having loans forgiven, but having less debt in your life is never a bad idea. Repayment of any debt is essentially an investment that guarantees you a return of whatever interest rate you were paying (or perhaps a little less if the interest was tax deductible). And becoming debt-free will give you a feeling of satisfaction that you'll never quite attain from looking at a 401k statement!

Those are my two cents-- whatever you decide to do, best of luck to you!
Any other thoughts or suggestions from readers out there? You are always great about helping each other!


Ashie said...

I just have to comment!

Any young person should learn how to invest for themselves, they are likely to be better than the pros (and I'm speaking as someone with a Masters in Finance). My preferred vehicle is forex - yes there is free good info out there. Even stocks, long or short-term... start slow, risk no more than 2% of your account, backtest and demo till you're confident... But if you trade, minimize your risk... I can't teach this, but they should be looking to learn this.
My 2c. Hope it helps some.

SP said...

As students, I doubt they have full time job with a 401k.

If not, they should look at Roth IRAs (fidelty or vanguard) and simply choose a target date fund. The phone reps can walk you through it. Fidelity requires a very small initial investment if you set up auto-invest, and vanguard requires $3k for most funds.

But I second the student loan question. Perhaps the leftover money should be going towards those, or towards paying tuition up front and reducing the need for loans.

mOOm said...

Everyone seems to be skipping over the interesting story here. Been together since they were 14 and 15 - one disabled in a car accident at 15. Both doing masters degrees but only one can work. Apart from the interesting life history here I am wondering about how disabled one of them is. Are they getting disability benefits from the government? Will they be able to work once they get a masters degree?

First, they shouldn't take the advice on Forex and they should build up an "emergency fund" in cash. It's really hard to make further suggestions without more detailed info on income, income expectations, spending, spending expectations, interest rate on the student loans, size of student loans etc.

Single Ma said...

Unfortunately, I have more questions than answers.

- If your rent is only $750/month and you have no debt (other than student loans and you're both still in school, so the SLs are probably deferred), how do your bills average $2,000 per month???

- If you one doesn't work, one works 2 jobs and they gross about $30,000 per year - that's only $2,500 per month BEFORE taxes. So after taxes, you barely have enough to pay the $2,000 per month in bills. What is left to invest?

No one needs a Masters in Finance to figure out that the numbers aren't adding up. But maybe I'm missing something.

Perhaps, instead of investing, they should work on ways to lower their monthly expenses so they can establish an emergency fund to cover them for 6 months. With a pre-existing health issue (i.e. per disabled), emergencies and/or medical bills are inevitable.

Sicilian said...

I am at the income level that this young couple is at after 15 years at the same job. I have aggressively invested $200.00 a month(and my company matches my money) for the entire time I have been working only to find myself with not enough money to live under a bridge at age 49.
I have stopped the investing, stopped looking at my devalued retirement, and am focusing on banking money and retiring debt.
When you don't make much money you can't have debt.

Ashie said...

Hi, I feel my comment wasn't clear: I don't think they should jump into something risky like forex (personal bias probably made me mention it), but should be very careful about their investments instead of blindly trusting someone else. They should educate themselves, even if it's only to the extent of picking funds.
And yeah, I did miss the important bit about disabilities and/or any payments regarding those.

Anonymous said...

I agree with Moom in that many questions are unanswered. I don't understand how a Masters' Degree gives you the ability to work when you are currently collecting SSI/Disability.

I would put my money in a savings account or emergency fund and pay for the wedding with cash, and then start investing once they pay their bills, finish school and get jobs. If they don't start investing until they are 25-30, they are still ahead of the game. At their young ages, there are other things they should put their money towards instead of investing.