Dear Carrie: I'm a 24-year-old single college graduate. I was fortunate to graduate debt free, and have a job that pays roughly $40,000 a year in a part of the country where the cost of living is relatively low. While I feel this is a great start and that time is on my side, I know there's more to do. I have begun to invest through my company's retirement plan and HSA offering; however, I have a savings of $10,000 to invest on my own, most of which is currently sitting in a checking account. I want to take advantage of my youth and invest aggressively. Yet I don't feel that I have the capital to properly diversify without facing a bunch of upfront costs or tax penalties. What are my options? -- Sarah
Dear Sarah: First of all, kudos! By contributing to your retirement plan and being debt free, you've already given yourself a great start.
With those things under your belt, the next thing to think about is an emergency fund -- and it sounds like you're in good shape there, as well. I generally suggest that everyone set aside enough money to cover three to six months of nondiscretionary expenses (in other words, just enough to cover things like rent, groceries and insurance) in case of a job loss, illness or other unexpected event. Ideally, this money is liquid and FDIC-insured: for example, in an interest-bearing savings account.
It's possible that most of your $10,000 of savings will have to go toward this emergency fund, but once you've got that secured, here's what I'd suggest:
Continue to make retirement a top priority.
If you can, consider putting 10 percent of your salary toward retirement. If you can keep contributing at this rate for the next several decades, you should be in good shape once it's time to retire. (A caution, though, to other readers: If you wait until later in your life to start saving for retirement, this percentage will likely need to increase considerably.)
The easiest way is to use your company retirement plan, taking full advantage of any match your employer might provide. (You wouldn't want to leave what is essentially "free money" on the table.) If your employer offers a Roth 401(k), this might be something to consider because even though the money is not tax-deductible now, ultimately your withdrawals will be tax-free -- a real benefit since you will likely be in a higher tax bracket when you retire.
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