A 4-step guide to investing success for recent college grads

Business Insider

a day ago

So you've just graduated from college. Congratulations!
It's an exciting time in your life as you get ready to enter the workforce. One of the great things about being at the start of your career journey is that you have ample time to figure out the path you want to take in life and where your passions lie.
Time is also your greatest asset when it comes to setting yourself up for a life of investing success.
Thanks to the power of compounding, which Albert Einstein famously called the eighth wonder of the world, the earlier you start investing, the better. According to insurance firm Mass Mutual, a 22-year-old who invests $500 a month will have $2,255,844 by age 65, assuming the stock market delivers an average annual return of 8%. That number falls to $972,542 if one starts investing at 32.
But investing isn't always easy, especially early on in your career when your earnings are lower. The process may also feel daunting and complicated if you haven't done it before.
To put those fears to rest, we've come up with a step-by-step guide on how to best get your financial house in order so you'll thank yourself down the road.
Come up with a budget
There's no one-size-fits-all approach for budgeting, so it's important to come up with a plan that works for you, said Melissa Cox, the Dallas-based owner of Future-Focused Wealth. Trying to keep up with someone who may have a different budget than you do is one of the most common mistakes she sees young people make.
"So many people come out of school and they just go crazy spending money," Cox said. "Social media and everyone sees what everyone else is doing — don't fall into that."
A good rule of thumb is to set aside 20% of your pre-tax income, according to Bryan Kuderna, the founder of New Jersey-based Kuderna Financial Team. So, if your salary is $100,000, you should be trying to save $20,000 a year.
But again, the practical savings rate will vary from person to person. Many recent grads have student loans to tackle, so it's good to understand what your repayment options are, Cox said. Maybe forgiveness is possible, or lower monthly payments based on your income. Perhaps refinancing your loans will allow for more manageable payments.
Finally, it's important to keep yourself a priority, Cox said. For example, perhaps you really value traveling or shopping — it's good to set some money aside for those things as well.
Build a buffer
When you start working, it's smart to set up a retirement account like a 401(k) or Roth IRA and start contributing right away. But we'll get to that in the next section.
When it comes to your money outside those accounts, the first thing you want to do — assuming you don't have credit-card debt — is build up a buffer of six months of living expenses, Kuderna said.
This is because people in their 20s often have big life events that they need the money for, he said. Having it in risky assets like stocks makes it vulnerable to downside in the near term.
"I always say liquidity is huge for a young professional," Kuderna said. "I might move out, I might have to get a new car, I might be getting engaged, married, a kid — all these things that can happen in your 20s."
While you might not want your money invested in stocks right away, you also don't want to have it just sitting in a checking account. Instead, plug it into a high-yield savings account or a money market fund to collect a better yield while short-term interest rates are still high.
Open multiple investment accounts
OK, now for the investment accounts.
First, make sure you have a Roth IRA or 401(k) set up with your employer and are collecting their monthly minimum match. As of 2025, you can contribute up to $23,500 to a 401(k) and $7,000 to a Roth IRA. 401(k) contributions are made with pre-tax money; the money is then taxed upon withdrawal. Roth IRA contributions are made with post-tax income, and eventual withdrawals are not taxed.
Setting these accounts up is important because the money comes straight out of your paychecks — it's like it never existed, and there's less of a temptation to spend it since withdrawals before you're 59-and-a-half years old are penalized at 10%. Plus, you can take advantage of the tax benefits.
"I'm huge on Roth options, especially for young people," Kuderna said. "If we can get tax-free growth for another four or five decades, that's worth its weight in gold."
Once those are set up, open up a brokerage account to invest your excess savings.
Considering your cash savings, Kuderna said this is taking a three-pronged approach: having cash for the short-term, a brokerage account with stock investments for the medium-term (maybe a down payment for a house in five, 10, or 20 years), and retirement accounts for the long-term.
Having a brokerage account for medium-term investments will allow you to capture potential market upside while not being subject to the 10% penalty of withdrawing money from a 401(k) or Roth IRA early.
"You don't want to neglect the mid-term," he said. "When you're 40 or you're 50 and you need money, you don't want to hit your retirement accounts, and you don't want to have it all just sitting in cash."
Decide where to invest
Now that you have your accounts set up, it's time to decide where to invest.
The classic portfolio structure is 60% stocks and 40% bonds. Stocks, while riskier, offer greater upside potential. Meanwhile, bonds are supposed to act as a buffer to stock market volatility by protecting your capital, producing a steady yield, and appreciating during times of economic distress.
But since you're in your 20s, you might consider allocating even more of your money to stocks since you can likely withstand more volatility, according to Chris Chen, the founder of Insight Financial Strategists. He said an 80/20 portfolio may be more appropriate.
How you allocate money in your medium-term and long-term investment accounts may look different, however. For your 401(k) or Roth IRA, one simple way to invest for the long term is by buying a target-date fund. For example, you might choose the Vanguard Target Retirement 2065 Fund (VLXVX) or the State Street Target Retirement 2070 Fund (SSGQX).
These funds automatically adjust your allocations to stocks and bonds as you age. As you start to approach retirement, the percentage of your money in bonds starts to increase to preserve your capital. Right now, the Vanguard 2065 fund has 53.1% of its assets in the Vanguard Total Stock Market Index Fund, which is made up of US stocks; 37.5% of the fund is in the Vanguard Total International Stock Index Fund; 6.5% is in US bonds; and 2.9% is in international bonds.
Expense ratios, or the fees that certain funds charge, are also something to keep in mind. The Vanguard Target Retirement funds, for example, have a fairly cheap expense ratio of 0.08% a year. The cheapest S&P 500 index fund is the Fidelity 500 Index Fund (FXAIX) at 0.015%.
For your medium-term investments, you should assess your risk-tolerance and timeline. Stock valuations are high at the moment, which suggests average 10-year returns may not be great. So if you need the money in five-to-10 years, being fully in stocks might be the wrong approach.
But if you feel you can have a longer timeline than that, Kuderna said investing in bluechip stock indexes like the S&P 500 is a good approach. If you want to be especially aggressive, you might consider investing heavily in tech stocks, he said. The sector is often riskier than other areas of the market, but has seen explosive growth over the last 15 years.
Some funds that offer exposure to tech stocks include the Technology Select Sector SPDR Fund (XLK), the iShares US Technology ETF (IYW), and the Invesco NASDAQ 100 ETF (QQQM).
"If you look at the greatest returns over a long period of time, it's in equities, it's people who have a higher risk appetite," Kuderna said. "If you've done those beginning steps of building a rainy day fund, setting money aside, not carrying any bad debt — if you're good there and we can afford ourselves a long-term time horizon, then we should try to almost encourage ourselves to be a little more aggressive."