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While you were in college, most, if not all, of your money was probably spent on education, food, and the occasional luxury. Now that you’ve graduated and started your career, you can focus on new priorities, such as investing to secure long-term funding.
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The first three investment methods are:
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1. High-yield savings account
As of February 20, 2024, traditional savings accounts earn just 0.46% interest, so there’s little incentive for new graduates to swindle their money at their local bank. But with high-yield savings accounts offered by many online banks, you can easily earn 10 times that amount.
High-yield accounts are a risk-free way to create an emergency fund in case you run into financial difficulties. Experts recommend starting by saving one month’s worth of take-home pay and then gradually building up to three to six months’ worth of income.
2. Retirement account
Thanks to compound interest returns, early contributions to a retirement account can have a significant impact on the account balance at retirement. According to Vanguard, for example, every dollar you donate when you’re 25 can grow to $4.80 by age 65. If she waits just five years, her dollar will be worth just $3.95 at age 65, nearly 18% less.
Experts recommend investing 15% of your income into a retirement account. An employer-sponsored 401(k) is often the best option for new graduates, but if your employer doesn’t offer one, consider opening an individual retirement account instead .
Employer-sponsored 401(k):
A traditional 401(k) is a tax-advantaged way to save for retirement. If you opt in, your employer will automatically defer your contributions from your pre-tax income. Every dollar you contribute reduces your taxable income by $1, saving you money in taxes. You can invest your money in any asset offered by the plan. Mutual funds and bond funds are popular choices because they automatically diversify your portfolio. This money grows tax-deferred, so you don’t have to pay taxes on your nest egg until you withdraw the funds in retirement.
The main benefit of 401(k) plans is that employers often match at least a portion of employee contributions. With that free money, your savings will grow faster.
Traditional IRA:
A traditional IRA is a type of retirement investment account that you set up yourself through an investment broker. Contributions come from pre-tax income and grow tax-deferred. Withdrawals after retirement are subject to income tax.
Although you can’t get matching funds with an IRA like you can with a 401(k), you may have more investment choices.
3. Pay off high-interest debt
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According to the Federal Reserve, the average credit card interest rate is 22.75%. This means that paying off high-interest debt is the most profitable investment you can make. When your balance decreases, you have more money available for additional investment goals, such as buying a home or investing in securities outside of your retirement account.
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This article originally appeared on GOBankingRates.com: The first three investments you should make right after graduation
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