The Ultimate Guide to Investing (and Getting Your Finances in Order) for Millennials

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Investing can be a tricky business for everyone, but for young professionals, particularly millennials, investing can be especially difficult to navigate. Young professionals are just launching their careers. They’re likely saddled by student loan debt and often cast off investing as something to get to later on. Having grown up during the financial crisis, millennials are clutching their cash.

But experts at Vanguard, SEI Investments, and PNC, whom we reached out to for this guide, say that embarking on an investment journey soon rather than later is key. And preparing to invest also means getting your finances in order. Here’s what you should know:

For Millennials Just Getting Started

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If you are just beginning to think about investing, experts say that an early start is key — your money needs time to grow.

“The most important step is to just get started,” Maria Bruno, head of U.S. Wealth Planning Research at Vanguard, said. “By sitting on the sidelines and not making the most out of your working years and the savings opportunities available to you, you are doing a disservice to your financial future. You’re missing out on the power of compounding – earnings upon earnings, which over time, can be quite impactful.”

“The earlier you start, the more time your money has to grow. As the value of your investment grows you accumulate earnings, which are reinvested. And future earnings are then generated on a larger sum. That’s the beauty of compounding,” Melissa Doran Rayer, director of Consumer Strategy at SEI Investments, said.

James C. Kelly, wealth strategist at PNC Wealth Management in Philadelphia added, “You have time on your side so you can really take advantage of compound interest. The ‘rule of 72’ is a helpful rule of thumb. It states that the time needed to double your money equals 72 divided by your interest rate. So at an 8 percent interest rate, it will take you nine years.”

Other tips on how to get started include meeting with financial advisors, using an online broker, and taking advantage of your company’s 401(k) offerings.

“Start by maximizing your company’s 401(k), and if you’re lucky enough to have a company match, make sure you save enough to get the match,” Kelly said. “Lastly, it’s very advantageous to work with a financial advisor. Advisors aren’t only for people making lots of money. They can help you at every stage of your life, including when you’re first starting out.”

Once you get started, it’s important to make sure you have goals for your portfolio.

“We recommend a more purposeful, goal-oriented approach to investing,” Rayer said. “Are you hoping to buy a house or pay for a wedding? What about retirement? And do you have an emergency fund (three to six months of expenses)? That’s actually a top priority in our book. Once you’ve identified your goals, you can estimate how much they’ll cost (in today’s dollars) and how much you’d need to save and invest to reach them.”

Bruno seconded the importance of goal setting.

“The best place to start is to get your investment priorities straight and understand your short- and long-term goals. Consider the goals you would like to work towards and the steps you need to take to get there. A few places to start include investing for retirement, creating an emergency reserve and managing debt (whether it is paying down student loans or managing your credit cards),” she said.

For Millennials With Disposable Income

For millennials with disposable income, our experts recommend planning ahead for retirement, making sure to have a budget, and having a little fun while investing.

“Pay your future self first,” Kelly said. “Your retirement fund is specially designed to last for the rest of your life. Extra happy hours and nights out are not.”

“Millennials who have a solid hold on their finances and are fortunate to have disposable income should look to maximize their tax-advantaged retirement accounts, such as an employer-sponsored 401(k) or IRA,” Bruno said. “A watermark should be 12-15 percent of your income, but I realize that can be tough for most young investors. Alternatively, you can invest at a ‘stretch’ amount and auto- increase that by one percent a year as you get pay raises. This way, you create the foundation for a disciplined investing program.”

Kelly also emphasized the importance of thinking about short term, medium term, and long-term savings.

“Make sure you have an emergency fund that can provide at least three to six months’ worth of expenses. That’s your short term. Your taxable investments should be on a five to ten year time horizon. That’s your medium term. You shouldn’t plan to touch that money for at least five years, maybe for something like a home purchase. The same thing goes with retirement accounts, which is your long term. You should adopt the attitude that you can’t touch those accounts until you retire,” he said.

While thinking about the future should be your number one priority, Rayor mentioned the importance of having fun while you invest. She suggested that millennials think about investing in the future as curating an experience.

“Assess the costs, figure out how close you can get given your finances, and create investment strategies that fit each individual goal,” Rayor said. “It’s also important to have a little fun in the process. Using a portion of discretion income to build experience is the millennial way!”

For Millennials Managing Debt

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This category will hit close to home for many millennials. Nearly 68 percent of students had to take out student loans during the 2011-2012 school year and 7 percent of students have at least $100,000 in student loan debt, according to Forbes. While this is the latest data, Forbes suspects that the amount of millennials with debt is only growing.

For millennials with debt, saving and paying off student loans is key.

“For many young investors today, the elephant in the room when it comes to debt is student loans,” Bruno said. “Investing is a series of tradeoffs, so it can make sense to balance savings with paying down debt. Remember that by paying down your debt, you’re really making an investment decision.”

“Just save! Get comfortable with your budget. When you get a raise, increase your savings rate, not your spending rate. That way you won’t feel the impact that much,” Kelly said. “You have to start saving somewhere. Let’s say you can only afford to put away $20 per month or $50 per month. Set a schedule where each year you bump that up just a tiny bit. If you’re saving in your 401(k) and only saving 4 percent, for example, push that up by 1 percent every six months or year.”

Even if you don’t have a lot of disposable income, it’s still important to save and invest if you want to be financially independent.

“I’m fortunate to have learned the keys to financial independence at an early age from my parents and my mentors,” Bruno said. “Even though I didn’t make much money at the outset of my career, I participated in my 401(k) and invested in an IRA whenever I could afford to. I jumped at the chance to take advantage of a Roth IRA when it was introduced in 1998. At that time, I converted my small traditional IRA to a Roth IRA, which I still contribute to.”

They also offered advice on how to manage your debt so that you don’t have to make the choice between saving money and paying off loans.

“Work on paying off the highest-interest debt first (i.e. credit cards), and then address the remaining debt (i.e. student loans),” Rayor said. “Once you have an emergency fund and you’ve eliminated your high-interest debt, you may want to split your available cash between paying off the remaining debt and investing for your important goals. That’s especially true if you can take advantage of an employer’s retirement plan with matching funds. If a retirement plan isn’t available or if you’re not an active participant, consider making deductible IRA contributions.”

“If left unchecked, consumer debt (think: credit card debt) can be a recipe for financial disaster. This type of debt typically comes with high interest rates and, in most cases, no tax advantages. That said, some debt can be considered a good thing as it provides proof you’re a good credit risk when you’re looking to finance big ticket items, such as a car or your first home. The key is to manage your debt so you don’t accrue large balances and become strapped with the tyranny of compounded interest,” Bruno said.

For Millennials Afraid of the Stock Market

This is a huge category. According to Forbes, 66 percent of millennials ages 18-29 and 65 percent of those ages 30 to 39 are scared of the stock market. Who can blame us? After coming of age during the 2008 financial crisis, we have plenty of reason to believe that the stock market is a risky move for our money. Avoiding investing, however, can prevent millenials from making enough money to achieve their long-term goals.

In order to overcome the fear of investing, our experts stressed educating yourself about the risks, selecting safe investments, and focusing on your goals to help motivate and guide your investment decisions so that you don’t miss out in the long-term.

“Millennials entered the workforce during or soon after the financial crises, so their view of investing is somewhat tainted and may result in them being reluctant to participate in the broad market. Going forward, time and opportunity are on your side,” Rayor said. “Adults learn best when they’re trying to do something like solve a particular problem or answer a specific question. So simply dumping the “big book of investing” on them won’t help. The learning has to be organized around specific questions and issues that people are likely to have: “How do I know how much I’ll need to retire?” “What options are available to save for my kids education?” And ideally, the learning should help people take steps toward accomplishing what it is they’re trying to do.”

“If you’d like to go out on your own, start with mutual funds, target date funds and exchange-traded funds. Stick to vanilla investments,” Kelly said.

They also highlighted the importance of overcoming your fears so that you can start investing early.

“A recurring theme jumping out at me from news headlines is that millennials are shying away from the stock market, setting them up for long-term failure. While investing in the stock market can be risky, avoiding it can be even riskier in the long-term,” Bruno said. “There are two opportunity costs as a result of staying on the sidelines. The first is shortfall risk— if the portfolio lacks investments that offer higher return potential, you may not achieve growth sufficient to fund long-term goals such as retirement. The second is inflation risk: the portfolio may not grow as fast as prices grow, and you will lose purchasing power over the long term.”

“Here’s one to illustrate how investing just a little bit can go a long way,” Kelly said. “I opened up a health savings account at an old job and invested in a target date fund, and when I left a few years ago it was worth $3,000. I just went back and looked at it, and it’s now worth $8,000.”

They emphasized seeking help from professionals if the idea of investing still makes you feel squeamish.

“We’re big believers in seeking advice with professionals — financial planners and investment advisors. Don’t be afraid to ask for help and keep asking questions until you get the answers you need,” Rayor said.

Mistakes to Avoid

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It’s easy for young professionals to make mistakes when they start investing. Our experts identified the most common investing pitfalls and shared tips on how to avoid them.

The biggest thing to avoid? Investing too late and increasing your debt.

“The biggest mistake is not doing it. You have to start somewhere. A lot of beginner investors think that because what they can invest is such a modest amount, it isn’t worth it, but the reality is that money will grow and grow over time,” Kelly said.

“For young people, the biggest mistakes include: thinking of the now without any consideration of the future, putting off investing money until ‘later,’ and racking up (more) debt with credit cards,” Raynor said. “One of the reasons we’re so hooked on goal-oriented investing is that it helps investors — at any age — stay focused and disciplined. If you really, truly want to own property or buy a primary home, you’re going to be more likely to set money aside for it if you can keep that goal clearly in mind and track your progress.”

And don’t underestimate the importance of short-term savings.

“A common mistake young investors may make is not setting any money aside to save for emergencies (which is a must for investors at any age!) or setting too much aside. The typical emergency reserve guideline is to set aside at least three to six months of living expenses in cash, such as a money market fund, in order to account for any unexpected spending needs, such as a car repair or (a worst-case scenario) losing your job. But for many just starting out, this can be a lofty goal, given other priorities,” Bruno said.

Websites, Podcasts and Other Resources

When it comes to investing, it’s important to keep yourself informed on not only your portfolio, but also ways to better manage your debt, keep track of your goals, and make responsible financial decisions. Here are some recommended resources to help you learn more.

“Vanguard provides investors with a number of resources to help them calm any fears or questions related to investing. There are a variety of lessons available on our website that may be particularly helpful for millennials, including how to handle college debt, how to save for multiple goals and investing basics. Each lesson dives into the steps one should take to overcome such investing obstacles, best practices for doing so, and the options and benefits that may be available to you, depending on your situation,” Bruno said. “I’d be remiss not to mention the Vanguard podcast, The Planner and the Geek, hosted by my colleague Joel Dickson and myself. Each month we look to help investors achieve their goals and evaluate time-tested investing fundamentals. We frequently feature special guests to offer their take on topics such as what will make you happy in retirement, whether or not ETFs are right for you, and how debt-burdened millennials can afford to invest.”

“Our Goal Investor site helps people estimate the costs of their goals, see how likely they are to reach them, and understand how to get closer. It will also recommend investment strategy options for each goal,” Raynor said.

“A great resource is the PNC POV blog,” Kelly said. “I can’t emphasize enough the importance of working with a financial advisor. “We are also big proponents of goals-based investing, which integrates a person’s investment strategy with their overall wealth strategy to help make sure they are properly aligned. Instead of investing based on expected returns, invest based on your future goals: retirement, buying a home, travel, paying for kids’ college expenses, etc.”