I'm 23, How Should I Be Investing?

Summary

In this conversation, Nick, a 22-year-old living with his parents in New York City, seeks advice on saving for retirement. He is interested in starting a Roth IRA but has concerns about his financial situation. Dave, the host, advises Nick to first build an emergency fund, focus on finishing his work-study program, and increase his income. He stresses the importance of delaying retirement investments until Nick's financial foundation is solid, suggesting that Nick should eventually invest 15% of his income into good mutual funds through a Roth IRA once he's financially ready.

Takeaways

• 😀 Nick is 22 years old and thinking about saving for retirement, but his current financial situation requires some adjustments before investing.
• 😀 Nick’s company doesn’t offer a 401k, so he’s considering a Roth IRA or traditional IRA for retirement savings.
• 😀 Dave emphasizes the importance of starting early, but advises that Nick should first build a solid financial foundation before investing.
• 😀 Nick has $3,000 in savings and $43,000 invested in single stocks, which Dave considers too risky for his current situation.
• 😀 Dave advises Nick to reduce his exposure to single stocks, limiting them to no more than 10% of his net worth (around $2,000).
• 😀 Nick is still living with his parents, which is fine for now, but he should eventually plan to move out when his finances allow.
• 😀 Dave suggests that Nick should focus on finishing his work-study program and increasing his income over the next 1-2 years before diving into retirement savings.
• 😀 Once Nick’s income increases, Dave recommends fully funding an emergency fund with 3-6 months' worth of expenses before starting retirement savings.
• 😀 Dave advises Nick to start contributing 15% of his income to a Roth IRA, focusing on growth stock mutual funds when he’s ready.
• 😀 The priority right now is securing stable finances—getting a stable income, a fully funded emergency fund, and moving out—before starting to invest long-term.

Q & A

What is Nick's current financial situation?

Nick is 22 years old, living with his parents, and working in a work-study program that pays around $15,000-$16,000 a year. He has $3,000 in personal savings and invested $43,000 from a settlement he received when he was hit by a truck at age 18. Most of his investment is in individual stocks.

Why does Dave advise against investing in single stocks?

Dave advises against investing in single stocks due to the high risk they carry. He suggests that, while Nick has a knack for it, he should limit investments in single stocks to no more than 10% of his net worth to reduce risk.

What is Dave's stance on retirement savings for Nick at this stage?

Dave believes that Nick is too early in his financial journey to start contributing to a retirement account like a Roth IRA. He recommends Nick focus on other priorities first, such as building an emergency fund, paying off any debts, and increasing his income.

What should Nick prioritize instead of contributing to a Roth IRA right now?

Nick should prioritize saving enough to cover three to six months of living expenses in an emergency fund, securing a stable income after completing his work-study program, and planning for his move out of his parents' house.

What are the next steps Nick should take after building an emergency fund?

Once Nick has built his emergency fund and has a more stable income, Dave advises him to focus on moving out, continuing his education or career development, and then starting to invest in a Roth IRA, contributing 15% of his income to good mutual funds.

How much of his income should Nick aim to invest when he starts?

Nick should aim to invest 15% of his income once he has moved out, completed his studies, and secured a stable career.

Why does Dave emphasize getting out of his parents' house?

Dave stresses the importance of moving out because it signifies financial independence and maturity. He believes Nick should avoid living with his parents indefinitely, especially after reaching a certain age, and should take steps to move into his own place once he is financially able.

Why is Nick's $3,000 savings likely sufficient as an emergency fund for now?

Nick's $3,000 savings are likely sufficient as an emergency fund because he still lives with his parents and has fewer expenses. Dave suggests that, at this stage, the $3,000 probably covers his immediate financial needs.

What type of investments does Dave recommend for Nick when he starts saving for retirement?

When Nick begins saving for retirement, Dave recommends investing in good growth stock mutual funds within a Roth IRA, as they offer a safer and more diversified option compared to individual stocks.

What role does Nick's current income play in his financial planning?

Nick's current income of $15,000-$16,000 a year is not enough for him to move out of his parents' house in New York City. Dave advises Nick to focus on increasing his income and securing a stable career first before taking on additional financial responsibilities like retirement saving.