Words of wisdom for the young investor

By Ben Steverman

updated 11:18 a.m. ET Feb. 13, 2009

Two 22-year-olds are just starting their careers and beginning to save and invest. One devotes half his salary to quickly paying off student loans, with the goal of saving money to travel the world. The other dabbles in stocks, while planning to buy a home. Which one is starting out on the right foot? Neither? Both?

Learning to invest is hard enough. Now try doing it during the worst recession in a generation and the biggest financial crisis in a lifetime. If you're a young person with money to invest, however, you can consider yourself lucky. You have income at a time when the jobless rate is rising rapidly. If you're just starting out, you avoided—so far—huge losses of the sort that drastically changed the retirement plans of many baby boomer parents.

No Easy Answers

But the current environment naturally leaves a beginner confused about how to invest. The tough housing market means real estate looks cheap, but it's also an unreliable investment. After the financial market's problems of the past year, the same can be said for stocks, bonds, and other investments. Are they a bargain or a dangerous trap? At the same time, the financial crisis and widespread layoffs seem to argue for playing it safe. But how much cash can really fit into your piggybank or under your mattress?

BusinessWeek asked experienced financial advisers for some advice to young investors. Experts don't always agree, but all agreed on one piece of wisdom: There is no easy answer. The right investing plan depends on your personality and your short-term and long-term goals, advisers say. Consider the two young investors mentioned above. On the surface, they're similar, but they're going about saving and investing very differently.

Alex Engelman is 22 and works at a market strategy consulting firm near Burlington, Vt. He distrusts the stock market and he doesn't plan to buy a home anytime soon. "I'm all about mobility in my twenties," he says. Instead, Engelman plows half of his income toward one goal—paying off student loans that once totaled more than $20,000. "I don't want debt hanging over my shoulder," he says. When the loans are paid off—before the end of the year—he'll start saving cash so he can pack up and travel.

Robin Jordan, also 22, works in marketing at a retirement planning firm in Santa Barbara, Calif. He doesn't plan to move away anytime soon, and is seriously considering buying real estate. "The rent I'm paying right now to live in downtown Santa Barbara is more than the monthly payment on my parents' mortgage in northern California," he says. "I look at home ownership more as an investment than as a lifelong commitment," he adds. Meanwhile, Jordan is also starting to dabble in stock investing—setting aside 20% to 30% of his savings to buy individual stocks and another 50% for broad index funds. He's trying to diversify his portfolio, but has noticed that's hard to do because many funds require minimum contributions.

More from Businessweek.com Ways to profit from the U.S. savings surge Personal finance: 20 Dos and Don'ts for 2009 Financial Advisers' Best Ideas

Both young men may be pursuing plans that are perfect for their particular circumstances. There are, however, some general principles of investing and saving that it pays to be aware of.

Advisers offer these tips:

1. Cash, cash, cash. Both Engelman and Jordan said they're not yet saving much cash from month to month. However, nearly every financial planner will tell clients the first priority is an emergency cash fund. Before you can invest for the long term, you need enough to cover your current needs, they say. It's important not just if you lose your job, but for covering any eventuality from a major car repair or moving expenses to a pet's—or your own—surgery. For years, many clients resisted this advice, says Leisa Brown Aiken of Timothy Financial Counsel in Chicago. They preferred to be making money in the stock market or spending more on a future or existing home. Now that stocks and home prices have been pummeled, there's been "a big sea change" in attitudes, Aiken says.

The insecurity of many jobs these days also prompts more saving. "People are getting wise: You've got to have money in the bank," says Robert Timineri of Total Return Advisory in Oroville, Calif. The goal is keeping the cash handy so you can get it in an emergency. Many online banks pay out relatively generous interest rates on savings accounts.

But how much to save? A bare minimum starting point is one month of expenses, but ideally a fund should cover three to six months of expenses. Timineri used to advise each adult should have ready access to $10,000 in cash, but, because of the bad economy, he has boosted that to $15,000 to $20,000.

2. Enough insurance? One other base that needs to be covered before serious investing starts is insurance. Robert Oliver of Oliver Financial Planning in Ann Arbor, Mich., says most young people don't have enough disability insurance, which covers living expenses in case you're injured and can't work. "As younger people, your main asset is yourself, your ability to earn over a lifetime," Oliver says. A disability puts that in jeopardy, but the basic disability insurance offered by employers is rarely adequate, he says.

MORE FROM PERSONAL FINANCE

Personal finance Section Front

FDIC: Minorities struggle to access banks Vanguard: 60 percent of 401(k) have recovered Answer Desk: Repairing consumer credit  New $100B safety net for jobless in works Congress scrambles to extend estate tax Auto loan delinquency rate edges higher Jobless face expiration of health benefit Cutting back is hard, cutting gift list is harder Newsweek: Delaying retirement to support the kids Holidays pose challenges for the jobless Personal finance Section Front   Add Personal finance headlines to your news reader: