Suze Orman is always game to answer your questions about money—but if she doesn’t like the way you ask, she won’t hesitate to correct you.
“Let me tell you what you should not have,” was her response to the first question we posed to her as part of “Ask Suze,” a new video series from NextAdvisor in which we present your financial dilemmas to the celebrated personal finance expert and host of the “Women & Money” podcast.
The question had been straightforward, or so we thought: “What investments should I have before I turn 30?”
But Orman didn’t agree with the premise. “Why do I feel like you’re just rushing to be investing in the stock market,” she asked, “but you are not putting building blocks in place that would be solid, and would be there no matter what happens?”
Her point: Before thinking about which investments you should have, you should focus on not having debt—specifically consumer debt from credit cards or personal loans. Next, you should focus on building an eight-month emergency fund. Only then, Orman said, should you worry about investing in the market.
The question came from a reader named Jesús, who is in his 20s. The average credit card balance for people in their 20s was about $2,700 last year, according to Experian. And the average personal loan debt for that age bracket was higher, at $6,900—a 10% jump from 2018.
Meanwhile, most people in their 20s don’t have anywhere near an eight-month emergency fund. The average savings balance for adults under 34 without children was $2,700 last year, according to a Bankrate analysis of data from the Federal Reserve. (Couples had a bit more saved, at $4,700.)
But Orman and many other experts have long recommended having a bigger stash of basic living expenses saved in a liquid account, in case you suffer a sudden drop in income or huge surprise bill. Why eight months? Your personal target may vary, but NextAdvisor contributor Farnoosh Torabi points out that in the Great Recession that ended in June 2009, at peak unemployment it took the average person more than eight months to find a new job.
For the unicorns in their 20s who’ve actually managed to clear their debt and accumulate an eight-month emergency fund—perhaps Jesús is one of them—Orman recommended a tried-and-true strategy for dipping into the stock market.
“When the time is right,” Orman said, “I would be dollar-cost averaging every single month with a specific sum of money into the ETF with the symbol VTI. And do it at a discount brokerage firm where there are no commissions whatsoever.”
An ETF, or exchange-traded fund, is basically a group of stocks that are bought and sold together in one package. VTI, which is the symbol for Vanguard Total Stock Market, is a specific ETF that pulls together stocks from the entire market. That means when you invest in VTI, or any of the index funds like it, you’re buying a piece of the whole market rather than a specific company or sector. Over time, these types of funds have been shown to deliver the smallest fees and most consistent returns. That’s because individual companies and industries may eventually decline or even vanish, but the broad U.S. market has risen slowly but surely over time.
To dollar-cost average means to deposit a set amount of money into your investments each month; this method ensures that you’re contributing regularly and riding out the regular ups and downs of the economy. Popular discount brokerage firms include Charles Schwab and Fidelity.
There’s just one thing to note. Many people in their 20s, even those with debt or inadequate savings, can and should be invested in the stock market—but only within a retirement account, like their employer’s 401(k) plan or an independent Roth IRA. Saving in a retirement account will give you exposure to the gains of the stock market, and starting early is critical to gaining enough compound interest to build wealth over time. If you’re not sure how much to save for retirement, especially during a pandemic, check out these tips from “Broke Millennial” author Erin Lowry.