Kimberly Palmer, author of Generation Earn

Moxy Magazine recently chatted with Kimberly Palmer, senior editor and personal finance columnist for US News & World Report and author of Generation Earn, which examines the relationship between young professionals and their money. She shared her tips for taking financial risks–without breaking the bank.

Moxy Magazine: What would you consider the biggest financial problem facing young professionals today?

Palmer: That we don’t save nearly enough. It’s tough because there are so many demands on our money, but figuring out a way to save at least one-quarter of our income is the best way to make sure we can meet our goals, like retiring, traveling or starting our own businesses. The most successful savers in Generation Earn are the ones that started small–in one case by saving just 2 percent of her income each month. She slowly ramped that up and now, four years later, has $100,000 in the bank.

Another trick is to focus on your three biggest costs — housing, food, and transportation. If you can minimize those, you’ll generate the biggest savings without having to nickel and dime yourself everyday. For example, maybe you can live in a smaller home for longer, limit car use and eat more at home.

MM: What investment options are available today for us today and how can we choose among them?

Palmer: We have infinite options, and that’s why investing can be so overwhelming! I recommend sticking with the basics. Unless you love doing lots of stock research — and really, even if you do — then the best approach is to stick with low-cost index funds for your long-term investments. For example, most of your long-term investments can be in an index fund that mirrors the S&P500. For your shorter-term savings, you can focus on lower-risk bond funds and money market funds. Brokerage houses such as Vanguard make it easy to compare options, fees, and risk levels [Editor’s Note: Does this still sound like Latin? Stay tuned for a piece on the basics of investing].

MM: How do you balance high-risk (but also high potential rewards) against secure (but lower potential reward) investments? What general investment strategy do you recommend for someone in their 20s, 30s, 40s?

Palmer: This is the classic risk-reward trade-off that you really can’t avoid. In fact, if something claims to offer both low-risk and high-reward, it’s probably a scam (After all, that’s what Bernie Madoff claimed to offer). I recommend first doing a little introspection. A general rule of thumb is that you should subtract your age from 100, and that’s the percentage of your retirement portfolio that should be in the stock market. If you have far less than that, then it’s time to give yourself a pep talk and embrace more risk.

MM: What tips would you give to someone just beginning to invest?

Palmer: Begin today! So many of us wait until we have “extra money” to start investing because we think it’s for “rich” people, but really, no one ever feels like they have “extra money.” You just have to make it a habit and build your investments into your budget.  Your employer might make it easy to automatically divert a portion of your paycheck into an investment account, in addition to any 401(k) contributions you’re making.

MM: What are the differences between DIY (managing individual investments yourself) and trusting an investment firm to manage it for you?

Palmer: The best choice for you really depends on your personal preferences. Some people prefer to manage their own money, while other people would rather outsource that task. Even if you do pay someone to manage your money, make sure you understand their recommendations and ask lots of questions. The days of blindly trusting “experts” are definitely over.

MM: How do you choose a financial adviser and how do you avoid being taken advantage of?

Palmer: Ask friends and family if they have any recommendations. Once you have a few names, arrange for a free introductory meeting, which most advisors offer. Ask the big questions–How do you charge fees? What types of clients do you have and what are some common recommendations you make? How did your clients fare in the recession?–But also ask how they usually work with their clients and make sure their communication style matches your own. Some advisors stick with email and phone; others prefer to meet regularly in person.

MM: What are some resources out there for young professional women to learn about investing?

Palmer: In Generation Earn, I make it easy to come up with a plan to get on top of your money and start investing. Some books make it complicated, but for most investors, sticking with the basics is the best strategy.

There’s no need to be constantly buying and selling stocks as long as you check in and rebalance your portfolio at least once a year. That’s why I also recommend the two classic investing books: The Little Book of Common Sense Investing by John C. Bogle, founder of Vanguard and A Random Walk Down Wall Street, by Burton Malkiel, which might help give you the courage to manage your own investments instead of paying someone to do it for you.

Article written by Melissa Breau for Moxy Magazine, February 2011. Images in article provided courtesy of Kimberly Palmer; Image in slideshow on the main page by flickr.com user iChaz.