About the Money Mondays Segments:
Welcome to Money Mondays! In this weekly segment, I will be providing short financial tips and tricks on how to improve your overall financial situation. Learning to be good with your money starts with little bits of knowledge accumulated over time. I’m seeking to help people who are in search of financial independence so that they may achieve their goals. Thank you for reading!
Getting Started with Investing:
Getting started with investing can be very intimidating at any point in your life, but you want to make your money work for you and not the other way around (just working for your money), right? The good news is that it doesn’t have to be so complicated.
Don’t be intimidated!
If you watch the financial news, you might get the impression that you need to be a world class economist in order to understand where you should get started with investing. On the other hand, there are so many stories of people getting ripped off by financial professionals that you might not know who to trust. Now I’m not saying that the world of finance is simple by any means, but all the complexity is no reason to shy away from having a successful financial future.
When should you get started?
Now – that’s the short answer.
This is a timeless question in the world of finance. Everybody wonders when they should get into the market. You might worry that you’re getting in when the market is too high. Maybe the market recently started to slip, and you are think that it might continue to go down (so it’s best to wait). These are common reasons people hold off on investing. The reality is that it will likely never feel like the right time. The longer you wait, the more opportunity you are likely to lose out on.
Compounding for your future
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Attributed to Albert Einstein
Compound interest is a concept that is not appreciated by most people. The basic concept is that your interest earns interest, and your interest’s interest earns more interest. For example, if you start investing with $1,000 and earn 10% over a year, you receive $100 on that $1,000. Now, let’s assume you reinvest that $100 with the $1,000 earn another 10% on the second year. This time, you earn $110 instead of just $100. That’s the concept of compound interest. Simple, isn’t it?
At first, this may seem boring. Yeah, you earned more money, but it’s just another $10. That’s true, but the cycle of compounding will continue. Year over year, the money will continue to grow on itself. And the sooner you get started, the more time you have for your money to compound.
Warren Buffett understood this concept very well. If you’re not familiar with Mr. Buffett, you should be (learn more here). He bought his first stock before he was even a teenager (at the age of 11). Of course, most of us do not have the foresight to get started that early (myself included), but that doesn’t mean it’s too late. The sooner you get started, the more time you have for your money to grow. Michele and I started right out of college with around $1,000, and it’s grown from there.
Starting with the basics
There are a number of different ways to get started with investing, especially in today’s world of technology. With that, I will discuss a path that I believe works well for most people looking to get started.
First off, here are a few areas you should have covered prior to doing more self-directed investing. Most people should have some form of reserve savings. This is emergency money for those unexpected things that happen in life. The amount you should have depends on your situation. In general, it’s suggested to have 3 to 6 months’ worth of expenses. If your job has more uncertainty, you might be more comfortable with a higher amount (and vise versa).
Also, if you have a 401(k) with your employer where they match some part of your contributions, you should make every effort to maximize their match. For example, if they match dollar for dollar up to 3% of your salary, you should contribute at least the 3%. That would be an immediate 100% return on your invested money after all, and where are you going to get those kind of returns? Don’t just leave that money with your employer!
After the Basics
Ok, you have taken care of your savings and your 401(k) contributions. What should you do next? Now you can start a brokerage account. This can seem intimidating for a lot of people who are not familiar with starting a brokerage account, but it’s actually very easy!
Most people have two main options for the type of account to setup. The first is a standard taxable account which are usually registered as an individual or joint account. The second is an IRA which can usually be setup as a Traditional or a Roth.
So, which one should you choose? Though this can vary somewhat based on personal situation, most people would be best helped by starting with a Roth IRA. The customer service group with the brokerage firm you choose can help with this decision as well, but here are a few reasons why the Roth is a good place to start.
First off, most people that are just starting off with investing can still contribute to a Roth IRA (this actually starts to go away for people making higher income). Second, the money grows tax free as long as you wait until retirement to access the growth. Lastly, just getting started with a Roth IRA account starts the clock on the IRS’s 5 year rule. Basically, once you have owned a Roth IRA for 5 years, you can access the contribution money without tax or penalty. It is not something I would recommend people plan on doing, but it can act as an emergency fund if needed.
Where should you invest?
Alright, I finally made it to this question: where should you invest your money? Unfortunately, there is no universal answer for everyone, but I can give some suggestions to get you pointed in the right direction.
By starting to work with one of the discount brokerage firms I mentioned above, you will actually have access to a lot of free guidance which is fairly decent. All of these firms have some sort of group who can provide a free consultation which will get you started off on the right foot based on your situation.
For most people, starting off with some sort of index fund makes the most sense. The reason that index funds work well for most people is that you gain broad and diversified exposure to the market, and you do so a fairly low cost. The reality is that successful investing starts with having a disciplined approach and keeping costs down. Most people who do poorly with their investments change their strategy because they believe their current strategy is not working well. Staying disciplined is extremely important!
All the firms above deal frequently with investment strategies around index funds and can help direct you to a suitable option. Vanguard and Schwab have their own line of index funds, and both have very low cost (which is very important).
Regardless of what firm you choose to work with, or what investment strategy you pick, long term investment success relies on 3 main factors. (1) Get started sooner than later. Compounding interest needs time to work for you, and the sooner you get started, the more time it has to grow. (2) Keep saving! Adding to your investments as you save more money creates its own compounding effect. When combined with #1, you have a double compounding effect! (3) Stay disciplined in your approach. As I mentioned above, sticking to a plan and a strategy is very important. It will take a lot of patience, but as time goes on, you’ll be very happy you did.
Why do you want to start investing? What challenges have you had getting started? How would you like to improve your financial future? For those that have started investing, what approaches have worked well for you? Please share your thoughts in the comment section below.