Personal Finance
When you think of investing, it may seem like something only the very wealthy can do. Stocks, bonds, crypto, ETFs – they all seem like they are from another world. So, you say to yourself, “Well, that’s not me! I don’t need to know how to start investing.” We understand. It’s hard enough to deal with life’s expenses, much less find enough money to put it into some mutual fund or brokerage account.
But you don’t have to be wealthy (or from another world) to start investing. Investing for the future is investing in yourself. And it’s much, much easier than you might think.
When should you start investing, and why?
When should you start? That’s easy: the sooner the better. When you put money into an interest-bearing account, every cent that it earns for you will also earn interest. (This is otherwise referred to as “compound interest.”) The earlier you start investing, the more you have a chance to make as your earnings snowball. The sooner you start, the more time the fund or stock has to grow in value.
Before you jump in as an investor, though, there are a few things to consider.
Budget for investments
You should create a budget to make sure you don’t invest money that would be better allocated to monthly expenses or to debt repayment. Without a monthly budget, you’re guessing at how much you should invest — it might be too much, or it might be too little. Without a budget, you could end up hurting your financial goals. By setting up a proper budget, you’ll know where you stand and exactly how much you can apply to your investment goals.
And while we’re on the subject of budgets, set up an emergency fund before you invest your money somewhere else. A standard savings account that you can access 24/7 is a good option. It will allow you to have the funds available anytime you need them. Also, if you have an emergency fund available, you won’t be tempted to withdraw funds from long-term investments in the event you need money quickly.
Pay off high-interest debt first. It makes no sense to put money into an investment account that earns 8% if you’re paying 18% on debt. This is where a budget also comes in handy. After monthly expenses are paid, apply any extra funds to debt payoff first. After that’s all paid off, shift money into an investment portfolio.
Decide how much risk you can handle
Assess your risk tolerance because investing involves risk. The old saying is “Don’t gamble with money you can’t afford to lose.” Ask yourself, “How much risk do I feel comfortable handling?” If you’re depending on the investment to maintain your lifestyle, consider the market volatility of any investment vehicles. Some people are comfortable owning individual stocks knowing they could lose everything or see tremendous gains. Others appreciate the relative security of bonds or bond funds, even with their lower, predictable returns.
Set up clear goals
Investing goals might cover a broad range, and you’ll need to set yours. Do you want a retirement account, with 20 or 30 years to go before you tap into it? Or is your investment strategy about buying a vacation property or boat within 5 years? Each goal changes the investment returns you’ll need and the risk you’ll accept to achieve that goal. Greater returns usually involve greater risk.
The three main asset classes are stocks (equities), bonds (fixed-income returns), and cash-equivalent instruments (certificates of deposit, Treasury bills, money market funds). Your personal asset collection will depend on your investment goals, but you might invest in any of these categories. Each have different benefits and risks, and there are benefits in having some of each.
How much money do you need to start investing?
Any amount is better than none at all. It goes back to the concept of budgeting your money: invest anything over what’s needed for your expenses and emergency fund. Set aside a fixed amount to invest monthly, no matter how much it might be. Take advantage of the idea of “dollar cost averaging,” one of the most common investment strategies. It involves putting the same amount of money each month in a mutual fund or a company’s stock. If the share price is up that month, you’ll buy less. But if it is down, you’ll buy more. The idea is that in the long run, as long as the shares trend upward, this will outperform trying to chase the market’s ups and downs.
If your employer matches contributions to a 401(k) plan, maximize that benefit. If they match the first 5% of your contributed salary, put in that entire 5% — and enjoy the bonus 5% they give you. Many plans let you choose your investment options as well, such as a high-return higher-risk fund or a fund geared toward preserving capital as one nears retirement. Sometimes you can split the investment into multiple funds, and some mutual funds are set up to back off aggressive investing as you get older.
Remember, though, that a 401(k) is a retirement investment. Early withdrawals from these retirement accounts might come with penalties and taxes. And if you have short-term investment goals, you’ll need to invest money elsewhere. (But still take advantage of your employer match bonus on a 401(k).)
How to start investing with little money
First off, you could open a savings account that requires little or no money to start. Build up your on-hand cash, then move it into investments that might provide a better return. Savings accounts are simple and safe but the returns are generally low. Here are a few other methods to consider:
- Most financial institutions, online or local, let you invest in certificates of deposit (CDs). These have a greater minimum investment (perhaps $500-$1,000 or more) and tend to require a longer term to remain untouched before maturity (usually 1 to 5 years). But the benefit is a higher interest rate than savings accounts offer.
- For investment accounts involving things like stocks, bonds and mutual funds, the starting initial deposit could be minimal or reach $100,000 and beyond. Some online brokers let you open a taxable brokerage account for a minimal investment, like $100 or less. Every form of investment comes with its own costs and fees, as well as possible tax consequences. It’s important to be clear on those before you invest, because those costs could gobble up a big part of your returns.
- Some investment firms now offer “robo advisors.” This recent development has shifted the role of the investment advisor to AI digital entities. Financial technology has advanced to where you can interact with a digital advisor anytime, get investment assistance on particular stocks or funds, and direct your buy/sell orders. As always, there’s no guarantee you’ll make more money — and no guarantee you won’t lose money — but that applies to advice from a live financial advisor as well.
- For any investment, there’s a risk-reward ratio. It all depends on your goals and what you’re comfortable with. Many folks like the idea of buying and selling stocks daily (they are referred to as “day traders”). Day trading is high risk. Playing the market like that is better left to experts and those with money to burn.
- The average person, especially those learning how to start investing, might prefer to minimize costs and diversify investments through vehicles like indexed mutual funds or exchange-traded funds (EFT).
The financial world can get complicated and it’s tough to navigate on your own. With access to your credit score, and tools to help you take charge, Best Egg Financial Health makes learning about your financial health and reaching your goals easier than ever.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.