How Do I Start Investing?
Investing is a powerful tool. It’s how people build wealth and how the wealthy keep getting wealthier. Lack of understanding keeps most people from ever getting started. Then there are people who learn how to invest, and dive in, but got started before they were ready and end up worse off than when they started. A good financial coach will help you make sure you are ready to invest before you take that step.
What Is Investing?
Investing is savings, but superpowered. Instead of earning less than a percent of compounded interest at your bank or credit union, investing allows you to earn much higher percentages in dividends. The stock market has averaged 10-12% returns over the entire history of our country, so those are good numbers to keep in mind when deciding how much your money can grow if invested wisely. Some investments are safer, with far lower returns whereas some are far riskier but with the hope of far greater returns.
What Should I Invest In?
Many people like investing in individual stocks in the stock market. Many modern apps have made it easier than ever to commit your money to something you do not entirely understand, so that option is becoming more popular. However, investing in single stocks is pretty risky. Your wealth rises and falls with the company you back. A safer approach, that still yields the 10-12% returns mentioned earlier, is to invest in mutual funds. Mutual funds combine hundreds of those single stocks into portfolios. As the companies in the portfolio perform, their stocks go up, and so does the value of your mutual fund. As the companies in the portfolio suffer, their stocks go down, but the value of your mutual fund is somewhat protected by the other companies it contains, so the losses aren’t so dramatic.
What Do I Invest For?
If you’re saving up for Christmas, you probably want to put your money in a savings account. Investing is more for the long term. If you don’t plan on using the money you’re putting aside for five years or more, investing is probably the way to go. Some examples of those more long-term things you might want to invest for:
Your next car
A new house
Your retirement
Kids’ college
And while most people aren’t looking far enough ahead to invest for some of the next items, you’ll be very thankful if you put aside the cash for these far enough in advance.
Braces
Weddings
Replacement appliances
The Power of Investing
Some quick math with the help of a free online investment calculator:
$100 saved at 1% compounded interest in the bank will only be worth $110 after ten years.
$100 invested at 10% in a mutual fund will be worth $270 after ten years.
Now, if you really want to make some money, you need to continue adding to your investment each month. So instead of just investing $100 one time, let’s see what putting aside $100 every month can do:
$100/month saved at 1% compounded interest in the bank will only be worth $151,490 after ten years.
$100/month invested at 10% in a mutual fund will be worth $246,084 after ten years!
Imagine you started putting aside that $100 when you got your first summer job during high school. By the time you’re done with college, you’ll have enough for a down payment on a house!
Investing Mistakes
Investing in something you don’t understand is one of the biggest mistakes you can make. If you are interested in investing in mutual funds, I recommend contacting (for free) one of Dave Ramsey’s SmartVestor Pros. They have been vetted to ensure they put their clients’ best interests first. They have the heart of a teacher, so you don’t have to feel stupid asking them questions. They’ll make sure you understand what you are investing in and all the details of the process for working with them. Best of all, they don’t charge you any extra fees for using them as your broker. Rather, they make money off of the investments you choose, so they win right along with you. That’s the kind of motivation I want my broker to have!
Maybe an even bigger mistake than not understanding the investments you put your money in is starting to invest before you’re ready. Just because a new app makes it easy to invest, and the marketing tells you you’re ready, doesn’t mean you should fall for that trap. So who’s ready to invest? People with money to invest. That means your money can’t be tied up in debt payments. If you’re still paying off credit cards and loans (other than a mortgage), you aren’t in a position to invest yet. When people start investing with too much of their income owed to other people, they find themselves in emergencies down the road when they need cash. They end up stopping their investments, or – even worse – pulling money out of their investments to cover their debts. Don’t make the mistake of investing while you’re still in debt. Pay off all your debt first.
There’s one more thing you need to accomplish before you are ready to invest. You need to have a good emergency fund. What happens if you have an emergency and there’s no cash on hand to cover it? Well, you can borrow the money. But, that means you’re back in debt and working against your investments. The other option is to take money out of your investments to cover the emergency. That would hurt your plan and hinder your goals. People who try this end up taking one step forward and five steps back. That’s not how you make progress! Once you have 3-6 months of required expenses in a savings account, then you have the buffer you need to put money into investments.
Where do I start?
Once you’re out of debt and have an emergency fund, the first thing to invest in is your retirement. It’s the most guaranteed life event you’ll have to face, and it requires the most money, so that’s why it comes first. Even if you think your children’s college is a higher priority, the truth is, college isn’t a guarantee. Someday, you will stop working though. Some people say they want to work until they die. That’s up to you…right? Not necessarily. Sadly, a lot of people find themselves out of work due to injuries or health problems. Even though they want to keep working, they might not be able to. A retirement fund makes sure you don’t have to stress about such unfortunate possibilities.
When you’re ready to start investing, figure out what 15% of your gross income is (that’s before taxes). That’s how much you should invest every month for retirement. A Roth IRA is the best option in almost every case because it allows you to invest your money where you want (like mutual funds), and not have to pay any taxes on it when you withdraw it some day. You don’t have to pay taxes on the dividends you earn either! A SmartVestor Pro can help you set up an IRA and pick the funds you want to invest in.
Once you have that retirement fund growing each month with 15% of your income, you can turn your eyes toward other investment opportunities. This might be your kids’ college funds, your next car, a down payment on a house, or any other long term goals you have.
If you would like to get a personalized look at your situation and help getting ready to invest, schedule an appointment with a financial coach today.
