Many people know they should be investing but they feel overwhelmed and don’t know where to start. In this investing 101 guide, I’ll provide tips to help you get started with investing and answer some common questions about investing.
Investing 101: Step 1
The first thing to consider before you start to invest is “what is your financial goal”?
If you want to invest so you can retire and you have a fairly long time frame for investing, traditional investing in stocks and bonds would probably be a good choice.
However, if you want to save for buying a home in the next year, investing in the stock market may not be ideal because in that time frame it’s possible that your money could go down leaving you without enough for your financial goal. A good rule of thumb is that if you want to invest in the market you should not plan on using your money within five years.
Another basic rule to remember is that investments are not guarantees that your money will grow. There is risk involved, as people who had money invested during the recession well know.
Short Term Investments
For short term investments, high yield savings accounts and money market accounts are usually best. The interest you will receive is less compared to the stock market on average, but you will also limit your risk exposure and have quick and easy access to your money. I personally use Bankrate.com to research the best interest rates available for online savings accounts as well as money market accounts.
Long Term Investments
If you have a longer time period, and you are willing to take on more risk for a higher return, investing in the stock market may be right for you. Continue reading for more information on investing in the stock market.
Investing 101: How Much Should You Invest?
This depends on your goal. But let me give you some examples.
Early Retirement
If you’re like me and you want to retire extremely early, you should invest 50% or more of your income. If this is the first time you’re hearing this you probably think I sound crazy. I know I thought that was crazy the first time I heard it. However, it’s true, and it’s not that hard to accomplish if you get a handle of your finances with a budget. Click here to learn more about how I’ve saved over $500,000 with these simple budgeting steps.
Also, I love this calculator that can help answer the question for you based on how long until you want to retire and what your current financial situation is.
Optimizing Your Employer’s Match
Other things to consider are whether or not your employer does a retirement savings match. If they do, I would recommend you invest the maximum amount you need to maximize their match and get all of it.
For example, if your employer will match your retirement up to 5%, you should absolutely invest 5% of your income because they will double it and effectively give you an additional 5% for free! If for example, your employer will match up to 5%, but you only put in 3% then they would only match what you put in (3%) and you would be leaving 2% of free money on the table.
Max Out a Roth IRA
Another good place to start is by trying to max out a Roth IRA each year. According to the IRS, the current maximum for 2023 is $6,500 or $7,500 if you are over 50-years-old.
Keep in mind that a Roth IRA is an account where you put money in after-tax, but it grows tax-free. When you take the money out (as long as you don’t take it out before the age limitation), the gains are tax-free as well. Many people worry about having their money “locked away” until their 59.5 years old. However, the great news is that you would only get a penalty if you take the gains out. You can take the base money that you put in out at any time without a penalty. Although, I recommend you leave it in the account so the magic of compounding interest can really work for you.
Literally Anything
If $6,500 is too much money, start wherever you can with what feels possible to you. Starting to put money in the market will help you build trust in the market. You will also see firsthand what it’s like to watch your money grow, even if that’s $100 per year or per month.
One Word of Caution
There are fees associated with purchasing stocks and index funds, and sometimes there are minimum amounts you need to start with to invest. If the fee to purchase a stock is $1, but you’re only investing $2, the fee is taking 50% of your investment which is too much! If you don’t have a lot to start with, for now, save your money in a high-yield online savings account or a money market account. When you have a few hundred or a few thousand dollars that you can put in the market, that’s when you can start.
Investing 101: How Do You Pick Stocks?
Don’t!
A lot of people think they need to hand-select individual stocks. That’s what scares them about investing because they don’t know how. My recommendation is to not pick individual stocks but rather focus on index funds made up of many stocks. This will help reduce your risk because “all your eggs” aren’t “in one basket.”
Investing 101: What Should You Invest in?
If you’re not picking individual stocks, what then should you be investing in? I am not a financial advisor, and I don’t want to give investment advice on a blog. However, I will lean on the advice of someone much richer and smarter than me: Warren Buffet. He recommends people invest in low-fee index funds like the S&P 500. Check out this article to learn more.
Investing 101: How Do You Start Investing?
This is the easy part. Once you’ve decided how much to invest (what works for you, $1 to $6,500 to 50%+ of your income) and what to invest in (index fund like the S&P 500), all you need to do is find a brokerage company that can do the trades for you. Vanguard is a solid choice because they have extremely low fees and competitive long-term returns. Check out this post from NerdWallet to read why they’re so amazing.
Investing 101: Do You Need a Financial Advisor?
I used to work for a financial advisor, so this is a hard question for me. What I saw was that many financial advisors charge large fees and don’t add much value. Sometimes they can do more harm by trying to beat the market and failing miserably (check out this bet Warren Buffet made with a stock trader) or by putting you in investments that line their pockets with large commissions.
However, they can provide peace of mind because you don’t have to think about your investments, and they can possibly keep you from making a rash decision like pulling all your money out of the market when it hits a low point.
I would recommend you educate yourself on simple long-term investment strategies and do it yourself. If you don’t want to do that, hire a financial advisor, but be very careful who you choose and keep an eye on the fees they charge you.
What About (insert hottest investing app here)?
I have mixed feelings about these. On one hand, anything that gets people to start saving and investing money is better than them not investing.
On the other hand, I’m an optimizer, and those apps are generally full of high fees meaning your money will not grow as big or as fast as it could.
So, “you do you,” but keep those tradeoffs in mind.
What do you think? Was this helpful? Let me know if you have additional questions in the comments below.
The Legal Stuff
Please note the information posted on moneyhackingmama.com is the opinion of the author and is for entertainment purposes only. It should not be considered professional financial advice. Please do your own research and/or consult a financial advisor or CPA before considering using the information obtained from this website.
