Why You Should Start Investing… NOW
Numbers don’t lie, and the truth of the matter is this: The earlier you start investing, the better off you’re likely to be.The longer your money is invested, the more time it has to grow. Earlier investors have a better chance of seeing a larger overall return on their investments by the time they withdraw money from the market.
More money is a strong case for getting started investing, even without knowing much about the stock market. If you want to get into investing but don’t feel like an expert, read on to see how you can start your investing journey.
We’ve made this guide with 10 steps to jump start your stock market investing journey.
Step 1. Check Your Financial Luggage and Determine Your Goals
Before you get into investing of any kind, you first have to make sure that your overall financial situation is in a position to accommodate the new activity. This will include everything from income, to debt, to your household budget.
Specific considerations include:
- Employment – make sure that both your job and your income are secure enough to allow you to begin investing.
- Debt – if you have a significant amount of outstanding credit, you may want to pay some debt down before you begin investing; you should never invest money you can’t afford to lose, and that’s the position you’ll be in if you have too much debt.
- Family situation – if you just welcomed a baby into the world, you may need all of your available income to help with the new arrival; family situations should be stable before you begin investing.
- Your household budget – you should have some room in your budget to direct cash into your investment ventures.
It’s also helpful to consider your goals and ask yourself why you want to start investing: ‘
- Are these investment accounts for your retirement?
- Is this money for a shorter-term goal, more like 5–6 years away?
- Will anyone else have access to this money?
Using these three questions as the starting point of your investing will help shape the decisions you need to make next. And they require no knowledge of the stock market! These are highly personal questions that each investor needs to answer for themselves. There’s no right answer, just the right answer for your life and goals.
Investing makes the most sense for the longer term. You generally don’t want to invest money that you need in fewer than five years, as there is a risk of losing that money in a downturn.
Step 2. Build a Cash Reserve
Before you put any of your money at risk, you should first have some put away that will not be subject to any risk whatsoever. A cash reserve equal to at least three months living expenses should be the minimum, and it should sit in nothing more risky than certificates of deposit or money market funds.
The purpose of the cash reserve is twofold: to act as an emergency fund in the event of a temporary income disruption or other financial emergency, and to keep you from panicking should your risk type investments take a sudden dive.
Step 3. Open a Retirement Account
Once you have a well stocked emergency fund set up, the best place to begin investing is in a retirement account. This can be a 401(k) plan (or its equivalent) through your employer, or an Individual Retirement Account (IRA) if there is no employer plan.
Retirement accounts are an excellent start because they represent long-term investing. In addition, they are tax sheltered — and can produce immediate tax savings too — and are typically funded through payroll deductions. You can think of it as patient capital, where you have literally decades to accumulate and grow your money.
One of the best aspects of a retirement account is that you can build up money in the plan without actually investing any money until you’re ready to do so. You can keep it all in a money market account within the plan until you feel comfortable adding stocks and funds to the plan. Blooom is one of the easiest tools to maximize your retirement returns.
There are a lot of retirement investment accounts, and you may or may not have access to all of them. Here’s a quick rundown of the most common retirement accounts you might come across:
- Roth IRA
- Traditional IRA
- SEP IRA
There are a lot of differences between these accounts. And you may not be able to open and fund all of them.
Employer-sponsored Retirement Accounts
Generally, your first step would be to find out if your job offers a workplace-sponsored retirement account like a 401(k) or a 403(b). Individual companies may have limits on what you can invest in or how long you have to work at the company before you can begin contributing to the plan.
These accounts may also come with an employer match, which is when an employer contributes the same amount of money or a percentage of what you contribute to the account. AKA, it’s free money in your investments!
Reach out to your HR department and see what retirement plans are offered. Then get the ball rolling on signing up for it. And for our brand new investors, feel free to ask HR a lot of questions about how the plan works. You want to understand as much as you can about your plan when you begin to invest money in it.
Individual Retirement Accounts (IRAs)
After you sign up for a workplace retirement plan, you have the option of opening an IRA for yourself. IRA stands for “individual retirement account.” Anyone over the age of 18 with income can open one for themselves. IRAs are not generally tied to an employer, making them appealing to freelancers and part-time employees.
There are several options for IRAs and they each have different details to them. There are income limits for a Roth IRA, for example. Definitely do some research on which account is best for you before you open any of them. You can start with our article that compares various retirement accounts.
Step 4. Open an Account with a Low-Cost Online Broker
Once you have a retirement account up and running, you can open an investment brokerage account for your non-retirement investing needs.
Betterment is an excellent choice for new investors because:
- There’s no initial minimum deposit requirement
- You can build the fund with periodic contributions as low as $100 per month
- Their fees are among the lowest in the industry.
One disadvantage of a broker like Betterment is that investing in the account is limited (get our full Betterment review here). You buy into either a basket of stock-related ETFs, or a basket of bond ETFs. This is excellent when first starting out, but when you are ready to spread your capital around the investment universe, and particularly into individual stocks, you’ll need to look for a full-service broker to meet your needs.
One such full-service broker when you’re ready to trade up is Fidelity. One of the largest financial firms in the world, Fidelity has it all — every conceivable investment choice and a long history of top caliber customer service to support it. For example, Fidelity offers one of the lowest trade commissions in the industry — $7.95 per equity transaction — as well as access to more than 4,700 funds.
Other brokers you may want to consider are E*TRADE, Merrill Edge and TD Ameritrade. Here’s a quick comparison among the three:
|Stock Trades||$6.95/trade ($4.95/trade for 30+ trades/quarter)||$6.95/trade||$6.95/trade|
|Promotions||Get 60 Days of Commission-Free Trades + Up to $600||Get up to $600 when you invest in a new Merrill Edge™ account||Trade Free for 60 Days + Get Up to $600 Cash|
Step 5. Start with Mutual Funds or Exchange Traded Funds (ETFs)
When you first begin investing you’ll be far better off with mutual funds and ETFs than plunging right into stocks. Funds are professionally managed, and this will remove the burden of stock selection from your plate. All you need to do is determine how much money you want to put into a given fund, or group of funds, and then you’re free to get on with the rest of your life.
One of the advantages of mutual funds is that you also don’t have to worry about diversification. Since each fund holds numerous stocks, diversification will already be built into the fund.
Step 6. Stay with Index Funds
To make mutual fund investing even more hassle-free, stay with index funds. For example, index funds that track the Standard & Poor’s 500 index are invested in the broad market, so your investment performance will track that index precisely. While you’ll never outperform the market in an index fund, you’ll never under-perform it either. As a new investor, this is as it should be.
Step 7. Use Dollar Cost Averaging
Dollar cost averaging is the process of buying into your investment positions gradually, rather than all at once. For example, rather than investing $5,000 in a single index fund, you can make periodic contributions of say, $100 per month into the fund. By doing this, you remove the possibility of buying at the top of the market. Rather, you’re buying into the fund at all different times and on a continuous basis. This also removes the “when” question, as in when to invest in a given security or fund.
Even better for you, dollar cost averaging works beautifully with payroll contributions and is a natural fit with mutual funds and ETFs.
Step 8. Get Some Investment Education
We could have made this step number three, with the intention that you have some understanding of investing before doing anything at all. Fortunately, mutual funds and ETFs — with the help of index funds and dollar cost averaging — remove that necessity. You can begin investing immediately even if you’re a novice.
But if you want to move beyond funds, payroll contributions and dollar cost averaging — and into holding individual stocks — you’ll need to learn all that you can about investing before you do.
While you are accumulating money for investments and piling them into mutual funds and ETFs, you should use this time to educate yourself about the game of investing. Read books, listen to CDs, read The Wall Street Journal, take a course or two at a brokerage firm or even a community college, join investment forums, and regularly visit investment websites, like InvestorJunkie.com.