Inside: “Investing” can be a scary word, but you know you need to do it. Here’s what I did to start investing. It’s not as scary as it seems – I’m still alive!
“Investing” is one of those last things I had to check off my grown-up list before I turned 30. Because everyone knows if you don’t finish your grown-up list by the time you turn 30, you’ll be forever doomed to wearing diapers, right? (Wait – was that just me?)
I didn’t want to start investing because it seemed scary to me. Like, spiders scary. To hell with spiders.
Today, though, I am a bona-fide investor. And do you know what? It’s a hell of a lot easier than college was, that’s for sure!
If you’re hesitant about starting to invest, have no fear. I’ll tell you about why it’s important and what the best ways to dip your toes into the water are. It’s not as scary as it sounds, I promise!
Contents
Why start investing?
Why invest?
I think a better question would be, why not invest?
It’s the single best way to grow your money. Maybe you’ve heard that you need somewhere around a million dollars to retire. A MILLION dollars!
Here’s a secret, though: you don’t actually have to save up that amount of money on your own. You can use the stock market to multiply your savings for you.
Let’s look at a short-term example. Let’s say you saved up $50 per month for five years in two different accounts:
- Savings account, earning 0.06% interest
- Stock market index fund, earning 7% interest
Guess what your bank account will earn you at the end of those five years? A jack-diddly-squat $4.62. Woohoo! You can buy two tacos.
But if you’d invested that money in the stock market instead and earned the average rate of return? You’d have earned a whopping $579.87. You can buy ALL the tacos.
Now, extrapolate this out over your entire working lifetime. You can earn hundreds of thousands of dollars without even lifting a finger to work for it. This is the real power of investing. This is the difference between poor people and people who have enough money to live the life they want.
Educate Yourself
That’s all well and good, but if you’re like me a few years ago, you still think that investing isn’t something that you can do. It’s for dusty old white men riding around in crisp black limos.
Here’s the truth, though: anyone can learn. And, like I said earlier, it ain’t exactly rocket science—not if you do it correctly. But, it will require a bit of studyin’ up on your part.
Here are some great blog posts and podcast episodes to check out:
- Listen Money Matters: How To Start Investing
- Listen Money Matters: What The F**k Is Vanguard?
- JL Collin’s Stock Series
Here are some good books to check out (affiliate links):
- The Simple Path To Wealth by JL Collins
- Investing In Your 20s And 30s For Dummies by Eric Tyson
- The Little Book Of Common Sense Investing by John Bogle
- The Boglehead’s Guide To Investing by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf
Keep It Simple, Stupid
There are a ton of ways you can invest your money. Stocks, bonds, real estate, ETFs, mutual funds, professional poker players, tulip bulbs, etc…
How the hell is one to ever make sense of such a mess, especially when people devote their entire lives to the game of stock picking alone?
Here’s another secret: you don’t need to be an expert to pick the right investment. All you need to do is to put your money in some basic index funds.
What’s an index fund? It’s a collection of stocks pegged to some index. For example, the S&P 500 index fund is a collection of the 500 largest companies in the U.S. The Total Stock Market index fund is a collection of all of the stocks. Each investment company—Vanguard, Charles Schwab, etc…—has their own index funds based on these indices.
In short: index funds are collections of stocks, like a chocolate sampler. Except way less tasty. But if you mix in enough time and money with an index fund, you can buy all the chocolate samplers.
Only Invest What You Can Afford To Lose
Another reason I was afraid to start investing was this: it’s possible to lose money. In fact, it’s possible to lose a lot of money—even a significant portion of your investment.
There’s a simple way you can get around this, though. Don’t invest what you can’t afford to lose.
I always keep this month’s and next month’s expenses in my checking account. I also keep my short-term savings (money I’ll need in five years or less) in my bank’s savings accounts. Finally, I keep my three-month emergency fund in my bank’s savings as well.
This effectively keeps me safe from any weird market turns. Everything else either goes towards debt or gets invested.
Of course, this means that you need to have some extra buffer money. If you don’t have that built up yet, I recommend setting up a budget, reducing your expenses, and earning more money until you do have enough. That way you can invest money without peeing your pants because you’re too scared to lose that money.
Related post: Make More Money: A Fear-Busting Game Plan To Start Side Hustling
Baby Steps: Start Small
Not all investing is created equal. If you’re afraid of jumping in the deep end of the pool, good news! You can start out in the shallow section.
That’s what I did. Most DIY investors buy and sell shares of index funds within brokerage accounts. Honestly, I am still learning WTF that all means.
That doesn’t matter just starting out, though. What’s important is that you just get started, so your money has the longest time possible to grow and you can become accustomed to the movements of the market.
Acorns is one really great way to dip your toe in the investing world. It’s a program that you link to your credit/debit card. Each time you make a purchase, it’ll round it up to the nearest dollar and deposit that extra money into an investment account just for you. Easy peasy!
My favorite tools to start investing are robo-advisors. They’ll ask you a few questions about yourself and your goals and automatically divvy up your money among a series of index funds. All you have to do is pony up the cash.
Betterment (affiliate link) is my favorite robo-advisor, and it’s the one I currently still have my money with. Full disclosure: I am learning how to do fully-DIY-investing and will be moving my money out shortly to an even lower-cost option. But, for getting started, Betterment was just the thing I needed.
Just Get Started!
I understand that investing can be scary. It doesn’t have to be, though. Investing can actually be your ticket to freedom. By learning more about it, investing simply, and investing only what you can afford to lose, you can take the first baby steps towards your financial freedom too.
When I graduated from college and started my first job, I started looking up “investing” because I heard I should. It took me a good month of research to realize that my 401K contributions were actually investments… I had no idea! Great resources for more investing info… I love JL Collins’ Stock Series!
Haha, I was the same way too! I was like, “Wait…..what?? I thought that was a savings account.”
Take her advice all of you lucky bastards over the pond. I have been started investigating investing two years ago. As it turned out as a foreigner start investing directly in the US is not really an option especially in baby steps. After a year of investigation and some money spent on books and video courses I postponed the whole thing as it should go like (hint: I liked to jump into dividend growth investing, but same stands for buying ETFs):
1. Open an account at a trusted US brokerage (my choice would be IB)
2. Deposit the minimum: $10k (I had fears at that point)
3. Pay the monthly service fees (12x$20 minimum)
4. Receive dividends, pay taxes (30% at this step)
4. Transfer the profit home and pay local taxes on it (another 15%, OhYeahh)
So for an example, let’s assume you invest the $10k and expect a solid 4% return, thus you will have $400 on your account on the end of the year. Uncle Sam withholds 30% for local taxes, which leaves you with $280. Deduct the $240 for the service fees and you will get to $40. If the fee of investing the initial $10k would not eat that amount up then the international transfer would definitely will. But lets assume it will take only half of it, so I will receive $20 in my precious homeland which I have to file for taxes and pay 3 bucks for our Uncle Sam.
Sounds tempting right? 😀
I am sure there is a solution even for me, but further investigation is in progress.
Wow, that really eats away at your returns! Are there no good investing solutions where you’re at? What about outside-the-box investments, like real estate, or some type of business (that’s a little too advanced for me right now, but if you studied up on it you’d understand it better)?
Not really. There are a couple of insurance companies offering 5 years long investment options with slightly better projected returns than savings accounts. The stock market here lacks liquidity and also I cannot really trust neither the government nor local companies. Investing in real estate locally is not a good idea, we do not have a blooming home’s market and while prices are far lower than in the US rents are too. Right now I “invest” as I could, paying back mortgage and make upgrades on the house, thus increasing its value. Just saying that the baby steps method is not really an option here. Maybe when I will have a little bit bigger amount for investing I will look for ways reaching the western markets through European brokerages, however, those are still abroad maybe we have lighter rules against them.
I’m not sure where you’re from but I imagine a lot of your assumptions aren’t accurate. For example, I don’t live in the US and:
1. I don’t need to open an account with a trusted US brokerage to invest in US equities, so no international transfers of money for me
2. I don’t need a $10k minimum (though you might need ~$1k or so)
3. No monthly fees for me whatsoever. The only fee I pay is when I sell an ETF (which is virtually never)
4. Yes, you will have to pay taxes on dividends if you invest in a taxable account. All my investments are in tax free/deferred accounts. That being said, most of your profits could come from capital gains, which won’t be taxed as much (at all?) in the US
Have you definitely explored all your options? Most countries offer local brokerages for investing in foreign equities with minimal fees involved.
Dear Vancouver Brit, sorry for late reaction and thanks for your points, but sadly my assumptions are more or less right. I checked the 34 brokerages my country lists. Only one found which has an online user interface (IBs) and I had a chat with them. They open a sub-account (managed account? I don’t know the exact terminology) at IB as the most trustworthy US brokerage. The only benefit that the minimum deposit is 2k, but all other rules still apply for me. We do not have tax-deferred accounts here or maybe I am the only one who was not able to find them 🙂
Hi excelent Blog, thanks for share your expirience.
Peter I’m from Panama Central America and Im investing in USA stock with optionxpress.
In this moment option xpress has not minimun deposit and not monthly or maintenance fees, I just pay 30% for dividend and if I sell all my holding Optionxpress would charge $30 for the transfer.
Find out now by chat and talk with them.
I think investing is a great idea – making money without having to do anything! You’re right about having to be preparing to lose a lot of money, but if you have time, you’ll gain most back if not more. People who lost money in the 08 crash have now more than doubled it again.
Very true! One of the hardest things for new investors to see their accounts go down. They panic, and pull the money out. Investing only money that I can afford to lose helps with that – I don’t get worried about it if I lose some. Yeah, it’s not fun, but I know I won’t be hurt if I do lose the money!
I’m a big believer in index funds, especially S&P 500 funds, which have a historical proven return of something like 9% per year. I just found an S&P 500 mutual fund with my online broker that has no load and no transaction fees, and just buy that, with dividends automatically reinvested.
If history is any guide, it show grow nicely!
True that! I love index funds. When I open my own (non-robo-advisor) account, that’s what I’m going to invest entirely in. Ain’t no one got the time (or expertise) for stock-picking.