Once you’ve learned how to effectively manage a budget, it’s time to take your money to the next level. So many people (women especially) get intimidated to start investing, but it’s way easier and far less unnerving than it appears.
Before we get into the “how,” let’s talk a little about the “why.”
Why is it important to invest?
Inflation can be a tricky concept, but all you need to know is that year-after-year one dollar becomes a little less valuable. Stack this up over the course of your lifetime, and the value of a dollar on the day you were born is going to be very different from the value of a dollar when you need to stretch it to pay for your dentures!
This is where investing comes in pretty handy. The earlier you invest your money, the more value it can earn in the stock markets that will help it grow. Ideally, inflation will stay under 2% each year and, on average, you’ll earn 8% per year investing in the stock markets. With just some simple math, this puts your potential average annual return at just over 6% throughout the course of your lifetime. Woo-hoo!
On the flip side, if you chose to keep your money in cash and never invest, your money would LOSE around 2% each year as inflation ate away at the value of your dollars. Get the picture? Put plainly; invest and you’ll get ahead. Sit on the sidelines, and not only will you lose but you’ll have less than what you started with.
So, how do I get started investing?
Great question! We’re so glad you asked. First, and we can’t stress this enough, you need to master budgeting before you take the dive into investing. If you aren’t living within your means and controlling your spending, then your money isn’t likely to stay invested for long (you’ll be too tempted to pull it out when you come up short for that vacation you need or when your car breaks down and you don’t have an emergency fund to pay for it). So, first things first, get your money in order and make sure you understand your financial situation before opening an investment account.
If you aren’t already contributing to a 401(k) through your employer, that is step number one. This is the easiest way to invest, and comes with a myriad of amazing tax benefits that are beyond compare. Today, 401(k)s are even set up to be almost full-proof in terms of selecting investments. Your 401(k) is likely to offer what’s called a target retirement date fund. This is a fund that will invest for you based on the year you think you might retire. All you need to do is max out your contributions each month, collect your employer match, and the 401(k) does the rest. Easy!
If you’re already maxing out your 401(k), the next step would be to open a Roth IRA or Traditional IRA. This can be a little trickier because you’re going to need to select your own investments. Investopedia.com is a great site that can answer almost any finance question you have, and we would definitely recommend expanding your financial knowledge before you open an account. With that said, Investment companies like Ellevest make it incredibly easy to get started. When opening up an account with them, their app will walk you through a set of questions that determine why you are investing, what you are saving for, and how aggressive you want to be. They will then recommend a set of investments that, if you answered the questions honestly, are usually spot on.
The most important thing to remember with investing is to start slow, start small, and don’t get discouraged. The stock market can be a bit intimidating when you’re just getting started, but over time you will get more comfortable. And, just for good measure, here are a few other quick ideas to help you get started off on the right foot:
- The most important thing to do when getting started with investing is to expand your financial knowledge. We recommend being comfortable with the following terms and financial products:
- Traditional IRAs and Roth IRAs (and their tax treatment and penalties for early withdrawal)
- Retail accounts (basically like checking accounts for investments, they have no tax advantages but can be used for things like saving for a house, etc.)
- You should know what an ETF is and how Mutual Funds work
- Don’t know what the Dow, S&P500 or Nasdaq are? Learn about them! They are easier to understand than you think.
- Once you’ve studied up, explore around for different investment companies that you can open up an account through. Each is different. Some offer more automated, software- driven investment advice while others will provide you with a financial advisor that can help you on a more personal level.
- Before you open an account, understand your fees! The federal government does its best to make sure investment companies keep their fees transparent, but oftentimes individuals don’t truly understand how these fees are calculated, when they are paid, and how they will affect their accounts. So make sure you understand exactly what you’re paying for (and what you get in return) before you buy.
And that’s it! Getting started investing is easy if you’re willing to do a little studying. And once you’ve picked up the basics, it really is smooth sailing from there. Good luck, and feel free to send us a message on Instagram, Facebook, or LinkedIn if these tips helped you or if you have any other questions!