Investing can be intimidating. You hear your friends talk about it, you hear about it on the news, you see numbers on the homepage of your devices, but you haven’t really paid much attention to it. If you pay attention to nothing else from this website, the thing you need to understand is that you have to learn how to invest.
Investing will help you reach your goals, take care of your children, achieve financial independence, and ultimately enjoy life. You do not need to be on the front lines everyday tracking news, reading charts, and running around like a stressed out wall street investor. It will take just minutes to set up, and once you make the decision to do so, you will be on the road to financial freedom.
Living Below Your Means
Although a simple and cliche slogan, it is an essential place to start when getting into investing. In order to be able to invest, you actually need to have some money. The simple formula for how to save money is to reach a point where your expenses are less than your income. Even if you have some savings right now your monthly expenses like rent, food, and gas must be below your income. If this isn’t the case, your priority needs to be achieving this. It is impossible to benefit from the long term upside of investing if you are accelerating downwards. Once you achieve this your savings will begin to grow.
Hopefully most of you will already meet this criteria. Check this out on how you can meet this goal if you need help doing so.
Dealing With High Interest Debt
So you have started to accumulate some savings in your bank account. You have one more hurdle to overcome before you are able to feel the benefits of investing. High interest debt is debt that you have that has an interest rate of over 6-7%. Common examples of this include: credit card debt, student loan debt and personal loan debt. As of 2023, the average credit card debt interest rate is over 16% interest. This means that if you are in debt $10,000 and don’t make any payments, after a year that debt will grow to over $11,600.
If you remember the compound growth formula from high school mathematics, you may recognize: A = P(1 + r/n)nt (we will use n = 1 to simplify). Using this formula on our example we get A = $10,000(1 + 16%)1 = $10,000(1.16) = $11,600 (since t = 1 year). Notice how after just 1 year you already would owe an extra $1,600. And since this is exponential growth, if you were unable to make any payments for 5 years, it will get even worse. At the end of 5 years you will now owe about $21,000.
As you can see, this explodes pretty fast, and its important that we take care of paying off this debt before we even start investing. Investing returns will not be nearly as high as this high interest debt.
Finally. Investing!
If you like understanding stuff for yourself, and experimenting hands on, I highly recommend creating a brokerage account that you can experiment with. Back in the days before I started investing, I just deposited a small amount of money in Robinhood to play around with. This was back before I had a job and was just coming out of high school (I think I only put in $25). Robinhood is a great beginner brokerage that does not charge commission fees and has an easy to use interface.
(Affiliate link: Get up to $200 of free shares!)
If you don’t really care how investing works, or just want to put your money somewhere that you don’t have to think about, I recommend creating an account with Acorns. Acorns is a great tool to use where you can set up recurring contributions and it will automatically be invested on the schedule you choose. Just keep in mind that the cheapest Acorns tier costs $3 a month, but will give you access to retirement account tools and a personal checking account.
(Affiliate link: Get $5 after you make your first investment!)
When you are setting up your account, you will be asked if you want a Conservative-Moderate-Aggressive account. Check out my post here for more information regarding this.
Keep in mind that whenever you sign up with a financial institution, you will likely be required to input your social security number. This is normal and required by US law.
Compounding to the Moon
If you choose to go with a self managed brokerage like Robinhood, YOU will be the one responsible for making the trades. I wholeheartedly agree with great investors like Warren Buffet who say that the best thing to do for the vast majority of people is to buy a cheap index fund. These funds tend to average a 10% return annually, and over the long run will make you rich. I recommend great funds like VTI, VUG, and VOO.
If you invest $1,000 today, you won’t be rich overnight, but using stable compound growth over time, your future self will be thanking you for starting as early as possible. After 40 years (if we assume 10% annual growth), that $1,000 will be worth over $45,000! That is the power of compound growth (go ahead and try with the formula if you don’t believe me)!
The biggest mistake is starting late. The younger you are, the longer you have for the power of compounding to make you wealthy.