“You should invest in…a 401k, 403b, IRA, Roth IRA, SEP IRA, index funds, mutual funds, stocks, blah. blah. blah.”
At some point, you’ve probably gotten advice on the “best” way to invest your money.
Although you know you could earn more than the meager .25% interest on your savings account, just the term “investment” can be intimidating.
It can seem like there is some sophisticated secret formula only the wealthy people on Wall Street know. Investing jargon is confusing and you’re afraid that you don’t have enough information to make good investing decisions.
Besides that, if you do decide to invest, where is the best place to invest, how do you go about doing it, and, for goodness sake, what if you make a huge mistake and lose it all?
Investing can sound confusing and intimidating, but it doesn’t have to be that way. The most important thing you can do is get past the fear and just do it. Believe me, a few years down the road, you’ll thank yourself.
Why invest now?
When we were in our early 20s, my husband had just landed his first permanent, salaried position. Immediately, he wanted to start putting the minimum the company would match into a 401k.
At the time, I knew nothing of retirement accounts and, though I understood compound interest, had never really considered putting money toward retirement at such a young age.
Retirement seemed like ages away, so why cut the paycheck at this point? Why should we tighten the budget even more when we never seemed to have anything left at the end of each month anyway?
Well, my husband persisted and I caved. We started putting 6% of his income into the 401k at the age of 24, with a company match of 50%. I admit, even the free money wasn’t appealing to me at the time (duh!?).
Fast forward to today. Am I ever glad my brilliant husband (you’re welcome, dear) convinced me on this one. Although we didn’t contribute more than the minimum for the company match over several years, it helped us get a decent start. At the age of 41, we are now less than 10 years away from retirement.
The sooner you start investing, even if it’s just a small amount, the more you will have later.
Start small and watch it grow
The thought of cutting back your paycheck can seem impossible when it always disappears almost as soon as it arrives.
Even if you feel like there is no room in the budget to put any toward a retirement account, try a small amount for a month or two. It doesn’t matter how much you choose to invest, the most important step is to start. Make it automatic so you never see that money in the first place.
The beauty of compound interest is an alluring prospect. I like to think of it like planting a seed. Plant that little seed, water it regularly, make sure it has enough light and that seed will turn into a large, beautiful plant (bonus if it provides food!).
Let’s say you come up with $50/month and you invest that amount each month for five years beginning at the age of 25. Even if you stop investing at the age of 30, assuming a 7% return, the original $3000 you invested turns into $10,186 at the age of 45 and $39,417 at the age of 65! (Just think of what $100, $200 or even more each month could become!)
Play around with investment calculators to see how investing just a little money now can turn into so much more later (check out Dave Ramsey’s Investment Calculator to run your own numbers).
How to start investing
If you want to learn more, educate yourself on investment options, but if you’re just not that interested at this point, that’s okay.
You don’t have to know the ins and outs of 401ks, IRAs, and SEPs to get started.
If you are employed at a job that offers a retirement account, such as a 401k or 403b, start there. Give human resources a call or shoot them an email to ask how to sign up.
Those who are self-employed can contribute to a traditional or Roth IRA (when income requirements are met) and a SEP or one-participant 401k plan.
If I lost you there, no worries! Several online investment services offer user-friendly, automatic investment options, making it easy to open an account.
These online investment services feature robo-advisors – a great option for people who don’t have much interest in investing, have only a small amount to invest at first, and/or want to take a hands-off approach.
The great thing about these services is they offer user-friendly apps for enrolling and investing that guide you painlessly through the process. A few companies offering these services are Betterment, Wealthfront, and WiseBanyan.
If you are selecting your own investments through a 401k or IRA, simply start with low cost index funds. Index funds are widely diversified and simply track the market. They’re passively managed, which keeps costs low, allowing you to invest more of your hard earned money.
With investing, there are inevitably going to be ups and downs, just take this advice from Warren Buffett’s right hand man,
Don’t freak out if the market tanks, be patient and wait it out, no matter how hard it is. Over years and years, overall the market has shown positive returns.” -Jack Bogle, The Little Book of Common Sense Investing.
It’s more risky not to invest. Being afraid to start or take a risk is understandable. But you don’t have to be an expert or have a ton of money to get started. You will thank yourself for taking this important step toward your financial future.
What scares you most about investing? If you already invest, what advice would you give those who are afraid to take the leap?
For further reading on investing, I highly recommend JL Collins’ Stock Series and his new book The Simple Path to Wealth.