Big Changes to Public Service Loan Forgiveness Program
The information in this blog is for educational purposes only. Snowball Wealth does not offer any investment advisory services and investment advice, and does not recommend investors to buy or sell any stocks or securities.
You are on top of your student debt and credit card debt and sticking to your monthly budget, and you have an emergency fund set up, so you are ready to take the next step and start investing. But how do you actually start investing in the stock market, and why does it all seem so complicated? We have put together a quick and helpful guide to help answer questions you have on investing.
Here are the top areas you should know about when starting to invest:
Before you start investing, you should make sure that you have your financial foundations in place. This includes an emergency fund of up to 3 to 6 months living expenses set up and that you don’t have any high interest debt. It’s important to set up your financial foundations, so that you won’t need to worry about these obligations while you are investing.
The best way to ensure you have the financial foundations you need is to get set up with a Snowball financial plan.
Once you have your financial foundations, you should start investing as early as possible. Why should you start investing early? That’s because when you invest, your investment returns will also start earning their own return. Think about a small snowball that rolls down a hill - as the snowball keeps rolling down the hill it gets larger and larger. This is the concept of your investment compounding.
Here is an example. You start contributing $250 every month to an investment account over 10 years, and you earn a 7% average annual return over this period. At the end of 10 years you will have $44,000 - $30,000 is money that you contributed while $14,000 is what you have earned over this period. That $250 contribution each month can add up to a lot over 10 years!
There are different ways to invest your money based on your financial goals. Common goals are if you want to grow your money for retirement or a future large expenditure.
For retirement goals, a great way to start investing is to contribute to a workplace 401K or retirement plan. Employers will often offer employer matching, which is contributing an amount of money to your retirement based on how much you contribute. This is like free money, so it’s great to utilize this if you have this benefit! To learn more about your workplace 401K retirement plan and if you have employer matching, you should talk to your HR benefits team.
People will usually recommend that at a minimum you take advantage of your employee matching, and invest 10% to 15% of your income each year in total for retirement. This is sometimes tough for people, especially if you have other financial obligations such as caring for family members or debt payments. We recommend that you at least take advantage of employee matching, and try to increase your contribution amount 1% to 2% each year to the extent you can.
For other investment goals such as a future large expenditure, you should think about when you will need the money and how much you will need. After that, you can figure out how much you need to contribute monthly or yearly to be able to meet that goal. If it’s too daunting to think about a goal so far out, you can definitely start small and set a goal for yourself. For example, you can set a goal of contributing $1,000 to an investment account in 2 years, or $42 a month.
If your financial goal is to grow your money for retirement, you can contact your current employer to set up a 401K if they offer it. If your employer doesn’t offer a 401K, you can still invest for retirement by opening up a traditional IRA or Roth IRA account (or individual retirement account). Remember that retirement accounts have certain restrictions - for example, you can only take out money after you reach a certain retirement age, otherwise, you can have huge tax consequences.
If you have another financial goal, you can open a regular investment brokerage account. You can often set up an IRA and regular investment brokerage account at an online broker. We recommend that you open an account at an online broker that has no or low minimums for opening an account, and that allow you to invest in small amounts. You do not need a financial advisor to start investing. This way, you can get started investing even if you only have a small amount to put away right now!
Below are some options:
There are lots of different investments, so you should try to understand what each investment is, what the risk is of the investment, and what the potential cost is. When people talk about risk tolerance, they are talking about the risk you are willing to take on an investment compared to the return. In general, diversification in your investments will have less risk than not diversifying your investments. Here are some common types of investments:
Exchange-traded fund (“ETF”)
The “how” to invest will really depend on your financial goals and whether you need the money 20-30 years from now or 5-10 years from now (e.g., your time horizon). In general, stocks will be harder to invest in as you will need to pick each individual stock, decide when to buy or sell, continue to track the stock, and there will be high concentrated risk in the stock. A lot of people who are just getting started in investing will look into a low cost ETF or index mutual fund.
If you do have financial goals where you will need the money within the next 5 years (e.g., short term), people usually recommend that you keep the money in a high yield savings account (where you will earn a certain interest rate on your money) or lower risk portfolio. Whenever you decide to invest, just remember that you can always start small (think $20 month)!
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