You’re trying to get somewhere. It’s a complex journey and you feel completely alone. The directions you were given were vague, and you’re not sure you’re going to arrive… alive. I’m talking about retirement.
Investing is a good idea if you plan on retiring. The best time to start is now. The sooner you start, the more time your investments have to grow.
Young investors are subject to misinformation and exploited because of their lack of experience. But a lack of experience can be overcome with some guidance. That’s why I’m sharing this. I want more of my peers, and young people in general, to think like investors. If my thoughts on investing strike you as unconventional or conservative, they may be the antidote you need. If investing is totally unfamiliar, I hope my thoughts can guide you and provide a literal road-map from which to begin your investing journey.
START WITH A SOLID FOUNDATION
When you are young, your ability to increase your earnings is actually one of your greatest assets. This means that by seeking additional education and training opportunities, you can make yourself more valuable and consequently increase your earnings. That’s to say, some of the best investments you can make are investments in yourself, your health, and your education.
BUILD A SAFETY NET
You can lose money investing. That’s why it’s a good idea to build a safety net before taking on any high-risk investments. A safety net is a bit of money you have set aside for emergencies. What constitutes an emergency is up to you, but running out of weed probably shouldn’t count.
If keeping a savings around has been a struggle, building up this safety net will be a financial boot camp. If you start investing before learning how to save, you risk losing money, and ending up in debt. Learning to save needs to come first, but along with it come auxiliary skills like budgeting and financial self-control. You’ll want a safety net AND these auxiliary skills before taking on any high-risk investments.
A safety net doesn’t need to be huge. How much you need depends a lot on your circumstances. What are your liabilities? Do you have any kids or other dependents? Think about what you’d need to have around in a worst-case scenario.
Is it just you against the world? Three months of your income may be more than enough. If your situation includes children, or a business, you might want nine months, possibly more. For most everyone, something in the range of three to nine months of your income makes sense.
WHERE TO KEEP YOUR SAFETY NET
Where you park your savings is worth some extra consideration. Inflation makes your money shrink. If you’re not keeping pace, those dollars will be worth less tomorrow than today.
You might consider putting your safety net in a money market account. There’s a huge variety to choose from. Seeking out these sort of accounts will help you in the long-term.
RETIREMENT ACCOUNTS
There’s no need to be intimidated by 401(k)s and IRAs. If your company matches contributions up to a certain percentage, you should do your best to contribute at least that amount. To invest less is to leave money on the table; money that could be growing interest for your retirement.
WHAT ARE IRAS?
IRAs are just another way to invest for retirement. There’s no right order to it, but for most of us, we’ll encounter a 401(k), first. But there’s actually no age requirement on IRAs, if you have a job, you can start saving for retirement before turning 18. If you are, or are planning on becoming a parent, you might want to keep this in mind.
WHICH TYPE OF ACCOUNT IS RIGHT FOR ME?
Do you expect to be in a higher tax bracket later in life? If so, you’ll want the Roth IRA. If you’re planning on living the simple life after your midlife crisis, you’ll want the regular IRA. It’d be a great idea to meet with a financial adviser and see what they recommend for your unique situation.
I’M SELF-EMPLOYED?
Look into something called an SEP-IRA. You still can and should save for retirement, even if you’re your own boss.
LEAVING EMPLOYERS
It’s not uncommon to work for at least a few different companies. When you leave an employer, you’ll be able to open something called a rollover IRA and move your existing 401(k) into it.
Leaving a company is a good reason to go visit a financial adviser. They can help you with this rollover process, which can be pretty stressful. You might have deadlines on getting things done and the threat of steep fees hovering over you.
SEEKING FINANCIAL ADVISE
When seeking counsel on financial decisions, look for advisers who charge an hourly rate. There are potential conflicts of interest when working with commission-based advisers, and generally, the hourly folks are giving the same advice and cost less. You may also be able to find free counsel if you are a member of a credit union or a bank with this perk.
AND FINALLY, THE PART ABOUT STOCKS
When you’ve got your safety net in order, you’re maxing out your company-matched 401(k), and you’re making the maximum contribution to your IRA(s) each year, then it makes sense to buy stocks.
Don’t day trade unless you get some joy out of it. It’s a disaster for most people, really, and the way taxes work out, it’s honestly the best strategy to just set it and forget it. If you day trade, expect to pay 10-15% more in taxes compared to capital gains taxes. When you hold an investment for a year or longer, you’ll save a lot in taxes when you sell it.
BUY THE WHOLE MARKET RATHER THAN MAKING PICKS
You don’t have to look far for good earnings and tolerable risk. I’d recommend something that tracks an index. For instance, check out the ticker symbol SPY. If you own a unit of SPY, it’s like owning stock in a bunch of different companies.
The churn and burn of the market ensures some of them go bankrupt, and some of them make huge returns. By being a stakeholder in the entire market, you catch an average return which is generally quite good. In truth, it’s almost impossible to find a strategy that performs better.
TIMING
When buying stock, you might want to consider doing it in small, but frequent contributions. This strategy is called Dollar Costing Average (DCA). That’s a fancy way of saying, “spread it out”.
The market is a turbulent and chaotic place. If you make one annual contribution, and you happen to make it at a high point, you’re spending the same amount of money for less stock. If you spread it out, you catch the average.
Maybe you think you can time the market? If you feel certain, you can try to time your contributions to the low points. But many have tried to time the market and failed. DCA is an effective strategy for most people. It helps lessen the anxiety and you’ll feel good when you buy in at the low points!
An example of this strategy in practice could be investing $1000 in the market quarterly, rather than $4000 at year’s end. Or you could set up a direct deposit of $150 per pay period into a brokerage account with instructions to automatically invest the money into your portfolio.
WHAT DO I DO NOW? (TL;DR)
If you just read all this and went “ummmm…”, here’s the TL;DR as an actionable to-do list:
- Continue to invest in yourself, your health, and your education, aggressively.
- Build a safety net after considering what you’ll need for yourself and anyone who depends on you.
- If you have a 401(k) and your company makes matching contributions, get all the free money you can!
- Seek financial counsel. Check if your bank or credit union has something free to start with.
- Open an IRA. Make the largest contributions you can manage until you can consistently contribute the annual limit.
- When you’ve maxed out your contribution to your IRA, start putting what you feel comfortable investing into instruments like SPY. Make sure you can hold the assets for a year at least! Selling before a year means you’ll get heavier taxes on any earnings you make. Remember: if you’re young, you’re in this for the long-haul.