Do I need “Wealth” to Invest? Investing Options in your 20’s and 30’s
Why Should I Invest?
So you’re at the stage where you’ve gotten yourself out of debt by paying off your student loans and credit card bills. Guess what?! You’re already doing great! And now you have even started saving a decent amount of money each month and have built an Emergency Fund in case you suddenly find yourself out of work or stuck with a large medical bill. This is even better! But now that you’re setting aside money each month into savings, the questions is “What do I do with that money?”
Interest rates on standard savings account are basically zero (less than 1%), so with inflation at 2% the value of your money declines in real terms which means you are actually losing money over the long term by leaving it in your personal savings account. While it is important to make sure that you have access to cash when needed to pay for unforeseen expenses, you probably don’t want to leave more than 3-6 months worth of living expenses in your personal savings account at one time. That means that you need to find a way to invest your newly acquired savings. Hooray for investing!
Life coach, author and investing guru Tony Robbins has stated that the 3 most important investing steps everyone should take are:
1) Make use of compounding interest as early as possible
2) Diversify your investments
3) Automate your investments
Read on, and I’ll touch on all 3 of these points.
Who Should Invest?
It’s a common misconception that when people hear about investing they believe that they need “wealth” in order to invest, when actually the opposite is true. You don’t need millions of dollars or even tens of thousands of dollars in order to begin investing for your future. The best time to start investing is when you are just starting out with modest savings. The reason for this is the magic of compound interest. Compound interest is when you earn money on a deposit (a percentage that varies depending on the type of account), and then you earn more interest on that interest from the initial deposit, and then this process keeps continuing for 10, 20 or 30 years until your money has greatly increased in value!
Example of Compound Interest: You invest $1000 as an initial deposit into an account that pays a 6% interest rate (slightly lower than the average of the stock market), and then you deposit $300/month (About 10% of $50k/year salary). After 10 years you would have $50k, then $141k after 20 years and $307k after 30 years. And this is even without increasing your savings relative to your rising salary!
The best part is that you can start doing this right now with investment options available to the average person. “So you’re telling me that there is an account out there that will allow me to grow my money that much?” And my answer to this question is YES. And the best part is that you don’t have to buy expensive blue-chip stocks (Apple, Amazon, Google, etc.), a life insurance policy or an expensive rental property to generate this extra income. All you have to do is deposit your extra savings each month and be patient as time is your best friend. With you only small deposits from your savings each month, over a 10, 20 or 30 year period you can grow you savings into multiple six figures.
How Do I Invest?
(Note: All investments carry some level of risk. Please do your research and/or speak with a professional before making investment decisions)
The best way to do this is to get into the stock or bond market early in your life and keep your money there over the long term. Some people might think that there are secrets to timing the stock market, or they are worried about recessions or market downturns, but the single most important factor to growing your savings is getting into the market early and keeping your money there over the long term.
A great way this can be done by the average investor is through index funds. An index fund is designed to track a specific group of investments, often stock or bond markets as a whole, and therefore is less dependent on an individual company, which decreases your risk and diversifies your money. So if the U.S. stock market overall experiences 7% growth per year over a 10 year period, then it is likely that an index fund tracking the U.S. stock market would experience the same growth.
Note: Index funds are a specific type of mutual fund, and all mutual funds are NOT the same. More to come on this topic.
If you are interested in buying index funds, Vanguardis a great option as they have extremely low fees (About 0.05% on profits). Or if you are interested in service which will manage the buying and selling of index funds for you and automate the process,Wealthfrontis a great option which only charge a 0.25% fee per year. All you do is setup an account, choose your risk tolerance and deposit your funds. Their service will automate the rest!
Investing shouldn’t be expensive or complicated as it’s so important to start early in order to maximize the value of compound interest. Hopefully you have learned a bit about investing and have gained confidence to get out there and begin investing for yourself!