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I’m so excited to welcome Hannah to the blog today! I met Hannah at DigiCoLab last year and she is an expert at focusing on the big financial picture. I asked her to share some investing tips since I am terrified of sending even $100 into the whirlwind stock market. After reading her advice, I promise you’ll be ready to put on your game face on and give it a shot!
Whether you want to be smart with your tax refund, just received an unexpected amount of money, or simply want to be comfortable in your retirement years, investing is one of those “adult” things we know we should do, but continually put off—either for lack of money, or because you’re drowning in financial jargon like IRA’s, 529’s, EFT’s, and AUM’s.
But investing is one of the secrets to becoming financially secure, and improves the likelihood of achieving your life’s biggest goals. Plus, when you mix good saving habits with continued investing, the results can be astronomical!
My goal is to unravel the mystery of investing and give you rock solid investing basics before you spend a single dollar. Understanding why you want to invest and what you want to invest in will help you choose the right options for a long-term strategy.
1. Know why you want to invest
To be successful, you have to know why you want to invest in the first place. Is it primarily for retirement, to buy a house, or for some other goal?
Investing in general carries risk. Because different goals have different timelines, knowing why you want to invest will help determine the amount of risk you can take.
For example: if you want to invest a chunk of money for your child’s college tuition and she’s 14, you will want to invest in something lower risk.
Those who study the stock market know that even though prices are rising, it’s going to fall again. We don’t know when that will be or to what extent, but if you don’t have a plan for your investments, your overall financial well-being is at risk.
2. Realize that investing is only part of your financial picture.
Sure, investing is important, but there are other financial issues to consider.
- Do you have an adequate (3 to 6 months of living expenses) emergency fund saved up? Don’t let sudden health care expenses, unemployment, or a car repair derail you. If not planned for, these emergencies could easily lead to financial ruin. An emergency fund needs to be your first priority before you start investing.
- What does your tax situation look like? If you’re in a higher tax bracket, picking the right type of account can save you a considerable amount of money. If you’re not in a high tax bracket, you can take advantage of tax-free options, like a Roth IRA account.
3. Decide on the type of account you want to invest in
If you’re investing with the goal of earning money for retirement, it may make sense to invest in an account specifically for that goal, like,
- An IRA (individual retirement account)
- OR, a 401k (an employer-sponsored retirement account)
However, if you do put money in a retirement account, be aware that you can’t pull it out without penalties until you reach age 59 ½. There are a few exceptions, like first-time homebuyers, but in general you can expect that this money won’t be available for many years.
If you’re saving for your children’s college, 529 plans or other college savings accounts could be useful. In this type of account, you make contributions using after-tax dollars, but your earnings will be tax-deferred while invested and tax-free when used for qualified educational expenses.
There are also individual and joint accounts to use for a variety of goals.
4. Decide on your investment strategy
There are numerous ways to invest your money. Think of your account type as a shopping cart; it holds the investments you want to choose. So looking at what to actually invest in is just trying to figure out what you want to take off the shelf and put in your shopping cart.
You can choose from thousands of stocks, or mutual funds, which is simply a managed portfolio of stocks and/or bonds. Exchange-traded funds (ETFs) are investment funds traded much like stocks. Like looking at paint chips at Home Depot, the choices can seem overwhelming!
When choosing your investments, there are some general rules of thumb that are important to take into consideration.
- Diversify your investments, meaning put your money in a spectrum of investments. You can choose from US stocks, foreign stocks or bonds. While it’s not a guarantee against loss, diversification is the best way to reaching financial goals over the long term while minimizing risk.
- Be aware of fees. Hidden costs are one of the big dangers of investing. Research expense ratios. An expense ratio is determined dividing a fund’s operating expenses (the fees) by the average dollar value of its assets under management (AUM). While 1% may not seem like much, it can easily erode profits over a lifetime of investing.
- Time. Be aware of when you plan to use the money. You may want to invest more heavily in bonds, which have lower returns, but also less risk, if you will need the money soon. Stocks have better returns, but are more volatile (which is why they are better for long-term investing).
5. Do you DIY or get help?
Some people truly enjoy investing on their own, and there are ways to do it very affordably. There are some great resources on the Vanguard website that can help you get started. Robo-advising is also becoming popular. Robo-advisors, like Ellevest, manage portfolios online, providing financial advice based on mathematical rules or algorithms.
It will be helpful to use a program to help you track your investments, such as Personal Capital. Whatever you use, make sure it is intuitive to you, so that you can easily keep tabs on where your money is going.
- If you choose to invest on your own, have a game plan for when the market goes down. The biggest mistake I see is people pulling out their investments when the market goes south (and you can be sure it will). The money you spend on an advisor can more than pay for itself by helping you be financially prepared for a downturn and keeping you steady in the storm.
- If you want to start investing and know that you want help, there have never been more options than there are now. If you’re open to working with somebody over the phone, Vanguard offers a good option through their personal advisor services.
- If you want more one-on-one advice, you can work with an advisor in your area. NAPFA is a great resource for finding a financial advisor. The total cost to invest may be more, but they offer personalized advice based on your particular situation. Before paying a professional, make sure you’re aware of what services will be provided and weigh whether it’s something that you want to pay for.
The most important thing to take away from all this is to jump in.
Starting early is the best way to maximize your returns. Find a way to invest that feels right to you and start contributing however much you can afford. Actively taking control of your finances and watching that nest egg grow is one of the best ways to live a wealthy life now.
What life goals do you have that investing could help you reach?
Hannah Moore is a Dallas-based Certified Financial Planner™ and owner of Guiding Wealth Management. She is the creator of the Everyday Money Workbook, a tool to help couples have meaningful conversations about their finances.
The workbook is based on the belief that it doesn’t matter if you have $1,000 or $1,000,000; it’s how you approach money that is central to living a wealthy life. The workbook pairs practical financial planning elements from a Certified Financial Planner™ with exercises designed to help couples find what it means to live a wealthy life now.
Disclosure: Some of the links in the post above are affiliate links. This means if you click on the link and purchase the item, I will receive an affiliate commission. Rest assured, I only recommend products or services I use personally and believe will add value to my readers. Read my full disclosure policy here.