7 Things You Must Know Before You Start Investing
This post may contain affiliate links. Please read my disclosure page for more info.
Over the years I’ve answered many questions about how to start investing in the stock market. I’ve always loved helping investors get started investing. I think a lot of it goes back to my own experience of learning how to invest. It wasn’t something that came naturally to me as I walked out of college with $50,000 in debt and was anything but financially literate.
Within a few years of graduating, I was attacking my debt and starting to learn more about how money works – part of that being investing. However, not everyone has the same experience. They may not have learned much about investing in school. They may not have been taught basic financial literacy topics at home. They simply may be afraid of investing.
Regardless of the circumstance, it holds them back from investing in the stock market, which already feels overwhelming to many people. I’m here to tell you that you can start investing and that thanks to the fintec boom, it’s easier than you think. So, if you want to start investing but don’t know what you don’t know, this post should help you get started with confidence.
You Can Start Investing With Little Money
‘Can I really start investing with little money?’ is the most common question I hear from investors. They believe they need a lot of money to start investing and because they don’t have a lot they put off getting in the stock market. This does two things. It keeps you from growing your wealth and leaves open the possibility of foolishly spending that money – thus holding back your net worth from growing.
There are a few common objections when it comes to investing with little money. The first is that it’ll do nothing. That is categorically false, thanks in large part to compound interest. Your money needs time to grow. The longer you give it to grow, the more it grows. Even if you start with a small amount, the fact that you start earlier rather than later is the most important point.
The second common objection is that there isn’t a brokerage that will let you invest with little money. Again, that is categorically false. Yes, some brokerages require more than others, but there are brokerages, such as Betterment and TradeKing and others, like Motif Investing and Wealthfront that allow you to start with $500 or less. There are even apps like Stash Invest that allow you to invest your spare change.
The simple fact is this: you can start investing in stocks with little money and do quite well. Don’t give into the lie that you need a lot to start investing. That will only hold you back in the long run.
You Can Have Someone Else Do it for You
Almost as much as I get asked about investing with little money, I get asked if it’s possible to pay someone to manage your investing. There are a few reasons for this question. The most common reason is that the person doesn’t know how to invest, but they know they need to start. The second is that they lack time to manage the investments.
In many cases, the person avoids investing, waiting for help to fall into his or her lap without realizing knowledge is out there for the taking. This is largely thanks to automated retirement programs, otherwise known as robo-advisors. Robo-advisors offer services that used to be available only to those who had millions of dollars to invest and could afford to pay a financial advisor to manage their investments.
Thanks to the growth of the financial tech industry, robo-advisors fill a once unmet need – financial advice for those who want help but don’t have the money to warrant it. Most robo-advisors follow the mindset of it not mattering, per se, what you’re investing in, but that you’re in the right allocation for your needs.
By doing so, they’re able to help you invest in line with your goals instead of simply throwing darts at a dartboard. There are dozens of robo-advisors to choose from, though the two most popular are Betterment and Wealthfront. If you’re interested in investing with a robo-advisor, take a look at my Betterment vs Wealthfront analysis to see which advisor fits your needs.
There are Plenty of Free, Cheap Resources Available
When it comes to investing, a lack of financial literacy translates into a need for resources to know how to start. The problem is that many newbie investors don’t know where to look to learn about investing, which holds them back from starting, thus beginning the vicious cycle.
If you feel this way, and don’t know where to look, there are three main resources at your fingertips. The first, assuming you have one, is your 401(k) plan. Many 401(k) plans offer free resources to help educate you on investing, how much you should be investing and what you should be investing in.
Your 401(k) plan may even offer free, live seminars on these topics. Take advantage of them if you can. If your 401(k) plan doesn’t offer these resources, ask your Human Resources department to offer them. They may be offering them and not advertise them well enough.
The next resource to take advantage of is the Internet. The web is full of free and helpful resources to aid you in your quest to start investing. If you have an online brokerage account through a broker, many offer free classes, tutorials and more to help you start investing. Lastly, there are many books out there that can help you learn about certain facets of investing. Here’s my list of the best investing books for beginners to give you an idea of where to start.
Timing is Important
No, I’m not talking about timing the market, rather time in the market. As I touched on in the first section, time in the stock market is one of the most, if not the most, critical aspects of investing. Your money needs time to grow. Yes, you will lose money over that time.
But, you don’t or shouldn’t care about what happens on a particular day, week or month…or even year. You want to have a perspective of decades. Regardless of when you want to retire, your money needs years to grow. Think of it this way…if you put off saving for retirement until the age of 45, you need to put away three times as much as you would’ve had to save if you had started at 25.
I know it may feel impossible to start investing when you have little money, or that a year or two doesn’t matter when it comes to investing. You can and what happens when that “year or two” turns into five or ten? Instead of looking for a reason not to invest, take action and start today – heck, view it as a bill to your future self and get started.
Don’t Listen to the Experts
Everyone, or at least it can seem that way, claims to be an expert when it comes to investing. They can either be the person who gives you the hot tip on a specific stock, or it can be the talking head on TV telling you the market it going to plummet/skyrocket.
In the case of the former, the last thing you need to do is follow a hot stock tip when you start investing. With the latter, they’re doing one thing – trying to get ratings. Regardless of the situation, they know nothing about your specific goals, needs or comfort level.
It’s understandable to want to listen to an expert when you’re just starting out investing. What I suggest, however, is to educate yourself on the basics of investing as it will empower you and give you more confidence. As you’ll learn, it doesn’t take a lot to start investing, and a little knowledge can take you a long way.
Expensive is Not Always Better
We commonly equate price with value. For example, when I want to buy a couch that will last at least ten years for our growing family, a $50 couch will likely not do the trick. I’ll need to spend more money to get a couch that will stand the test of time and the test of my young kids.
Investing does not work that way and don’t let anyone tell you that it doesn’t. The reason is this…the more money you pay to do your investing, the less money you have working for you. The amount may seem like nothing in the term of a year or two, but over the course of a decade or more it adds up to real money.
That real money is lining the pockets of bad financial advisors / bad products you have no business using. You should expect to pay something to do your investing, but not as much as you think. You may only be investing in your 401(k), and if your fund only offers expensive funds, ask your employer to offer cheaper funds. You can even use the free tool at Personal Capital to compare funds you’re considering to find the cheapest one available.
You Need to Have an Emergency Fund
When I help readers with investing questions, one of the first questions I ask is if they have an emergency fund.
What does an emergency fund have to do with investing? If you’re new to investing, just out of college, have little to invest, etc. it has quite a lot to do with investing. Let’s take a look at an example to explain.
Say you open an online brokerage account and fund a Traditional IRA with $2,000. Six months later your car breaks down, and you need $1,000 to repair your car, however, you have no money to repair it, leaving you with the choice of putting it on a credit card or taking money out of your Traditional IRA. The first option leads to debt and the second option means you have to pay at least 20 percent in taxes.
Neither is really a good choice. The solution is to have an emergency fund. While opening a Traditional IRA with $2,000 is a great decision, it’s also shortsighted if you have nothing set aside for emergencies.
So, if you could go back and make a different decision, what should you do? You should start an emergency fund with $500 or $1,000 and put the rest in your Traditional IRA. This allows you to have money in the event of an emergency and start saving for retirement.
I know it can be a challenge to start investing, but by knowing a few simple things you can start with confidence and build a great foundation for your future self.
What do you wish you would’ve known when you started investing? What are some other reasons you believe people don’t start investing? Did you have an emergency fund when you began investing?