When you’re down to your last $20 and you still have days to go until payday, how do you even begin to worry about investing?
Or say you actually have a little set aside to invest: Where do you even start?
Stocks, bonds, mutual funds, portfolios — where to begin? Isn’t it easier — and safer, frankly — to stick your money under the mattress, or hide it in a savings account?
Investing sounds scary. It calls to mind panicked day traders, volatile stocks, huge losses, complicated jargon.
More importantly, it seems very risky.
It’s hard to believe that the money you carefully set aside will even grow and not be swallowed whole.
It’s tough to swallow your fear and move over what little money you have left at the end of the month to something that’s not a sure thing.
I was terrified of investing for a long time. Too long.
I let my day-to-day money concerns trump my long-term goals because I was scared of not having enough money in the bank in case something happened.
I had savings, but it was never enough to soothe that fear. My anxiety that I could lose my job, or encounter catastrophic medical bills, always kept me from loosening my iron grip long enough to invest.
I didn’t even want to forsake the small amount that would be taken from my paycheck and put into a 401(k).
I rationalized that the more take-home pay I could scrape together, the safer I would be.
Now, 10 years later, I could just shake that version of myself. I missed out on a decade of good returns in the market, and the money I believed I was “saving” I spent anyway.
I’m a decade behind in saving for retirement, which means that even though I have finally started investing, I won’t be compounding the interest on those missing years going forward.
That’s lost money that could have been put toward a comfortable retirement.
But as soon as I realized my mistake, and figured out how to relieve my money anxiety, I immediately started putting my money to work.
I read a few simple books on investing and started following personal finance blogs, which explained investing for the everyday person.
I signed up for a Roth IRA with a well-known brokerage account, which was a simple online process that took only a few minutes. And finally, I sat down with my budget and really got clear on what I wanted my money to do for me.
I saved up a good-sized emergency fund and paid down my credit card debt. Now I had a buffer for those emergencies that so scared me.
With that safety net in place, I started putting money each and every month into my retirement account. Out ofsight, out of mind, and working for me and my long-term goals.
Now it’s your turn. You want to invest, but you’re afraid to start. Why?
- You feel you don’t know enough about it
- You feel you don’t have enough to get started.
- You feel it isn’t a priority right now.
These are understandable feelings. But they’re only roadblocks to your success if you let them be.
Investing can be a way to earn returns on your savings — a way to grow your money, to get more back than what you put in. Nothing in life is risk-free.
In fact, timidity regarding investments could cost you even more in the long run.
Instead of compounding interest on your investment, you lose money to inflation — the same amount of dollars won’t buy the same amount of goods in the future if inflation rises.
Here’s what I learned: simple savings can’t match the growth potential of stocks and bonds. Over the last 80 years, stocks returned 10.5%, bonds 5.2%, and cash, just 3.8% — but inflation this year is about 1.9%.
If inflation rises, you could lose the value of your savings — especially if your money is held in an average consumer savings account returning less than 1% APY.
You can’t avoid risk. Just living is a risk. But you can mitigate it. You can protect yourself. You just need a little education and a plan.
If you don’t know enough about it, learn
First, a brief handle on terms: You’ll likely find it best to invest by spreading your money (or allocating it) across a variety of assets: stocks, which are shares of a company; bonds, which are like long-term loans to a company; cash, where your money just sits tight, liquid; and funds, which are collections of different types of investments.
Some common funds: Mutual funds are a collection of stocks hand-picked by experts, provided for purchase for a fee. Index funds are collections of funds with a makeup that matches a particular index, such as the S&P 500.
Target-date funds or lifecycle funds are the easiest way to invest. They simplify the asset allocation for you, depending on age and expected date of retirement.
The younger the investor, the more the fund’s allocations are weighted toward risk (i.e. mostly stocks). The older the investor, or closer to retirement, the more the fund’s portfolio is weighted toward conservative investments.
A lifecycle fund at age 25 might be 90% stocks and 10% bonds, whereas the allocations at 55 years old might be 60% stocks and 40% bonds.
The fund reallocates for you over time. And you can always choose a more conservative target.
The best way to get started … is to just get started
You don’t need a lot of money to begin investing. In fact, you can get started with nothing but a trip to your Human Resources department, to enroll in your company’s 401(k).
Even part-timers can be eligible if you work 1,000 hours in a year, or about 20 hours a week.
With a 401(k), you send a percentage of your pay to a retirement account.
The money is taken from your check before tax, so it’s a seamless way of saving because the cash never hits your account — instead, it’s waiting for you in your retirement account, safe from your avocado toasts or whatever. Once you set it up, boom. Done.
In 2017, you can contribute up to $18,000 in a year.
If 401(k) enrollment isn’t for you — maybe you’re self-employed? — then you can probably choose an IRA.
That’s an account where you deposit your money after it’s been taxed and then use it to buy investments, such as index funds or lifecycle funds, depending on your plans. In 2017, you can contribute up to $5,500 a year (up to age 50) in an IRA.
An IRA will likely require a minimum investment, such as $1,000 or $3,000, to get started — but that’s not always the case.
Say your IRA of choice does require a minimum. To get to $1,000 in a year, set aside about $90 a month. You can use a special savings account and auto-deduct from each paycheck.
Or, if you can’t do $90, start at $45 a month for two years. Can you find $11.25 to trim from your budget each week? Two years of saving is a drop in the bucket compared to the decades you can be growing your money once you invest.
Not every account requires a minimum of that size. Some places will let you fund a Roth IRA account with as little as $100, as long as you set up auto payments to the account.
Others have no minimum at all. You don’t have to let minimums keep you from putting your money to work now.
Once you’re in the habit of saving — paying yourself first, putting money aside for an emergency fund or longer-term goals — then saving for retirement becomes second nature.
The best time to get started … is now
- The first hurdle to investing is finding enough money to invest.
- The second hurdle is educating yourself on how to begin.
But the third hurdle is possibly the trickiest: finding the confidence and the patience to get started, and to weather the market.
Investing works best when given time to weather small ups and downs. Measure growth in decades, not years. And the best way to ensure your money has a long time to grow is to simply to begin.
If you’re young, you have the best advantage of all time.
Millennials grew up amid the devastating effects of the 2008 Great Recession. They saw pensions dry up, the job market shrink and stock prices plummet.
But given a few years to recover, the market continues its upward trend, smoothing out even the big dips. Stocks lost value in the years immediately following — but bounced back higher than ever.
The secret to any forward motion is the first step.
Becoming comfortable with the uncomfortable
It’s natural to want to reduce risk or eliminate it completely. In the drive to combat anxiety over the future, especially in the face of a monolith over which you have no control (hello, stock market), the first inclination is to disengage.
It’s a protective mechanism. Just as you may disengage from a relationship to avoid being hurt, you try disengaging from your money, only to find that technique doesn’t actually protect you.
In fact, it can hasten the very the action you’re hoping to avoid: in this case, financial insecurity. Disengaging from the market can backfire on your future by removing your money from the possibility of growth.
Fortunately, while no one seems to be born with patience or wisdom, both are traits you can develop over time. Mindful decisions about investments are the best way to protect your future.
Fear of investing is just fear that the future will be worse than the present. To invest is a vote of confidence — a testament to the future and its abundance.
About the author: Mary Beth Eastman is the editorial producer at Simple. Thrifty. Living. She lives in Pittsburgh, Pa.