Investing for beginners is about more than obsessing over the latest meme stocks. In fact, it might just put you off investing because, let’s face it, that doesn’t do anything for your investment knowledge other than keep you busy and bored. Investing has come a long way. It’s more accessible, it’s cheaper, and it’s a great way to build passive income. In fact, investing is sitting right under your nose. If you have a 401(k), you already have your toes in the water. Roth or traditional IRA? You guessed it, you’re an investor. All that needs to happen now is expanding that portfolio to include index funds and other investment types so you don’t have all your eggs in the proverbial basket.
Step 1: Invest to build wealth, don’t wait for wealth to invest
You have to get over the thought that investing is reserved for the wealthy. Nonsense. Investing is a component in your journey to wealth. And if that’s not enough to convince you, surely the fact that you can start your portfolio with as little as $50 per month will get your attention. That’s $12.50 a week. It’s one less impulsive order on Amazon per week. It’s the money that gets “lost” in your handbag when you’re carrying some cash. You know, the money you don’t miss when it’s gone? Just think, $50 per month, invested right, could be a serious game-changer for some.
Step 2: Use the Ladder of Personal Finance
Investing that $50 seems easier said than done, right? Where do you even start?
Ramit covers that for us with his Ladder of Personal Finance. Investing money for beginners might seem daunting, but knowing where to start is a great first step to getting over investment jitters.
Five basic steps allow investors to start and build on their investment portfolios.
Rung 1: 401(k)Wealth is about finding low-cost investments and if they happen to have other advantages too, all the better. A 401(k) is a great way to boost your investments.
- Some employers offer a matching incentive where they match all or part of your contributions to your 401(k).
- There are tax benefits because the money is taken from your pretax income, which means you pay less in personal taxes.
Rung 2: Debt Have you ever seen that meme that reads, “Cleaning the house while your children are home is like brushing your teeth while eating an Oreo.” Those looking to invest and still have debt might find investing the same. The meme would read, “Investing while you have debt is like brushing your teeth while eating an Oreo”. Sure, you can do it, but it’s always going to feel like you’re trudging mud.
Why? Because the interest you’re paying on the debt is most likely far more than the returns you’re getting on your investments. Ramit has a system for paying debt off faster, so you have more money to invest.
Also, credit cards can be a great boost when you’re using the benefits but can be a tremendous burden if you’re only making minimum payments. When you use your credit card, be sure to square off the balance every month to make sure that you are using your credit and it’s not using you.
Rung 3: Roth IRA Contributing to a Roth or traditional IRA is a great way to pay your future self. A Roth IRA means that the contributions are done after taxes, so when you make withdrawals after the age of 59 ½, the withdrawals are tax-free. A traditional IRA has the tax-deferred until a later stage, so you’re taxed at withdrawal. Stick to your maximum limits to avoid penalties.
Rung 4: Max out your 401(k)If you haven’t already done this, now is the time to max out your contributions to the 401(k). Remember, there are tax benefits.
Rung 5: Non-retirement investing Some of you will breathe a sigh of relief. Yes! We’re going to talk about other investments and yes, we want you to learn about investing in stocks for beginners. We want you to look into exchange-traded funds, mutual funds, and index funds and put together a portfolio you’re comfortable with. But just make sure all the other steps are out of the way in order for you to make the most of your personal finance journey.
Step 3: Understand your investment options
Investment talk can quickly turn into gibberish and if you find yourself contemplating learning Klingon instead as your eyes glaze over with boredom, we’re going to break this down as simply as possible.
Target date funds
One of the rules of investment is to keep the higher-risk investments for the longer term. This means that the closer you get to the end of the term of the investment, the lower the risk should be. Retirement investments are perfect for this kind of approach. Target date funds do exactly that. The best part? It happens automatically. It also offers a bit of flexibility by allowing you to keep it beyond retirement. In the beginning, the objective is to grow the fund and when you’re nearing your retirement date, you want to keep it stable. A great first step to choosing a target-date fund is to allocate a target date. Thereafter, you want to find your risk sweet spot. This type of investment is convenient and a little more predictable, however, you have little control.
Index funds and mutual funds
Investing starts getting a little more tricky here as you navigate through your options. But let’s break it down. Index fund: These are cheap and relatively convenient. The returns here are fairly predictable and you have a little more control than with a target-date fund. Mutual fund: Have a good look at the broker’s pricing to ensure that you’re getting a good deal because the fees can eat into your capital faster than you can sink your teeth into that chocolate brownie on cheat day. You have a bit more say in what you’re going with and with these, the predictability is also pretty stable.
Stocks, bonds, and cash
Dipping your toes in some serious water with stocks and while you have all the control, you also have the inconvenience of checking on these like a mother hen trying to find her chicks on open farmland. You also have to be prepared to take it as it comes, as there is little to no predictability where your returns might land. Bonds, on the other hand, are quite stable but their returns tend to be much lower too. As a beginner though, it’s prudent to focus on investments that require little time and effort.
Step 4: Allocate your assets for the win
Whether you’re a teenage boy looking to beef up and build biceps or a middle-aged guy looking to drop that beer gut, you’re not going to do it with carbs, sugar, and all the wrong fats. You’re probably going to increase lean proteins, cut down on the Budweizer, and choose the salad over mom’s lasagna. But now, you can’t just live off egg whites and skinless chicken breasts. You need a proper nutritional plan to ensure that your body gets the very best mix of nutrients to ensure you meet your goals. Investments are the same. The different types of investments are referred to as assets and a well-balanced portfolio will include a healthy mix of all of them. This might be where you want to watch those YouTube tutorials on investing in real estate for beginners, as they form part of this conversation. Your portfolio’s assets should depend on three factors:
- The capital to invest
- Time period of the investment
- Risk appetite
So your investment “plate” can include assets such as mutual funds, index funds, stocks, bonds, property, heck, even mint condition baseball card worth a small fortune. The assets and their quantity will depend on the three factors above. For instance, someone who only has a short term to invest, say around five years, should consider a bigger slice of the more predictable assets. Those who have longer can include more unpredictable options such as stocks. So why do we do this? Well, it boils down to that proverbial egg basket. With any type of investment, there is risk. even when you’re investing in a basket of funds such as index funds. Something could happen to the market and all those funds could tank. Now, if you only invest in one thing, it increases the risk of you losing all of it. That is why it’s important to differentiate. When you split up your investment into different asset classes, a weakened economy or market crash might not have as devastating an effect on your investments. While it’s tempting to put all your money into investments and assets that perform well when everything goes well, you’re increasing your risk.
Step 5: Automate your investments
This is a no-brainer, whether you’re a beginner investor or not. Automating your investments is as groundbreaking as your 6-floor walkup installing an elevator. It saves you time, it might save you money, and it will for sure save on frustration. Now, if you know anything about Ramit, you’ll know he’s all about systems. Automating your finances is putting a system in place that ensures that you invest, even when you’re not thinking about it or particularly feel like doing it. And that’s the point. If you want to achieve any goal, you need a system for when you no longer feel like doing it, or you’re faced with other elements competing for your time.
Schedule your bills
You don’t have to receive any snail mail anymore. All your bills can be sent electronically, which makes automation a breeze. Schedule your bills to get paid when you get paid.
Set up your 401(k)
Your 401(k) should be deducted from your paycheck even before you get paid. Adjust the amount to match your employer contribution if not done already, and max it out if not done already.
When your salary lands in your account, you want to make sure that the four major payment categories are taken care of immediately. These include your Roth IRA, savings account, credit card, and miscellaneous bills that can’t be paid by credit card such as rent. Remember that your credit card payment should square off the balance every month. You decide whether you’re going to load payments or whether you’re going to ask the companies to deduct the installments through direct debit.
Just kidding! There’s no admin day. But what you can do is ensure that your investments are automated too. There are a number of reasons to do this. For starters, you want to pay yourself first and with investments, you’re paying your future self first. Another is that we tend to get emotional when the markets shift. By automating your investments, you are more able to resist an emotional investment, which could be detrimental to your long-term investment strategy. Investment apps are ideal if you’re looking to start your investment journey, as you can automate your payments, invest on the go, receive live updates, and invest small amounts just to get used to it.
Step 6: Investments are a no-emotion zone
When you see your house burning down, your kneejerk reaction is to get all the valuables out and start dousing it with water, right? So it’s easy enough to apply the same amount of gusto to an investment. However, market shifts are not housefires. They’re more like controlled field fires to encourage the sprouting of new seeds. Now, if you’re going to pull out your capital when this is happening, you’re going to lose out. Don’t get me wrong, there is a time and a place to move and shift capital into different funds, but if you’re invested in an index fund or something like it, making emotional changes will make growth on your investment difficult. Another emotional ticking timebomb is leverage. Just don’t go there. Leverage might seem like a good idea at the time, but essentially you’re dealing with investment debt. It’s not worth it, even if you manage to get it on the upswing. Because when it goes back down, you’re in the hole and with these kinds of investments, you’re looking at selling your assets to make up the loss. The risk extends beyond just the capital you put in.
The bottom line
You want to build a passive income and you’re in it for the long haul. Investments are finally accessible and affordable and from as little as $50, you can get the full investment experience. What’s more, you don’t even have to work very hard at it. Investment automation, simple assets, and a varied portfolio can put you on the map in no time. Ramit’s book, I Will Teach You To Be Rich, is a goldmine if you want to know about investing and other personal finance hacks, such as landing your dream job, living your best life right now, and ditching the budget in favor of a spending plan.