How to Get Started with Investing
Anyone with a full-time job can and should be able to save a small amount toward their future goals.
To many, the idea of investing seems like an unattainable goal, or one that's reserved only for the wealthiest individuals. In reality, investing is simple, effective and entirely within reach for most employed adults. However, many have made up their minds that investing isn't worthwhile because the benefits may not present themselves for a long time. A survey from Schwab Retirement Plan Services found that, out of 1,000 adults between age 25 and 70, one-third said they simply weren't prepared to make the lifestyle sacrifices that would allow them to save and invest as part of a long-term strategy.
Investing isn't just for the independently wealthy anymore. Anyone with a full-time job can and should be able to save a small amount toward their future goals, like retirement or homeownership. However, that doesn't mean using your first paycheck to jump head first into the stock market. By setting a goal and finding the right balance between risk and reward, it's possible to become a successful investor even on a tight budget.
"It's possible to become a successful investor even on a tight budget."
The basic principles behind investing are the concepts of risk and reward. Entire books have been written on these subjects, but what the average person needs to know is that investments that provide higher returns also tend to be riskier. For example, the typical savings account provides a return of less than 1 percent per year - usually much less. However, in an FDIC-insured bank, that money isn't going anywhere. On the other hand, investing in a company on the stock market could provide theoretically infinite returns. Likewise, that money could also disappear overnight.
To get as much from the rewards of investing as possible while minimizing risk, it's important to diversify your savings. That's why investment firm Vanguard, among many others, recommended investors begin with an emergency fund of liquid cash before doing any serious investing. This means taking the time to build up some money in a regular savings account and leaving it for only major, unexpected expenses. These include medical emergencies, losing a job, or anything you haven't otherwise planned for in your budget - and you do have a budget already, right?
Exactly how much you should save in your emergency fund is a point of debate. Some say three months of basic living expenses are necessary, while others suggest six months or even more. As your safety net, your emergency fund should be enough to sustain you if you were suddenly let go from your job or otherwise lost your main source of income. For reference, according to the most recent Federal Reserve data, the average unemployed worker today will remain as such for about 28 weeks - that's more than half of a year.
If you've been saving money in a basic account, congratulations - you're already an investor. Once you've built up a sizeable cushion of savings, you may be wondering where to go next. The Simple Dollar recommended that burgeoning investors look no further than their workplace 401(k) funds. By setting up a percentage of each paycheck to save in a 401(k), it's easy to get into the investing game. It's especially important to take advantage of a match, if your employer offers it. The Simple Dollar noted that even if you are paying down debt from student loans or credit cards, contributing to a 401(k) is vital. Even if it's just 5 percent of your take-home pay, over many years, this can grow into a big chunk of change. Even better, 401(k) funds have tax advantages built in.
If your employer doesn't offer a 401(k), or if you're really good at this saving thing, consider looking into other basic retirement accounts. One good option, according to Bankrate, is a target-date fund . These accounts are geared toward retirement, and are based on the precise year you plan on retiring. Target-date funds use this date to balance the ways they invest your money - it's a little like having a financial advisor, but much less expensive. Target-date funds are great ways to get started with long-term investing without becoming an expert on the subject.
Investing seems awfully complicated, but that's not always true. It's entirely realistic to get started investing today - in fact, it's better to start now than later. Ask your Vectra banker how!