Investing 101: An Easy Guide To Making Money While You Sleep
When I graduated from college, I kind of knew what investing was. I’d taken finance classes, and I knew about retirement accounts. But just because I knew what investing was, that doesn’t mean I made smart decisions.
I was a pretty decent little saver, but when it came to investing, I was completely risk-averse. When I was signing up for my benefits at my first job, I remember asking if there was an option to keep my 401(k) in cash. I didn’t want to lose my hard-earned cash by investing poorly, so why not just keep it in something safe?
In my mind, cash was king. It sat in a savings account where I could see it. I understood it. And I wasn’t alone.
Turns out Millennials are great at saving money, but really drag their feet when it comes to investing. Especially women. Women keep 71% of their assets in cash, which means we’re missing out on a big opportunity to create wealth.
I get the reluctance to invest. It feels time-consuming to research your options, and it can be scary to think about losing money when investments go down. To get you started on your investing path, here are some basics you should know:
What Is Investing?
Investing comes in a lot of different forms. You can invest in your education, buy a rental property, put your money in CDs or bonds, buy stocks, and more. But the simple idea is this: you want the money that you invest to make more money.
For this article, we’ll focus on investing your money in stocks and bonds.
Let’s say you have $10,000 today and you’re deciding whether to keep it in your savings account or invest it. If you keep it in your savings account for the next 30 years, with an interest rate of 1.5%, you’ll have $15,630.
If you decide you’d rather invest that money, predicting how much you’ll have in 30 years is less exact. The stock market has historically had a 7% return on average. While past returns definitely don’t predict future results, most people agree that 7% is a reasonable estimate for growth.
Growth won’t be consistent each year. Sometimes there will be large dips where you lose a lot of money like in 2008. Sometimes you’ll see huge returns where you earn a lot of money like in 2017.
If you invest that $10,000 and assume that you’ll have an average return of 7% over 30 years, you’ll end up with a jaw-dropping $76,122.
By investing your money, you’re putting it to work for you.
The Problem with Not Investing: Inflation
If you’re still not convinced that investing is the right move, we have to talk about inflation. Prices go up each year because of inflation. If your grandparents have ever reminisced that in their day, seeing a movie cost 25 cents, you can thank inflation for that price increase.
If your money doesn’t increase with inflation, what you have sitting in the bank will be worth less over time.
The bummer about inflation is that if your money doesn’t increase with inflation, what you have sitting in the bank will be worth less and less over time. If something is worth $10,000 today, using historical inflation rates, we can predict that in 30 years it will cost $25,800.
That means that the $15,630 that you’ll have sitting in a savings account in 30 years will actually be worth less than it is today.
When Should You Invest?
Does this mean keeping your money in a savings account is a bad idea? Not at all!
Savings accounts serve a very important purpose. They keep cash safe, so it’s there when you need it. It’s a good idea to keep your emergency fund and any cash that you’ll need in the short term in some sort of savings account.
If you're investing, you should do so for the long term — at least 10 years.
However, your retirement account and any money that you’ll want in the future might be better off invested. Experts say that if you're investing, you should do so for the long term — at least 10 years. That gives you time to weather the ups and downs of the market.
How Can You Start Investing?
If you work for a company that has an employer-sponsored retirement plan, like a 401(k), that’s a great place to start. Usually, if you contribute to your retirement account, your employer will also contribute money to your retirement. This is free money that you should take advantage of.
If you work for a company that has an employer-sponsored retirement plan, like a 401(k), that’s a great place to start.
If you don’t have access to a retirement account with your employer, the next best thing to do is to open up an Individual Retirement Account (IRA). These retirement accounts offer big tax savings and are an easy way to dip your toe into the investing world. Just remember, any money that you invest in a retirement account should only be used in retirement. If you try to use the money before then, you’ll be hit with penalties and a big tax bill.
Okay. You understand investing is important. You understanding why thinking ahead is a must. But every time you try to crack open a book on investing, the terms and jargon are too overwhelming for someone who isn't an economics major.
Nothing to be ashamed of! It takes time to understand investing thoroughly. Luckily, there are plenty of easy options that will do the heavy lifting for you and get your investment accounts set up in a snap.
Option 1: Robo-Advisors
Robo-advisors are a really popular option for people who want an easy-to-use investing platform. You can have an account set up within minutes! All you need is your smartphone, a bank account, and an idea of how much you want to invest. After you answer a few questions, your robo-advisor will select the investments that are best for you. It will also consistently monitor your account and make trades to make sure you’re getting the optimal investment strategy.
After you answer a few questions, your robo-advisor will select the investments that are best for you.
Evie's favorite is Betterment (not an ad). There are no minimums to open an account with Betterment, so you can get started no matter how little you have to invest with.
Other popular robo-advisors include Ellevest, which is designed specifically for women, and Wealthfront.
Option 2: Target Date Funds
Another incredibly easy way to start investing is with a target date fund. With this fund, you simply choose the year you want to retire, and the investment company will automatically manage your investments within the account, to ensure you have the optimal mix.
Simply choose the year you want to retire, and the investment company will automatically manage your investments.
Let’s say you think you’ll probably retire in 2050. You’d open an account and select the 2050 Target Date Fund and begin making deposits. Everything else will be taken care of for you!
You can find target date funds with investment companies like Vanguard. Their website isn’t as user-friendly as Betterment’s, and they do have a $1,000 account minimum, so keep those two drawbacks in mind as you look at your options.
Investing may seem overwhelming at first, but you don’t need to understand every detail or have a lot of money to get started. There are so many options now that make investing easy and accessible for everyone.