After working hard to aggressively save the next essential step is to invest your savings. There is no amount too small to start investing. In fact in my opinion it is best to start investing as soon as you can with smaller amounts so you are comfortable with the process.
Research and Select a Brokerage Account
I started my first brokerage account (not 401K related) in my thirties. In hindsight I wish I set up my first brokerage account when I started my first job out of college but for various reasons I waited. The biggest reason is not knowing how to invest and worrying about losing money. Also there were very few people that I knew that talked about investing. I thought I was still young and with so many other things to prioritize like climbing the corporate ladder I could always wait. Like with many things in life it is best to just start and make adjustments as needed.
I finally dedicated myself to researching and exploring options. I found nerdwallet was very helpful in providing the pros and cons with each brokerage site. In addition I researched many investment articles and strategies from reputable people such as Warren Buffet.
Eventually I ended up choosing primarily Charles Schwab and have been pleased with user friendly approach and investment selection. There are a lot of different brokerage account options that can all get you to similar financial goals so please feel free to select other options just as long as you start.
There a lot of options to invest. Some may choose to invest directly into individual companies; however, this should require diligent research on each company and even then can be risky. For those that want to simplify the approach to investing without spending a lot of time research companies investing in index funds is a good option.
- An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index.
- The S&P 500 Index, the Russell 2000 Index, and the Wilshire 5000 Total Market Index are just a few examples of market indexes that index funds may seek to track.
Pros of Index Funds:
1.) Rather than investing in one stock index funds goal is to track the entire index thus your capital is diversified across multiple companies.
2.) If you prefer passive investing and are willing to hold onto stocks for the long term (5 years or more) Index funds could be a good option.
3.) Index Funds typically have lower expense ratios. Be sure to check the expense ratios closely before investing.
Cons of Index Funds:
1.) The market and Index could decrease due to an economic recession thus your investment could decrease. This is the same for many other investments, as with any recession there is always a risk of loss.
2.) Gains are limited to performance of the index the fund tracks. For example if you are looking for big gains in a short period of time this may not be the best option for you.
Please visit Investor.gov for more information on index funds.
After weighing the pros and cons of index funds my current investment strategy is primarily investing in index funds for the S&P 500. While I don’t expect to have my returns skyrocket in the short term I am comfortable with holding for the long term.
I continue to reevaluate my investment portfolio and ensure that I am taking enough risk in my investments and not holding too much cash. One easy mistake is to hold too much cash.
After saving up for a six month emergency fund it is important to consider other ways of diversifying your investments vs holding on to cash. While having cash during a recession is better than losing money, having too much cash is also not good especially during periods of high inflation. Holding too much cash also means you are missing out on compound interest.
Importance of Compound Interest
Compound interest is the gains not only from your original investment but also the gains on the interest from multiple years of investing. For example if you invested $1,000 today at 10% compound interest, at the end of ten years you would have $2,594. Where as if you didn’t have compound interest the $1,000 ten years from now would be $2,000. This means with compound interest you would have almost $600 or 30% more.
Make Decisions for Your Best Future Today
It’s easy to put off any investment decisions as I know first hand it can seem overwhelming; however, it is important start making decisions for your best future. Even small changes can help you learn more and be more confident in the future. That means taking some risk in investing after doing diligent research. While the strategy I have preferred for my current lifestyle is investing in index funds, other strategies are welcome as long you are informed going into the investment and it aligns with your financial goals.
If you are uncertain of what is the best investment strategy for you, then consider trying a couple and starting with smaller amounts and seeing which strategies meet your goals. As with any investment particularly with investing in index funds there could be days, months, and even years with negative returns. If you are willing to hold for the long term then you will be in a good position to ride the bumps and hopefully be in a good position by the time you retire.
Automate any Transfers
One tip that I’ve more recently done is to automate any transfers that way I don’t have to think about transferring the money. In general I’ve found the more automation the better. On a monthly basis I’ll have my 401K, 529 account contributions, and brokerage account contributions automatically transferred. This ensures my investment goals are met upfront, reducing any likelihood of overspending on other purchases.
Keep Building Your Investment and Finance Knowledge
Once you’ve completed the above steps take confidence in knowing you are well on your way to becoming a knowledgeable investor, maximizing your savings, and planning for the future. Keep up the great work by continuing to evaluate your portfolio, continuing to read and research ways to invest, and then make revisions to your investment strategy as needed.
In summary with your hard earned savings be sure to:
- Select a brokerage account after doing research
- Invest in your selected strategy (index funds are a reasonable option)
- Take advantage of compound interest by not holding too much cash
- Take the plunge and start making decisions for your best future today
- Stay on track and make the process more efficient by automating any transfers
- Keep building your investment knowledge and adjust as needed