While the stock market seems like a closed-off world to many people, only accessible to people in jackets yelling orders into phones or on the floor of the New York Stock Exchange, it’s actually extremely accessible. However, when you should start investing and at what age to start investing really depends on your individual finances and approach to money.
It’s not smart to just jump into investing without understanding first what investing means and how you can get started — especially with the past year of erratic drops, falls and record-breaking DOW closes against rising unemployment rates and a struggling U.S. economy. But you can still get started investing without too much risk, as long as you understand that risk and play it safe with your money.
When should I start investing?
Invest when you’re young
The power of compound interest works in your favor. If you invest $100 at age 25 into something that returns 7% annually on average, you’ll have just shy of $400 at age 45 and $1,500 at age 65. The more years you give compounding to work, the more your money will grow, and that growth will accelerate as more time passes. Invest when you’re young, and you give compound interest lots of years to work for you.
Invest after paying off high-interest debt
High-interest debt is debt that charges interest that exceeds what you can get from investing. As we trust Warren Buffett’s long-term prediction of a 7% average annual return for diversified investments, any debt with an interest rate over 7% should be eliminated before you invest.
Given low interest rates, this generally means things like student loans, car loans and home mortgages fall below that threshold, but things like credit cards and payday loans are much higher.
Invest after getting caught up on bills
This follows similar logic as to why you should pay off high-interest debt before investing. The late fees that accumulate on late bills blow away the returns you would get on investing (never mind the negative impact on your credit), so you should be up to date on your bills before investing for the future.
Invest after building a solid emergency fund
An emergency fund is a pool of cash you can turn to in a personal emergency of any kind. Don’t trust credit cards to this; instead, keep the money in an FDIC insured savings account, with a small amount somewhere in your home. You should have at least a month’s worth of bare minimum living expenses stowed away for the future and be contributing additional money automatically to your emergency fund.
Three types of investment accounts
Self-directed investment accounts are ones where you’re in complete control and decide exactly how the money in that account is invested. These tend to have low fees and expenses, but you’re making all the decisions for yourself. This is great if you know how you want to invest and just want to keep it simple.
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Robo-advisor accounts are ones that are managed by automated software with limited human intervention. Accounts like this usually respond automatically to market changes, altering your investment without your intervention according to your specifications, which are usually set up with some initial questions once you open the account. The fees are usually fairly low for these types of accounts.
Broker-managed accounts are managed directly by financial professionals. You’ll pay higher fees for this, but you have a financial professional actually looking at your investments and making decisions on your behalf. You have a person you can actually call with questions, too.
How to open an investment account
An investment account is simply an account that you have with an investment firm — a business that specializes in managing investments. Signing up for an account is as easy as signing up for pretty much any online account, though you’ll typically be asked for more personal information for tax purposes.
- Decide whether you’d like a self-directed account, robo account or broker-managed account to start investing.
- Go to the website or download the app and find the “Open an Account” button to get started.
- You’ll be asked what kind of account you want to open. Most investment firms refer to stock investment accounts as “brokerage accounts” so click the brokerage account button.
- Confirm whether it will be an individual account or a joint account.
- If you already have an account with the brokerage, you will log in and get started funding. If you don’t, you will provide your name, contact information, Social Security number (to confirm your identity) and home address.
- You will likely have to provide bank account information to fund your account. If the brokerage has minimum deposits, you will have to fund your account with at least that much, but many brokerages have $0 deposit minimums.
- Once your account is funded, wait until the cash has transferred from your account and is available to trade with, then you are ready to start investing.
What should I invest in?
Once you’ve opened an investment account, the array of choices can be dizzying. Here are some investments worth considering.
Stocks are individual shares of ownership in a specific company. These tend to go up and down in value in relation to how well that company is doing, which is judged by the dividend that’s paid out. A dividend is a small amount of money, usually less than $1, paid to the owner of each share in the company roughly once per quarter. Individual stocks tend to be very volatile and risky and aren’t a great choice unless you really know what you’re doing, particularly if you’re relying on the money involved.
Options are the right to buy or sell a share (or more) of stock at a pre-set price for a certain period of time. For example, you might buy an option to buy a share of Coca-Cola stock for $50 at any time in the next six months. These tend to be even more risky, as they only pay off if the stock you want changes significantly in value.
Mutual funds are large collections of different investments. When you buy a share of a mutual fund, you’re buying a small piece of everything owned by the mutual fund. These vary a lot in risk, depending on how they’re managed, but they can be a great way to spread out your risk by being invested in lots of different things. However, mutual funds usually have a required minimum investment.
ETFs are a type of mutual fund that usually doesn’t have a minimum investment, but can be more expensive to buy and sell. Usually, buying and selling a mutual fund directly doesn’t come with fees, but ETFs typically are charged a buy and a sell fee. ETFs can be a great starting point for new investors.
Index funds are another type of mutual fund. They’re usually governed by a simple set of guidelines with the aim of simply matching the entirety of a particular market at the lowest possible cost. Index funds are a great choice if you want to just invest regularly and watch your money grow in a hands-off way.
Cryptocurrencies like Bitcoin are digital assets designed to work as an anonymous but secure online medium of exchange. These tend to be extremely volatile, and you usually invest in them through platforms focused on cryptocurrency, like Coinbase. These are very volatile and risky; don’t invest unless you can afford to lose much of your investment.
Real estate refers to land itself, along with any improvements or buildings on that land. Real estate is often bought directly from owners or through real estate firms, but you can buy investments through investment firms that are collections of a wide variety of real estate, such as REITs or real estate index funds. Real estate offers a wide range of risk depending on things like property location.