Want to be wealthy? You’ll need to invest, says Erin Lowry, the personal finance expert behind Broke Millennial and author of "Broke Millennial Takes on Investing: A Beginner’s Guide to Leveling Up Your Money".
Millennials are in a good position to invest, because they can tap into investing’s biggest asset — time. “Time enables you to weather the ups and downs of the market. It lets you take advantage of compound interest for a longer period of time. And that’s what’s going to get you to your long-term goal of living comfortably and achieving financial freedom and independence,” Lowry says.
Step 1: Set your financial goals
You need to get your financial life in order before you dive into investing.
“It’s really important to write down your goals,” Lowry says. Then you can figure out when it makes sense to save v. when to invest.
For your short-term goals, like moving or replacing your car, you might to save. That’s because investments in the stock market can rise and fall, and you won’t want to pull out your money when the market is down.
- Master your cash flow. “People hate the word ‘budget’,” Lowry says. “I like ‘cash flow’. You need to know how much is coming in and how much is going out.”
- Build your savings. You need enough money in an emergency fund to cover three months of your expenses as well as your short-term goals.
- Pay off credit cards and high-interest debt. You can probably start investing while you are paying down mortgages, car loans, and student loans. Lowry’s rule of thumb is that it’s okay to start investing if your student loan interest rate is 5 percent or below.
Step 2: Start with a retirement fund
Have money in a retirement fund? You’re probably already investing. Lowry is on a campaign to change the way we talk about the money we put away for retirement. “We say ‘save for retirement’ but we are investing for retirement. People don’t think of themselves as investors, but they are. It’s important, because it can build confidence,” she says.
Most employers offer either a 401k or 403b plan, and many will match part of your contributions. “If you can take advantage of the full match, that’s wonderful. If you can’t, start with 1 percent and every three to six months add another 1 percent,” Lowry says.
If you’re self-employed, you can invest for retirement in an IRA, a SEP IRA, or a solo 401k. Lowry recommends putting aside 35 to 45 percent of your income to cover your taxes and your retirement investments if you work for yourself.
She follows her own advice, putting 45 percent of every paycheck into a savings account. From that account, she pays her quarterly taxes and uses the money left over to invest in her SEP IRA. “This ensures I’m still prioritizing my future and investing for retirement instead of just putting it on the back burner,” she says.
We say ‘save for retirement’ but we are investing for retirement. People don’t think of themselves as investors, but they are. It’s important, because it can build confidence.
You don’t necessarily need to max out your retirement investments — it depends on how much money you think you’ll need in retirement, and what your other goals are. You can’t easily pull money out of your retirement investments, so if you have goals that are 10 to 15 years away, it might make sense to invest for those in tandem with retirement. In that case, you might not be able to max out your retirement savings.
For 2018, Lowry didn’t max out her SEP IRA contributions, but she invested more than what a 401k would have allowed, since 401ks have lower limits. She feels comfortable with a high level of risk for these investments, since she’s 35 or more years away from retirement. So she invests about 90 percent of her portfolio in index funds.
She and her husband also invest less than 5 percent of their monthly income into taxable investments they may use for a down payment on a house — a long-term goal for them. “It’s a modest sum because we’re focused on paying off my husband’s student loans right now, but I still like to balance in some investing,” she says.
Step 3: Take the plunge
Once you’ve organized your financial life and you’re saving for retirement, you’re poised to start investing on your own. Here’s what to do next:
1. Educate yourself
Lowry says there’s plenty of credible information out there, no matter how you like to consume content — podcasts, books, blogs, magazines, or TV shows.
She thinks the educational portals the brokerages provide are great tools, and you don’t have to be a customer to access them.
“And I say this with a huge caveat — Reddit is always a place to go. The advice is worth exactly what you paid for it, but it’s a good jumping-off point for resources and a variety of opinions,” she says.
2. Decide how much you want to invest
Some funds have minimum initial investments, so if you know you want a certain fund at a certain brokerage, check to see how much money you need to get started.
If you don’t have much money to start with, microinvesting — investing small amounts of money — is an option. But Lowry says to watch out for fees. “A lot of apps only charge $1 a month. That sounds like such a bargain, and frankly it is,” she says. But if you’re only investing a couple of dollars a month, the fees can eat up all your returns. She recommends that you put in at least $25 to $50 a month.
3. Understand fees
“Every dollar you pay in fees is a dollar less that’s compounding for the future,” Lowry says. The expense ratio, for example, is a common fee. But it can range from .04 percent to 1 percent. It’s not necessarily bad to pay a higher fee, but you need to be sure you’re truly getting value out of it.
“I compare prices on different funds to ensure I’m getting the best value for my money,” Lowry says.
4. Do your research
To find the right fit for your investments, ask friends, parents, and coworkers what they recommend, and look at online reviews. From that list, play around with the web sites and apps. “Especially for millennials, the user experience of the site can be make it or break it,” Lowry says. And make sure your investments are secure — look for two-factor authentication.
Make sure whoever is working for you has your best interest in mind. That’s called the fiduciary standard. Another standard, the suitability standard, simply means that investments are suitable for you — they aren’t necessarily the best choices for you.
5. Contact your top choices
“When you’re starting out, the process can feel really intimidating,” Lowry says. “Pick up the phone and call someone who works at the brokerage.” They can talk you through the nitty-gritty like how you’ll connect your bank account to your brokerage account. Plus, it will show you what their customer service is like.
Not sure if investing is right for you?
If you’ve followed all these steps you’ve likely overcome the biggest barrier to investing: fear.
Still, if you’re just not comfortable with investing, that’s okay, Lowry says. She shares something she learned: You don’t have to invest. You just have to understand that when you do invest, your money does the heavy lifting for you. If you don’t invest, you’ll have to save a lot more to meet your goals.
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