Let’s face it, investing can be intimidating at first – especially if you’re starting from scratch. Fortunately for all of us, it’s easier than ever to invest and there are tons of resources we can use to learn the basics. Without further ado, let’s dive into how you can start investing with absolutely no background knowledge!
What Having Little Or No Investing Knowledge Means
So, you already know whether you have a lot of knowledge about different investments or not. That shouldn’t really be up for debate, and it shouldn’t be a shock to you that you don’t know what you’re doing. However, it may come as a surprise that your current lack of knowledge will heavily impact what types of investments you should get started with.
Let’s take real estate as an example. It’s a great investment, one which has made countless people wealthy over the years. However, until you have more experience with it, you shouldn’t focus on it heavily. Instead, it’s better to invest in the stock market – or in REITs if you’re absolutely set on real estate. Leave real estate alone until you have a solid understanding or a great mentor to help you.
You’ve Finally Decided To Start Investing
Whatever your reason, it’s great that you finally decided to start investing. No matter where you’re at, it’s never too late to start investing. As you’ll find out with time, the most important part of investing is just starting – and staying consistent.
Considerations For Your Decisions
Ultimately, you need to figure out your long-term financial goals. Once you’ve figured that out, it makes it much easier for you to actually get started. When you understand those long-term goals, it makes all your other decision-making much easier. Whenever you’re making an investment, remember to do your research and think about how this would help or hurt your progress towards your financial goals.
How Much Do You Actually Need To Invest?
This is a hot topic among many people. It depends on your goals, of course, as well as when you’re starting or how aggressive you want to be. Let’s say you’re starting in your mid or late 20s, for example. How much you need to invest will still be variable, but start with at LEAST 10% of your income. Keep working on investing more. When you’re investing 20-25% of your income, you may start to feel more financially free – and a nice retirement is perfectly within reach. If you’re investing 50% of your income or more, then you likely can retire early!
Index Funds And ETFs Are A Great Starting Point
Over the years, the term “index fund” has become a bit of a buzzword – and rightfully so – but many people still have questions about what index funds actually are.
The short explanation is that they’re a type of mutual fund or ETF whose portfolio is designed to mirror a market index (like Dow Jones, S&P 500 or Nasdaq Composite). Of course, if you’re not already finance-savvy, that may sound like a lot of nonsensical jargon.
As an example, let’s say an index fund is based on the S&P 500. The S&P 500 measures the stock performance of 500 of the largest companies that are publicly traded in the United States. This hypothetical index fund would then possess stocks for all the companies in the S&P 500, in an attempt to mirror their overall performance.
Since an index fund isn’t actively trying to determine which companies will have their stocks decrease and which will have theirs increase, they don’t need to be as actively managed. Consequently, index funds will generally have much lower fees than those that ARE actively managed. However, most index funds have high commission rates, so if you intend to actively trade they may not be for you – they’re much better suited for buying and holding.
The main takeaway is this – index funds and ETFs are a perfect investment for beginners.
Examples
When picking an index fund or ETF, I recommend checking the fee, historic returns, and the minimum investment requirement. If you don’t know the general details of an index fund or ETF, don’t invest in it. Also, this isn’t an exhaustive list of the good or best index funds and ETFs, nor does it necessarily make an ideal portfolio – it’s a starting point for you.
- Fidelity ZERO Large Cap Index Fund (FNILX) – an index fund with a fee of 0% and no minimum investment, making it one of the better choices for beginners (yes, you read that right – 0%)
- Vanguard S&P 500 ETF (VOO) – another great fund with a low fee of .03%
- Vanguard Growth ETF (VUG) – a bit of a “riskier” and more expensive fund, it has an expense ratio of .04%
- Fidelity 500 Index Fund (FXAIX) – another solid pick with a fee of .015%
- Schwab Total Stock Market Index Fund (SWTSX) – with an expense ratio of .03%, SWTSK is another great option
- Vanguard Total Stock Market ETF (VTI) – a big part of many portfolios, it only has an expense ratio of .03%
Make Use Of Your Retirement Accounts
The most important part is clearly starting and being consistent, but investing in the right account can save you a huge amount in taxes. Also, if you want to retire early, you may need to consider investing in an account with no tax benefits, so you can begin withdrawing from it much earlier (with no penalties).
401(k)
A 401(k) is a type of tax-advantaged investment account. There is a cap on how much you can contribute annually, but usually your focus is simply on reaching the amount your employer will match.
In a traditional 401(k), your contributions are deducted from your taxable income. This means that your contributions are made tax-free, but you will have to pay tax on them when you withdraw them in retirement. This can be a good thing since a lot of people will be in a lower bracket when they retire. However, it is always unknown how policies and taxes will change in the future, so you can never be completely sure which will end up being the better option in the long run.
In a Roth 401(k), you make contributions that have already been taxed. That means you won’t have to pay taxes on them later, when you withdraw.
IRAs
An IRA is another type of tax-advantaged investment account. There is a cap on how much you can contribute annually to a Roth IRA, which you’ll ideally reach.
In a traditional IRA, your contributions are deducted from your taxable income. Like the traditional 401(k), this means your contributions are made essentially tax-free, however you will have to pay tax when you withdraw them during retirement.
Roth IRAs use contributions that have already been taxed. While that seems unfortunate now, it does mean you won’t have to pay taxes on them later on, which could turn out in your favor (but it could also work against you too). The main issue for Roth IRAs is that they have an income cap, so once you make over a certain amount you can’t contribute to it anymore.
Make Priorities
This isn’t the perfect priority list for everyone, but it’s a place to start to get you thinking about your personal priorities. Read it, take it with a grain of salt, and adjust it as you need to so that you can reach your financial goals:
- Your emergency fund, for emergencies of course (yes, I consider this an incredibly important priority).
- Meeting your company’s 401k match, if they have one.
- Be sure to eliminate any eliminate any high-interest debt if you haven’t already.
- Max out an IRA – traditional or Roth depends on the details of your household, but I think a Roth IRA is generally a good investment.
- Consider contributing more to your 401k – there is a LOT of debate on this, and I think it comes down to when you want to be able to pull money out of your investments. If you want to retire early, you may want to look at other options like contributing to a standard account with a brokerage.
- If you’re happy with where you’re at and how your investments are going, think about donating more or contributing to some account (like a 529) for your kids.
Use M1 Finance
For those of you who don’t know, M1 Finance is a brokerage that offers high customization and automation to help you build your ideal portfolio that can meet just about any preference or requirements you may have. On top of that, it has low fees and minimum balance requirements.
You can create and design your own portfolio – made up of anything from index funds to individual stocks. Alternatively, if you are more of a beginner, you can use their premade portfolios based on your current goals. What separates M1 Finance from its competitors is that M1 lets you deal in fractional shares and it gives you immense control over your own portfolio. Overall, it’s a great brokerage that has the flexibility to give just about everyone (except for day traders) the flexibility they need to hit any goal.
How To Get Started With An M1 Finance Account
- Follow this link to get started.
- Sign up quickly and set up an email and password.
- You’ll be prompted to create the type of account of you want (standard, IRA, etc.)
- Link your bank to M1 Finance so that you can set up initial deposits – you can go ahead set up automatic deposits too if you want!
- Set up a portfolio with the index funds and ETFs of your choosing – M1 Finance makes it easy to adopt a “set it and forget it” mindset, as your deposits will automatically be distributed to the portfolio.
Building A Portfolio
- So, M1 Finance splits up your portfolio into “pies” which you can manage yourself – or use premade ones. If you’re brand new to investing, I recommend using the premade ones for now. If you are more experienced and want to be more hands-on, the process of building your pie is pretty simple.
- Navigate to your pie and select “manage pie.”
- Select the edit option.
- There should be some option to add funds or stocks, denoted by a “+” icon or an “add” button depending on whether you’re in the app or browser – click it.
- Search for the index fund, ETF, or stock you want to add to it.
- Add it to your pie and specify what percent of your contributions you want allocated to it.
Conclusion
The sooner you start, and the more consistently you’re able to invest, the better off you’ll be. Make it a priority to invest as soon as possible, and make sure you budget in some routine investments. If you’re really struggling to get started and didn’t understand this article at all, try out Acorns. Think of it a bit like training wheels – it will get you started on your investments and teach you a lot of the fundamentals that you need to know.
If you have any tips or recommendations, let us know in the comments. For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter!
