By Katie Bingham-Smith
Understanding money, and ways to make it grow, is essential if we want to take charge of our finances and have security down the road. If you are feeling overwhelmed when it comes to investing your money, you aren’t alone. Getting started can make you feel confused, especially if you have zero experience when it comes to investing.
Liz Winfeld, an Independent Financial Adviser at LPL Financial, LLC, says to think of investing your money as paying yourself. “Investing is about time, not money,” she says. “So pay yourself first by establishing either a brokerage account or some sort of retirement accounts. If you can, do both though. Make investing your money (and paying yourself) your first monthly action, not your last.”
It doesn’t have to be a ton of cash, either. Winfeld says something as little as $25 a month (you can skip one meal out or cut back on your latte budget) to start out with is going to make a huge difference to your future — every little bit counts and will add up.
The old saying “A penny saved is a penny earned” holds true for investing. It’s not solely about saving, but also about not overspending. Staying out of consumer debt can help our financial future in big ways.
Winfeld explains some debt like school loans, mortgages, car loans are unavoidable and fine as long as “you don’t bite off more than you can chew,” but she advises to steer clear of credit card debt at all costs.
“Credit card debt is the worst thing you can ever do to your present as well as your future self,” she says. If you must use a credit card, Winfeld recommends choosing one that pays you cash back, unless you really will use those miles or hotel rooms that some credit cards offer.
Her rule of thumb is to “never put more on it per cycle than you can pay off, in full, every month. If I could only give one piece of advice to young investors, this would be it,” she says.
Something else to consider is not getting caught up in investment trends. “When starting out, don’t go chasing the ‘next great investment,’” she says. Instead, you should be sticking to “low cost index funds in the form of mutual funds or exchange-traded funds,” says Winfeld.
“One of the most important things you can do as a beginner investor is to be patient and realize this isn’t a game — it’s a commitment you are making to yourself,” she says.
It’s also important to realize investing your money will take some time, but you and your future are worth that time.
It’s important to sit down, make a budget and stick to it. Winfeld advises everyone to understand what’s coming in, what’s going out and why. “It doesn’t have to be strict or absolute,” she says, “but it should be mostly true.”
Start by jotting down what you spend money on every day for a month. This will show you your mandatory and discretionary expenditures and, from there, you can decide how much you can/should spend and how much you can save for something you want or need for your future.
A bonus tip offered by Winfeld is taking advantage of all the things your employer may offer as far as investing money. “If you work at a place with a 401K, 403B, SEP or Simple IRA and a ‘match’ is offered – work towards maxing out the match,” she says. “[That] means putting in enough of your money to get the highest percentage of what your employer will match. If not, then understand your own tax situation to know whether or not you best benefit from an IRA (tax deferred growth) or ROTH IRA (tax free growth).”
Eric B. Lusk is a Wealth Advisor for Dow Wealth Management, LLC, and says when you first begin to invest, think about when you will want your money back as this will determine what kind of investing you should choose. “The suitability of an investment starts with how soon you need to access that money. If it’s sooner, then go safer; if it’s later, then think bigger,” he says.
Lusk advises putting money into a pre-tax retirement plan. This way, the investor will avoid paying state and federal taxes.
“For someone making $40,000 that means for each $1 put into a retirement account they don’t pay the Federal Government 10%, nor the State of Maine around 5%,” says Lusk. “So if that person takes 85 cents out of their pocket it magically turns into $1 for a gain of 15 cents. That 15 cents is an automatic 17.6% return just for the heavy lifting of delaying gratification. Over the last 10 years, the S&P 500 Index has averaged around a 15% annual return, but in the first decade of the 2000s the total return annualized right around 0%.”
Lusk also advises not to get emotional about your investments saying, “Owning stocks, and sometimes mutual funds and exchange-traded funds, can become buried in emotion. Just because your grandmother made a fortune off a company in the 1950s and 1960s doesn’t mean that company will always do equally well in a new era and under new management. Don’t be afraid to pare back a winner – trends, technology and interests are dynamic and so your investments should be, too.”