Without much more than basic knowledge of how the stock market works, I was prepared to wait to get involved until I got a job with a 401k. I figured that would help me get my feet wet and provide the motivation I needed to learn more and prepare for the future. Words like “investing”, “IRA” and “bonds” all made me feel the same: excited, and really really nervous.
My wife and I have thought about opening an IRA for a while, and now that we have our debt paid off and our emergency fund is well under way, it was the next thing to do on our personal financial checklist. However, something kept stopping me.
I hadn’t ever taken the time to learn about investing, and I felt like waiting wasn’t going to hurt me that much.
Then, something changed.
I read this post about investing returns over time at the personal finance blog Darwin’s Finance. I read the post through a couple of times, because I couldn’t believe what I was seeing. The post starts with a quote from the author’s father:
“If you started investing at age 25 and put the same amount of money into stocks until age 35, you’d have more money at retirement than if you started saving at 35 and invested the same amount of money in stocks EVERY YEAR until retirement”
Someone who invests $5,000 a year from age 25 to age 35 will (with an average 8% return) have $615,580 when they turn 60.
Someone who begins investing $5,000 at age 35 and continues until age 60 will (again, with the 8% return) have $431,745 at age 60. (See the post for graphs and full explanation).
So even in a down market (and maybe even especially in a down market) in makes sense to start with something, somehow, to cash in on the power of time. But, you don’t want to invest without doing your research and making goals. My wife and I decided to open a Roth IRA, and during our research, completed a questionnaire that helped determine if we were really ready to begin investing. A Roth IRA is a recommended choice for those starting young – the money is taxed now, but not when you draw it out – beneficial if you anticipate being in a higher tax bracket when you retire. I felt like some of the things I learned during my research might help others who are nervous about beginning to invest.
NOTE: This is what I’ve learned over only a short time of research – please learn for yourself and seek qualified financial assistance before starting to or continuing investing. The information below is based only on my experience and is not professional investing advice.
What Is Your Purpose For Investing?
You’ve got to have a goal. This is the first question we were asked. There are three main purposes for investing:
Growth – You want your money to grow. You’re prepared to take slightly bigger risks that have potential to grow, and are also prepared to invest for at least five years (or more) to realize the potential of your investments and recover from down turns in the market.
Sample goals: to save for college, a home or retirement.
Income – Instead of growth, you’re looking for more immediate income. You’ll look at more conservative investments that pay dividends, either monthly or quarterly.
Sample goals: to pay for monthly expenses.
Preservation of Capital – The main goal here is to preserve and slowly increase your investment. You’d want to use this type of strategy when you’re looking for small returns on your investment, but your main goal is to preserve what you already have.
Sample goals: to build an emergency fund or save for an expense within the next 12 months.
How Long Are You Planning on Investing?
Obviously, the length of time your money will be invested affects what type of investment you’ll choose.
Do You Have a 3-6 Month Emergency Fund?
I was very glad they asked this question. Investing is an important financial goal, but it should become a priority only after other major financial needs are met. An emergency fund should be the first thing on your list to take care of.
How Much Are You Going to Contribute?
This is also a key thing to consider. You shouldn’t go into debt to invest. You should only contribute a small, reasonable amount until you’re comfortable with investing and have learned more about it. We’ve started with just $20 a month into a mutual fund. We’ve budgeted that amount into our monthly budget and know we can afford to contribute at least that much each month – both key considerations.
Start With The Basics
Don’t feel pressured to begin investing if you’re not sure you understand how everything works. My wife and I have been looking at doing this for quite a while, and have sat down and gone over the numbers and the different ways we can invest, as well as the different tools we have access to. Begin learning, and before you know it you’ll be ready to go. Again, though, take the proper time to consult professionals and understand the risks of investing. You need to understand there is a very real possibility you’ll have weeks, months, and years where your investment might be losing money. Hopefully, though, if you’ve done your research and prepared for the worst, you’ll be able to ride out the bumps in your long-term investment strategy.
I understand that there will still be ups and downs (probably even more major ones) between now and the time I retire. But I also can’t describe the relief and the feeling of comfort that I have knowing that I’m at least doing something for the future. The earlier you start, the more consistent you are, the better of you’ll be, and the more time you’ll have to recover from major downswings in the market. Investing wasn’t the huge ugly monster I thought it would be. I’m actually enjoying putting what I’ve learned to use. Do your research, talk to a professional, and get started!