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A Beginners Guide, How to Start Investing
Investing - Where Do I Start?
Many Millennials entered the workforce during the Great Recession, and as a result have started their careers at lower salaries or not in their preferred field of work. Compound this with the fact that Millennials carry more debt in the form of student loans than any prior generation, and it’s easy to see why some (not all) might be nervous about putting their hard earned savings into an investment that carries any degree of risk. However, not investing while time is on your side could make for a difficult road to retirement. To start, here is an overview of some common investing products.
Common Investment Products
- Annuity: Designed to accept and grow funds from an individual and then at a designated time pay out a stream of payments to the individual on a periodic basis.
- Bond: Debt investment in which an investor loans money to an entity — corporate or governmental — that borrows the funds for a defined period at a fixed interest rate.
- Certificate of Deposit (CD): Savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the Federal Department Insurance Corporation (FDIC). The term of a CD generally ranges from one month to five years.
- Individual Retirement Account (IRA): IRAs are established by individual taxpayers who can contribute 100 percent of compensation up to a set maximum dollar amount. Traditional IRAs are tax-deferred – you don’t pay taxes on the money in the account until you withdraw it. In some cases, contributions to a traditional IRA may be tax-deductible. Roth IRAs work differently – contributions are taxed, and therefore not tax-deductible, but money in the account grows tax-free. When you withdraw funds later you are not taxed on that money or the interest it’s earned. The “what you see is what you get” aspect of tax-free Roth IRA withdrawals can be helpful when budgeting for retirement.
- Mutual Fund: Made up of a pool of funds collected from many investors for the purpose of investing in securities. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors.
- Promissory Note: Written, dated and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at a specified future date. Promissory notes can be investments or merely a loan between the maker and the payee. Whether or not it is a security depends mostly on the intent of the parties in the transaction.
- Stock: Type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.
Millennials have said to be nervous and uncertain about investing. There are many concerns which keep millennials from earning money through compound interest. Below are the top three reasons Millennials don't invest and strategies to overcome these fears.
I don’t have enough money to start investing.
"The journey of a thousand miles begins with a single step." (Lao Tsu, Chinese Philosopher)
If you can put aside $5 or even $10 a week, then you have enough money to start investing for your future goals. You might be able to find even more to invest by looking at your budget.
You are not required to have a large deposit to get involved with a brokerage firm or trading platform. Firms often offer investment options with low or no commissions or management fees. Many also offer investing apps for your smartphone.
The best strategy is to automate your investing. If you’re paid bi-weekly and have $5-$10 deducted from your paycheck before it hits your bank account, you’ll have $130-$260 to invest over the course of the year, and you won’t miss it because you won’t see it. If your employer offers a 401(k) or Registered Retirement Savings Plan (RRSP) or pension, invest in it, even if it’s a small amount. You won’t miss 1% of your paycheck if you never "see" it.
If you think $5 a week is too little, remember, compound interest and time are on your side, no matter how small you start. Before placing your money with any broker-dealer, make sure they are registered by contacting the Indiana Securities Division at 1-800-223-8791 or search the database on the Securities Portal.
I don’t know enough about investing to invest.
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” (Warren Buffett)
If you need help building a portfolio, you can enlist the assistance of a robo-adviser or consult a financial professional after checking to ensure they’re appropriately registered. Many financial planners, investment advisers, and brokers are willing to work with clients who are just starting out on their investing journey and have not yet accumulated many investable assets. In a way, time is on the financial professional’s side by working with younger clients whose investments will enjoy the benefit of compounding value over time.
The best strategy is to grow your investor education muscle. You can contact us for additional education materials, search online or read a book for more investor information. Also research low cost financial professionals in your area or those who are remotely willing to help you with your investment goals.
I’m afraid of losing all my money.
“When you invest, you are buying a day that you don’t have to work.” (Aya Laraya)
While there is always a risk of losing money when investing, leaving your money in a savings account is almost a guarantee that you will lose some of the value of your money to inflation. As Robert Allen once said, “How many millionaires do you know who have become wealthy by investing in savings accounts?” The answer to that rhetorical question, is none.
The best strategy is to get some perspective by looking at the data on market performance over the long term (10, 20, and 30 years). Understand that while there are fluctuations, in general, the market has trended up over the long term. Consider the timeframe for your investment goals – when do you hope to retire, or semi-retire and pursue your own hobbies or interests full time?
Don’t get hung up on the sensationalized news on social media or 24-hour news shows. It’s important you don’t make your investment decisions based on sources that offer dramatic, sensationalized spins on the latest market dip or the hottest new IPO.
Most importantly – right now time is on your side, but with each day that passes, it’s a little less on your side. It's best to get started and make a few mistakes, rather than do nothing at all. Your future self will thank you for taking steps today to be in a better financial position later.