If you think investing in the stock market is not for you, then you’re probably not interested in creating wealth. Investing in stocks allows us to have more money for things we desire, like retirement, education, vacations, and leaving an inheritance to the next generation. Investing may seem like a daunting task, or perhaps you think it’s for rich people only, but trust me; with a few basics steps and a $100 you can start your journey to being financially free!
- Decide why you are investing- Are you investing money for college for the kiddies, retirement, fun, boredom, a mixture of each? Whatever your goals are, this will help determine how much you invest and where.
- Embrace compounding- Compounding interest is one of my favorite things when it’s working for me. Compounding interest is when the interest or return you earn on an investment, is paid interest. For example, if you invest $100 in month one and earn 10% or $.83, the next month you will earn interest on the $100.83 or $.84. The interest you earn gets bigger each month. It may not seem like much but investing $100 could net you $1,083 in 25yrs even though you didn’t invest anything else. Compounding really works for you when you start young. For example, say at 25 you start investing $3,000 a year earning 10%. Then, you stop at 35 and let the money sit in the market until you are 65. Do you know how much you will have at 65? $834,000. Your sibling, who isn’t as smart as you, waited until they were 35 to start investing $3,000 a year, and they invest annually until they are 65. Do you know how much they will have? $493,500. They invested $90,000, while you only invested $30,000, and you have almost twice as much as them. That’s the power of compound interest at work! Maybe you are 35 and you haven’t started investing yet, it’s never too late to make compounding work for you.
- Watch out for Uncle Sam- Investing is a little less fun when you think about the IRS getting their paws on your returns. That’s why it is wise to invest in tax deferred investments. 401K’s that are offered through most employees allow pre-taxed contributions to your retirement accounts, saving you money on taxes now. Roth IRA’s are not funded with pre-taxed dollars, but distributions at retirement aren’t taxed, saving you money on taxes later. Investing in both to fund your retirement is a good plan. Don’t forget the employer match on your 401K, if it is offered. This is free money your employer is giving you and never should be turned down!
- Where do I start – Well, it depends on the answer to #1,”why are you investing”. If it’s for retirement and your employer has a 401K that is the best place to start. IRA’s can be open at brokerage companies like Fidelity or Vanguard. They also have different educational savings accounts, and if you are looking for a traditional brokerage account to buy stock or funds (a combination of stocks) you can get those there as well. Another great place to invest, that can save you money on investment expenses, is investing directly through a company’s transfer agent. Most large companies hire a transfer agent to handle their stock transactions, and you can invest through DRIP accounts directly though these agents for fewer fees then you would pay a stock broker. But, when you buy stock directly from a company, make sure you have done your homework, and that you are very familiar with that company. Some examples of transfer agents are: Computershare, Disney Shareholder Services, and American Stock Transfer & Trust Company. For example, you can buy stock in Walmart, McDonald’s, or Disney for as little as $25-50 a month.
- What to avoid- Taking unnecessary risks, by investing in companies or products you know nothing about. Investing is a long term commitment. Thinking you are going to get rich quick isn’t the best plan. If the money will be needed in the next three years then you probably shouldn’t put it in the stock market. If you have debt you are paying 15% on you should pay that off before you start investing. Ignore all those loud mouths on TV who think they know the next hot stock, because they usually don’t. Watch out for fees. Paying too much to invest can hurt your returns in the long run.