05 Dec I’m in My 20s. How Do I Begin My Investing Journey?
I’m in My 20s. How Do I Begin My Investing Journey?
Young adults are becoming more and more intrigued by the idea of investing. They’re intelligent and can see that putting money away now can pay off big time in the future. They are fully aware of the various trading apps flooding the market, including Robinhood, Acorns, and E*Trade, and they want a piece of the action.
Although these apps allow you to make trades without any fees, few financial planners would advise you to buy individual stocks because it’s just too risky.
So how do you begin your investing journey as a 20-something? Assuming you have about $1000 to invest, let’s look at some of the best options for you, and some you’ll want to avoid too.
Minimums for Opening an Account
Although $1000 may seem like a lot of money to you, it’s not necessarily a lot of money to many investment firms. In fact, it’s almost too little to mess with. Many brokerage firms have minimum amounts you must deposit to even open an account, and most won’t take your $1000 to start an investment account for you.
So what do you do?
Investment Options When You’re Starting out Small
With only $1000 to invest, you basically have to work with a “discount broker” who is usually very hands-off and doesn’t offer much advice; his only job is to make the transaction happen for you for a fee. So, understand that you’re pretty much on your own.
Mutual funds or bonds are easier as far as minimum investment amounts. You can purchase these from a brokerage firm or your local bank. Government bonds are available through www.TreasuryDirect.gov and start at about $100 each, which is very reasonable.
Although mutual funds are a feasible option, realize that there are fees such as the management expense ratio and loads (sales charges) that you’ll incur, which are still less than the fees and commissions you’ll pay for stocks. Some mutual funds utilize dollar cost averaging which allows the investor to invest over time instead of in one lump sum. For example, you could agree to invest a fixed amount each month of just $50-$100 depending on what minimum requirements are in place for a particular company. Dollar-cost averaging is a great, low-risk investment strategy for beginners. Dollar Cost averaging does not assure a profit and does not protect against a loss in declining markets. This strategy involves continuous investing; you should consider your financial ability to continue purchases no matter how prices fluctuate.
One of the best ways to begin investing is through a 401(k). If you’re fortunate enough to work for a company that offers a retirement option like this, then be sure to take advantage of it.
When NOT to Invest
Young 20-somethings are often eager to invest because it’s exciting and new, and many enjoy the riskiness. But let’s be honest; young adults usually have better or more important things to spend their money on than investments.
For example, before investing, you should make sure to have a fully-funded three- to six-month emergency fund in place in case you lose or quit your job or have a health issue arise. It’s important to have this cash available in case a situation like this occurs rather than having it tied up in an investment.
Also, if you’re a college graduate, you likely have some college debt. It’s better to knock out that debt before beginning to invest. Otherwise, you’re simply making money through your investments but losing money with the interest you’re still incurring through your college loans. Take care of the college loans (and other debt) first; then invest.
As a young person, you’re probably just starting to get an idea about what your monthly expenses are and how to manage your money after college. Maybe you have a new job thanks to your new degree. Take some time to get a handle on your current financial situation and get some stability going before you start investing.
Also, consider any larger expenses you’ll have in the next few years that you’ll need cash for and don’t want to be tied up in investments. Will you be buying an engagement ring or planning a wedding in the near future? Do you want to start a business or purchase a house soon? If you answered “yes” to any of these questions, you may want to hold off on investing until later. A high-yielding savings account or CD might be a better option for you (though you’re required to leave your money alone in a CD for a specified period of time or pay an early withdrawal fee.).
Understanding Investment Costs
The bottom line is this: it costs money to invest money. And it’s important to determine whether the costs of investing are worth it or not based on the small amount you have to invest. For example, every time you buy or sell a stock, you pay a fee. If you are charged $10 per trade and you want to trade 5 stocks, that will cost you $50, which is 5% of your initial $1000. You certainly don’t want to lose money just by selling and buying shares, especially if your investment isn’t making any money. Then you end up with less than you started with!
The Importance of Diversification
By diversifying your investments, you build a safety net around you and your money. Basically, you don’t want to put all your money in stocks or all your money in a CD. You want to spread it out so if something goes bad, you aren’t completely financially ruined. Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.
If you buy single stocks, it’s difficult to diversify. But by choosing an investment option like mutual funds, you’re automatically diversifying because a mutual fund is made up of many stocks and other investments by default.
As you begin your investing journey if you’re overwhelmed or feel like you just don’t know what to do, remember that help is just a phone call away. The financial advisors at www.russellandcompany.com are not only knowledgeable but also competent; they can help steer you in the direction that is right for you no matter if you’re a brand-new investor or if you’ve got some investing experience under your belt.
This newsletter was prepared by a third party company to be used on the Russell & Company and Simple Money Tips for Women websites.
