When I graduated from college and got my first job, I was excited. For the first time ever, I would have real money. In my new job I had deductions for insurance and benefits, but no 401(k) or IRA options out of the box for a new manager. I took my cash and bought lots of fun things like snazzy suits and cool drinks. I did not, however, buy into my future.
I am in the camp of finance bloggers like Ramit Sethi: I don’t think we should be super cheap and cut our spending to fit our income. I think we should make more to live the life we want. One of the easiest ways to do that without stressing is to start with an automatic investment. I had the first part in place – direct deposit – but did not take the next steps.
Websites like ING Direct make automatic investing really easy. ING, and other online banking sites, let you schedule automatic transfers ahead of time. You can transfer funds to a savings account, another bank, or a brokerage firm account. If you make it automatic, you can do it in a small dose and start your investments. You don’t need $1000 to start; you only need to make a commitment to invest at a regular interval. Many people call this “paying yourself first.”
At ShareBuilder, owned by Capital One, you pay $4 per trade. If you decide to invest $40 per month, that is only two weeks of coffee or one dinner with the girlfriend/boyfriend, you can build up a portfolio of nearly $500 in your first year. I am sure you can live without an extra $40 per month. When I started automatically investing, I started at over $200 per month. You can also make similar investments with Charles Schwab (where I do my stock trading), Scottrade, E*TRADE, or any other full service or online firm.
The next part is deciding on what to buy. Stocks, bonds, mutual funds, ETFs, index funds, the list goes on. As a young person you can take risk, but you don’t want all of your eggs in one basket. Avoid individual stocks and bonds as they do not offer any diversity. I suggest avoiding most mutual funds too, as they do not always perform well and often have high fees. I would look into ETFs and index funds. Pick one that reflects the market you would rather invest in. You can buy into a Dow Jones Industrial Fund, NASDAQ index fund, S&P 500, Russell 3000, and so on. In the long run, the markets always go up.
Now you have your formula and your plan. As a guy, I like instant replays and recaps. Here is the recap of a 20-something starter investment plan:
- Get paid with direct deposit
- Start making automatic investments every payday
- Invest in a low fee ETF or Index Fund
- Don’t touch it. Build a portfolio
After a few months or a year, you might decide to invest in a different fund. That way you are double diversified. If you are investing purely for retirement, Vanguard is another company that makes investing easy. Just do not be tempted to give up after a bad day, week, or year. I don’t even check in on my stocks every day. If I did, I would be too tempted to make bad trade. Investments are for the long run. Short term trades are more like gambling. After a little while, you will no longer be Poorer than You, you will be richer than most.
If you have any questions, feel free to contact me through my contact form or just leave a comment below.