There’s no doubt investing can be scary. First, there’s the terminology: index funds? Capital gains taxes? WHAT?! Then there’s the fact that we’re talking about MY money. It’s not like I have piles of it lying around. Thankfully, I have an expert friend whose approach to finance is basic and straightforward. I sat down with her recently to get some beginner’s advice. Here’s what I discovered.
THE MANY BENEFITS TO INVESTING…
Investing provides a HIGHER RETURN (money) than a Savings Account!
ANNUAL RETURN 2006 – 2016
Sources: S&P 500 Return Calculator, GoBankingRates.com
Consider: If I had invested $100 in the US stock market (S&P 500) in 2006, I would be $55* dollars richer today. What did I do instead? I let that money sit in my bank account and earn an interest of 6 cents a year. After 10 years I have 60 CENTS** in my pocket. That won’t even buy me a slice of pizza at the mall. Now imagine, had I invested a $1,000. I would be $450 wealthier today. EVEN if I had purchased stocks in 2006, and had to deal with the 2008 stock market crash, I would STILL be better off. This is how the rich get richer!
INVESTING IS TAXED LESS THAN A SAVINGS ACCOUNT
The money you earn by investing in stocks can be taxed at a lower rate than the money you earn from interest in a savings account. To accomplish this, all you have to do is hold on to your stock investment for more than 1 year.
- Ordinary Income: Income brought home from your employer plus the money earned in interest from your savings account.
- Capital Gains: Money earned from investments (stocks).
- Short term capital gains: Money made if you chose to sell your investment less than 1 year after you made the purchase.
- Long term capital gains: Money made from investment if you choose to sell after more than 1 year from initial purchase. Long term capital gains tax is the lowest tax, regardless of your tax bracket. If your income is less than $37,650 a year, your stock investment is TAX FREE!?
Look up your salary below and see the difference in taxes
2016 Federal Taxes Paid Based on Annual Income
RISK IN INVESTING CAN BE MANAGED…
You’re probably thinking, this all sounds great! What about the risks? Investing in the stock market is risky since the returns are not guaranteed. The value of stocks rises and falls every day. Fortunately, there are few steps you can take to minimize your risks from investing that don’t require years of training in Wall Street.
First, consider investing in index funds. An index fund spreads out your risks across the entire US economy by purchasing a wide range of stocks, not just one specific company. Therefore, if Apple’s next product flops (Apple watches) your savings won’t go the way of the Titanic. Stocks get extra risky when you put all of your eggs in one basket, your empanadas in one Tupperware, your churros in one flimsy fair cup (you get the idea). Again, there’s no guarantee you’ll make money from the stock market- many don’t. The chances are much higher if you’re diversified, which is to be invested in many different stocks at once. Investing with an index fund is also cheaper than paying someone in a regular mutual fund to buy and sell stocks for you. Also, it is less time-consuming than researching a wide range of stocks yourself, although this may eventually become a hobby you enjoy.
PLAY THE LONG GAME
Another way to minimize your risk is by investing in the long-term. Investing in the stock market over many years, protects you from blips and crashes. While it is relatively risky to buy a single stock and sell it 6 months later, if you invest in an index fund and sell 10…15…20 years from now, your risk of losing money goes down. (Hooray, less anxiety!)
Now that you’re convinced of the value of investing, time to begin. First, you need a brokerage account that allows you to buy and sell stock. Wealthfront and Robinhood are two excellent options for new investors: they are easy to use, charge low (or no!) fees, and allow you to invest in many stocks at once.
To begin investing with Wealthfront, you need at least $500. The advantage of Wealthfront is its use of software to select and optimize your ETF (electronically traded funds) investments across stocks, bonds and even international. Simply put your money in and forget about it! No need to scour the financial news like a trader from Wall Street. As a bonus, if the total value of your investment is less than $10,000 the entire service is FREE.
Robinhood charges no fees to buy and sell stock. No fees!! This is especially welcomed, if like me, you have only a small pot of money to invest. Unlike Wealthfront, Robinhood won’t invest your money for you: you’ll have to choose which stocks or funds to purchase, hopefully this becomes an exciting part of the process for you. Remember to diversify, and consider starting with Total Market Index Funds or S&P 500 Index Fund stocks instead of individual company stocks.
Keep in mind that investing isn’t fail-proof. The value of your investment will go up and down. You can lose money if you sell during down times (think 2008 stock crash). If you invest long term there’s no reason to feel intimidated. If it helps, try investing small sums of money first. The main thing is just to get started. Vamos!