Ask the Expert: How to Start Investing
For a lot of young people investing feels like something, you should start doing later in life, when you have plenty of money to play around with. Right now you're focused on paying off student debt and saving for a home (that's kind of a retirement plan, right?). But you don't have to wait until middle age to start investing. And there's is no shortage of apps and online tools that can help you get started. We asked Jennifer Barrett, VP of Editorial and Founding Editor of Grow at the investing app Acorns, to give us some tips on how to get started investing while you're young and saving for a house.
Should people start investing early in life? Why?
There are two very compelling reasons to start investing early in life. If you start investing early, you stand to reap the most benefit from your investment. That's because your returns will compound over time, which means your balance can grow exponentially. But you need time for it to grow. Investing is a long-term proposition.
Another reason to start investing early in life is that it helps you build good habits. You become accustomed at an early age to setting money aside for your future goals. And that is priceless. Without that discipline, you'll always be living on the edge. But if you're able to set aside even a little bit of money consistently, you'll be amazed at how much of a difference it can make financially. Bottom line: You're not going to be financially successful unless you're able to get into the habit of setting money aside to save and invest.
Is there an amount of wealth or income a person should reach before they consider investing?
No. That's one of the messages that we want to get across at Acorns and Grow. Many people assume they need to have a certain amount of wealth before they can start investing, but that's just not true. In fact, investing is the key to building wealth. And I'm not talking about becoming a billionaire. When I say wealth, I'm talking about building enough wealth to support yourself for life and to support the life you want.
You don't need to invest a lot to make a difference. Let's say you start with $100 and put in another $50 a month. After 25 years, assuming an annual return of 6 percent, you'd have more than $33,000. Bump that monthly contribution to $75 and you'd have nearly $50,000. (You can run your own calculations on the SEC site: http://investor.gov/tools/calculators/compound-interest-calculator.)
As with any good habit, it's about getting started and sticking with it. Start small. Just get started.
Is investing still an option for someone saving for a large purchase, like a home?
That depends on when you plan to make that purchase. The stock market can fluctuate, as we've seen in recent months, and you never want to be in a position in which you have to sell your stocks when the market is down.
So if you're planning to tap those funds within the next year or two, putting your money into a savings or money market account, or a CD, is probably a better option.
You won't earn much on your money in a savings account right now. The average yield on a savings account as of today (12/21) is .06 percent, according to the FDIC. That means for every $100 you're saving, you're essentially earning 6 cents in interest.
But if you've got a short-term horizon, you've got a few better-paying options.
There are higher-yield savings and money market accounts with yields of more than 1 percent. And while a 24-month CD is paying out .35 percent on average right now, there are some 12-month CDs with annual percentage yields of more than 1.25%. You can check Bankrate.com for CDs and accounts with the highest yields and rates. Just be sure that the CD is insured by the FDIC or the NCUA (National Credit Union Administration).
How can tools like Acorns help introduce people to investing?
Acorns makes investing simple. You can do it from your phone in a few minutes. I signed up while I was waiting for a friend in a restaurant. It's that fast. There's no minimum balance. And the portfolios are designed to fit your needs and goals.
Acorns is also unique in that it's designed to be integrated seamlessly into your daily life. With the Invest the Change model, every time you make a purchase, you're also making an investment in your future. The rounded-up feature means you're adding money to your account without even thinking about it. And it adds up. Among users who are only rounding up change, the average yearly contribution is more than $400.
Get started investing
Ready to get started? Make sure you choose an app and company that's right for you. We love Acorns because it's so easy to invest spare change or other small amounts, but there are tons of other companies out there that might be a great fit for your needs. Here are a few of our favorites:
Aspiration’s motto is “Do Well. Do Good,” which is perfect for any young investor who wants to know what their money is supporting. Not only do you decide how much you pay the bank in fees (seriously you decide, although most customers do pay them), you can also invest in companies with sustainable goals. Aspiration helps choose those investments based on their governance policies, and their environmental and social practices.
Betterment leans more toward the traditional than some of the other services, but still charges much less in fees than a traditional bank. With personalized portfolio allocation and a team of experts, it might be ideal for a first-timer who’s a little nervous about investing their money.
Robinhood is great for people who want to get started in the stock market because you’re not paying fees on your trades. It takes a couple of minutes to get started and the app is easy to use—it was even named one of the Best Apps of 2015 by Google.
So what are you waiting for? Get started investing.