My parents taught me about saving and budgeting from an early age but it wasn’t until much later that I learned the power of compounding and that anyone can start investing.
I’ve been working on getting today’s post for months. I’ve followed Miranda Marquit’s blog for quite a while and love the blog as a resource and a break from all the ‘frugal living’ sites. Her perspective on how to start investing is an excellent one.
And it’s a great story to share. Like many of us, Miranda was taught the basics of money at an early age but one crucial piece of financial freedom was missing. Saving and budgeting are great starts to meeting your financial goals but to really get there you need to start investing and make your money work for you.
It took me a while to figure this out and Miranda does a great job in her story below.
My Financial Education to Start Investing
My parents taught me the basics of money as I grew up. They taught me how to budget, how to put money into a savings account, and how to give to charity. They taught me about weighing my choices for smarter spending. Investing or how to start investing, though, was not something that was discussed as I grew up.
When I lived with my parents, investing was still very much seen as something that only the rich could afford to do. Even today, many people mistakenly believe wealth is needed to invest. This isn’t the truth, though. Over the course of the last decade, I’ve learned that all you need to start investing is $25 and a willingness to be consistent.
How to Start Investing in Index Funds: Boring, Yet Effective
Initially, my freelance work focused on science. Since my original major in college was physics, I thought it only natural to follow science writing. Soon, though, I discovered that the demand was all for personal finance. I agreed to write about money because that’s where the gigs were. I didn’t know anything about finance at the time. However, as I learned more about money and how it works, I realized that I should start investing.
I felt intimidated. Even though I was learning about money, I didn’t know much about investing. I didn’t have a huge lump sum with which to buy stocks; I thought maybe I could put $50 a month into something. But I didn’t think it was enough to do anything with. How could that small amount make a difference? And what if I picked the wrong stocks and lost my money?
After doing a little more research on how to start investing, I learned about index funds. Rather than trying to pick individual stocks, I could invest in the whole market. This spread some of the risk around. Not only that, but I discovered that there are brokerages that will let you open an account with as little as $25. If you agree to an automatic investment each month, you can buy shares in an index fund with as little as $50 a month.
[My two favorite investing platforms Motif Investing and Scottrade both require a little more to open an account and start investing but not by much. Motif Investing requires a minimum of $250 to begin investing in funds but you can buy up to 30 stocks at once for one $10 commission. Scottrade requires a minimum of $500 to get started investing but offers some great cash back bonuses and just $7 per trade.]
I quickly realized that automatically investing $50 a month into an all-market index fund was probably the most boring thing I could do with my portfolio. But I also realized that I wasn’t in a race to beat someone else or log fabulous gains. My goal was to begin building long-term wealth. I didn’t need amazing returns and vast riches — all I need is enough for comfort later on.
Of course, $50 a month isn’t going to be enough to retire on. But it’s a start, and the earlier you start investing and earning compound interest, the better. After a couple of years, as my income increased, I was able to boost the amount of money I contributed to my retirement account. Now, 10 years later, I contribute much more than $50 a month to my retirement portfolio.
I’d be much further behind if I hadn’t started investing when I did. At the time, I was amazed at how fast the money could add up. Now, I’m even more amazed because I’ve been able to step up what I contribute. It’s a snowball effect when you invest.
Today, it’s even easier to start investing. There are numerous websites that specialize in helping ANYONE get started with investing. In fact, there are accounts that allow you to start investing with as little as $5, and that will take your pocket change and invest it automatically in the index fund of your choice.
I’ve learned that even though the market rises and falls, over time it trends higher. That means that, long-term, the odds are in your favor if you are investing in the market as a whole (instead of individual stocks) and if you are consistent in your efforts. I don’t worry about my retirement future because I started investing years ago, even though I wasn’t sure it would be worth it. But it has been worth it — and I only wish I’d started even a little sooner.
Just How Much is it Worth to Start Investing Early?
I want to thank Miranda for sharing her story and advice on how to start investing early. To reinforce Miranda’s advice to start investing early, I decided to see just how powerful time can be for your portfolio. I put together the chart below to show how much you would have at 65 years old if you contributed just $50 a month, depending on when you started investing.
Stocks have provided an average annual return of 10.2% over the nearly 90 years through 2014 while bonds have average a 5.5% annual return over the same period. Average returns are likely to be lower over the next decade on lower interest rates so I am using a portfolio return of 6.8% for our model.
By starting to invest at 20 instead of 30 years old, you more than double the amount available on which to retire. Sure, you’ve sacrificed a little more ($6,000 more over ten years) and for longer but the additional reward is well worth it. None of the values in the chart will make for a luxurious retirement but $185k is way better than the alternatives and nearly everyone can afford a monthly $50 contribution to their investments if they budget right.
Maybe it’s providence but $50 a month just happens to be close to the limit, on an annual basis, for how much you can invest in your individual retirement account. These tax-advantaged investment accounts are one of the best investments you’ll ever make and one of my 16 easy money tax tips for year-round savings. Start investing early and make your money work for you!
Miranda is a financial journalist. She writes for a number of personal finance websites and blogs, including her own blog, Planting Money Seeds.