“Money is not a game. Investing for the rest of your life and the lives of your loved ones is serious business.”
-Rick Ferri, All About Asset Allocation
There are any number of reasons you might put off investing for another day:
- Your budget is tight and you can’t find the room to save.
- You feel overwhelmed by all the investment decisions you would have to make.
- You’re worried about making a mistake and losing money.
- You think investing is only for people wealthier than you.
- You assume that you can start investing later and you’ll be fine.
- Investing? Isn’t that basically like gambling?
Those are all reasonable things to feel, and the truth is that I’ve felt some of them myself at different points in time.
But none of them are good enough reasons to put off investing or to wait to start taking it seriously. Because what’s at stake is your ability to support yourself independently and pursue a life you enjoy.
Whether by choice or necessity, the reality is that one day you will have to support yourself without a job. And investing is the way to ensure that when that time comes, you have the resources available to do so.
This isn’t to say that investing has to be overly difficult or stressful. You can put a great investment plan in place right now, no matter how much money you have or how much you already know about investing. It doesn’t have to take a ton of time or expertise.
But you do have to take it seriously and you will have to put some work in if you want to get it right. And the sooner you do so, the better.
Here’s how to do it.
Step 1: Understand your options
Before you can actually start investing, you have to contribute to an account that allows you to invest. And some accounts will be better than others for your specific needs.
Here are some of the most common options you might have:
- 401(k) or other employer plan – Your employer likely offers some kind of retirement plan, and you may even already be participating. This is often the easiest place to start.
- IRA – An IRA is like a 401(k) or other employer retirement plan, but you open it up yourself. You can choose between a Traditional or Roth IRA, and though there are some income limitations around who can contribute, there are also some ways around that.
- Health savings account – Though health savings accounts are technically meant to help you afford medical expenses, they can also extremely powerful as a retirement account.
- Self-employed retirement account – If you’re self-employed, you have several options for opening a retirement account through your business.
- Regular taxable account – All of the accounts above offer special tax advantages that should typically make them the priority. But if you’ve exhausted those options you can always open up a regular investment account to save even more.
For a more detailed rundown of these options, including an order of operations to help you decide when to use one account over another, check out this article: How to Choose the Right Investment Account.
Step 2: Start saving
So once you know which accounts you have available to you and which one(s) you want to use, the next priority is starting to save.
First, you can use this calculator to figure out how much you should be saving each month.
Then you can automate as much of that savings as possible to your various investment accounts so that you’re making consistent progress month after month.
Keep in mind that if your employer offers a 401(k) match, the amount they contribute counts towards your savings goal as well. That’s a big reason why it often makes sense to grab that full match before contributing elsewhere.
Finally, DO NOT worry about your specific investment choices until you get your savings plan in place. They do matter, and we’ll talk about them in the very next step, but it takes years of investing before those choices matter anywhere near as much as how much you save.
So for now, just focus on saving.
Step 3: Learn the investment basics
Once your savings plan is in place, it’s time to make sure that money is going to good use.
The good news is that it’s actually not that difficult to make good investment decisions. There are only a few key decisions that really matter, and each of them is simple enough that anyone can get them right.
The real key here is to not worry about doing everything perfectly. There is a wide range of “good enough” investment plans and your only goal should be to make sure you’re within that range.
So do a little bit of research and make sure you’re getting the few big things that matter right. Here are a few resources that will help you do just that:
- The Only 7 Investment Decisions That Matter
- The Beginner’s Guide to Index Investing
- Two Easy Ways to Make Investing Less Risky
Step 4: Increase your savings over time
It’s very possible that you won’t be able to hit your savings target from Step 2 right away. And that’s okay. It’s normal for it to take some time to get this right.
Your goal is to get as close to that target as you can right now and then to find ways to increase your savings over time if necessary.
One way to do this is to start tracking your spending using a tool like Mint or You Need a Budget. That will show you where your money is going now, which will help you identify any areas that could be improved.
Another trick is to set a calendar reminder to increase your savings by 1% every 6 months. 1% at a time will barely be noticeable, and after a few of those increases you’ll have made a real impact on your savings rate.
Finally, don’t forget that cutting your spending isn’t the only way to save more. Finding ways to increase your income can often be a more effective strategy.
Step 5: Stay the course
There will always be a temptation to change your investment plan.
The stock market will be way up or way down. You’ll hear about a different investment strategy that promises great results. Your friend will tell you about some hot stock that’s about to take off.
Your job is to ignore all of that and stick to your plan.
Most investors hurt themselves by chasing the latest and greatest investment fad. They end up zigging and zagging without any real plan behind their actions, which hurts their returns and makes it harder for them to reach their goals.
If you’ve made good investment choices from the beginning, and you will if you follow the steps above, you will almost certainly be much better off sticking to your plan for the long-term.
Are you ready to get serious?
Investing doesn’t have to be complicated, overwhelming, or intimidating. You can put a great investment plan in place right now, no matter how much money you have or how much you already know about investing.
But if you’d like to one day be able to support yourself independently, you DO have to take it seriously. And the sooner you do so, the better.
If you’d like even more in-depth, step-by-step guidance on investing, check out my book: The New Parents’ Guide to Financial Independence.