Money recently launched Dollar Scholar, a personal finance newsletter written by a 27-year-old who’s still figuring it out: me.
Every week, I’ll talk to experts about a money question I have, whether that’s “Are online banks sketchy? or “How many credit cards do I need?” As I learn, I’ll share simple ways to improve your financial life… and post some funny memes.
This is (part of) the ninth issue. Check it out below, then subscribe to get future editions of Dollar Scholar every Wednesday.
Next month is the five-year anniversary of me moving to New York City, which means it’s also the five-year anniversary of me getting my first-ever Adult Job™. I worked full-time during the last couple semesters of college, but I didn’t become a legit salaried employee until fall 2014. Though I made almost no money — especially after I discovered how easy it was to order food to my Brooklyn apartment — I managed to scrape by.
Now, half a decade later, I’m fortunate enough to have a little bit of extra cash. Not much, mind you — I still get empanadas delivered on a regular basis — but enough that I could put some of it away… if I knew how.
Is there a minimum amount of money I need to begin investing? And how exactly do I get started?
Because most of my investing knowledge comes from the time my fifth-grade class played the stock market, I called Corbin Blackwell, a certified financial planner who works with Betterment. Blackwell told me that before I start investing, I should make sure I have a solid emergency fund that can cover three to six months of expenses.
A good place to start investing is in my 401(k), a retirement plan offered by my employer. Not all companies have them, but those that do often match the money workers put in (to a certain amount). Specifically, Blackwell said I should look into choosing a target date fund, which she called “an easy, straightforward, pre-packaged way to make a smart investment.”
With a target date fund, I first select the year I think I’ll retire (and therefore need the money). Then I contribute, and someone else manages the allocation of assets, or stocks and bonds, over time. As the target date gets closer, the manager will tweak my portfolio so the level of risk decreases.
“Unless you choose a target date that’s so wildly off your retirement date, it’s hard to screw it up,” Blackwell adds. Speaking my language!
From there, she said I can check out a robo-advisor, or a digital money manager. Betterment is just one of many, but it happens to be Money’s favorite option for beginners (as ranked last year). Betterment prides itself on goals-based investing and auto-rebalancing over time, which means it makes adjustments on my behalf to make sure I meet my targets. There’s no minimum to open an account under its Digital plan, which has a 0.25% annual fee.
After signing up, I’ll tell my robo-advisor how much money I want to invest and set a risk level I feel comfortable with. Then I’ll just let it run on its own.
According to Blackwell, I might just end up learning something.
“Once you have skin in the game, it is more interesting, because then you start getting curious about what you own and why you chose it and that sort of thing,” she says.
Sounds responsible. But I’m not always responsible, so I had another question for Misty Lynch, the head of financial planning for John Hancock: What’s stopping me from taking, like, $200 and buying, like, a single share of Apple?
The answer is nothing. However, as Lynch explained, then all of my metaphorical eggs would be in one basket. It’d be wiser to put my money into something like an index fund, where I’d essentially buy into lots of different companies.
“If you own a big, broad index, that makes things a little bit less risky,” she says. “You could either choose Italian food or one specific entree. Chances are, if you go broader, you’re going to maybe have a little bit more luck.”
Bottom line? Once I have my emergency fund set up, I should make sure I’m putting money into my employer-sponsored 401(k). Then I can open an account with a robo-advisor. I don’t need a lot of money to start investing — $50 or $100 is a fine starting place.
What I shouldn’t do, according to Lynch, is wait too long. I should begin building the habit now.
“I think people want to be 100% out of debt or maybe are afraid of the markets … there’s never really a perfect time for people to get started,” Lynch says. “If I’d waited until my loans were paid off, I would have missed 10 years of a bull market.”