I’ve never had any idea what I should be doing with my money—I figured keeping it in savings accounts was good enough, right? But then I heard that if I invest in my 20s, I stand to make exponentially more than if I invest later (explained here). Though it seems impossible and adult-like, it’s time to put all the pennies you can spare towards something productive.
I kept asking people what to do, but no one wanted to answer because money is a big secret no one talks about. I heard I should buy mutual funds, but how do you do that, and how was I supposed to know which ones?
Eventually, I just started my foray into investing by trial and error. My employee stock plan meant I had an E*Trade account already set up for me to explore (though there are many other options, like fee-less Robinhood). You can also turn to a super smart robot or an actual human financial adviser, who will likely be paid either a flat fee or a percentage of your profit.
I’m obviously very new to this but seeing my money grow by actual dollars instead of cents was exciting. I have since learned that investing is the only way you have hope to beat the inflation rate—meaning, while your money is sitting in a savings account, it is losing value because the value of the dollar is also going down. I am not an expert by any means, but I do know that investing your money in things other than your closet or a Vitamix is important if you would ever like to, you know, stop working someday. Here is an extremely simplified list of five easy things you can do with your money to (hopefully) make it grow:
1) Savings Accounts
If I invested $1,000 on 1/1/14, it would now be worth: $1,000.10 (assuming .01-percent APY – from “Regular” Bank of America savings).
As you can see, savings accounts don’t exactly grow your money. Still, most millennials (and women) are keeping most of their money in savings. Savings accounts have two main benefits: 1) You can access that money at any time (probably, depending on your bank) 2) You will never lose that money because it’s guaranteed by the government. You should definitely have an emergency fund in a savings account. However, as I mentioned earlier, since the value of money is going down due to inflation, the value of your savings account goes down as it sits there (unless there is some kind of horrific market crash).
PROS: Available immediately, guaranteed money
CONS: Doesn’t really grow your money
FEES: Usually there are fees if you do not meet minimum requirements or make excessive withdrawals (that’s what your checking account is for, yo).
If I invested $1,000 on 1/1/14, it would now be worth: $1,010.05 (assuming 1-percent APY from Discover)
TEN DOLLARS—We’re in the big money now! A CD (certificate of deposit) means you’re loaning the bank your money for a fixed time. Rate-wise, this is a lot better than a savings account, but you can’t touch the money for the duration that the bank is using it (or you will typically face penalties). CD rates will vary based on your bank and the period of time, and require a starting balance. Note we’re still not beating inflation here, but you’ve made 100 times more than your savings account and your money is still guaranteed.
PROS: Makes more money than savings, guaranteed money
CONS: Starting balance required, can’t touch money, still don’t beat inflation
FEES: Early withdrawal (usually)
3) Mutual Funds
If I invested $1,000 on 1/1/14, it would now be worth: LOL you can’t do that, but if we play pretend, around $1,070 (based on Vanguard moderate risk mutual fund).
OK, so here we have finally made some kind of significant money. Mutual funds mean you fork over cash to an investment company and they invest it in a variety of stocks and/or bonds for you (and everyone else who gave them money). For this service, they take a fee from the fund every year, and this is often indicative of how much money you will make.
Mutual funds are nice because someone else is doing the work, although this can be a con for some people (though there are options if you want to invest in socially responsible companies or conversely, if you hate humanity). Mutual funds can either be actively managed (as in, humans choosing at will) or aligned to the market. Note that although studies consistently show only a very small percentage of actively (human) managed funds beat the market, because they require a higher cost to run the fund. Since mutual funds are diversified, you don’t lose all your money if one company takes a nosedive. You can choose the type of fund and level of risk, and check Morningstar to see ratings (or use a finder like this one from Vanguard).
You can purchase shares in a mutual fund through E*Trade (or whatever), and they require an initial investment, anywhere from $2,500 to $50,000 (bigger investment = fewer managing fees) plus a small fee ($20) to buy. They will also probably pay you dividends to say thank you for investing (which you will also probably get from ETFs or stocks—more on this later). However, your money is not guaranteed. If the market goes down, so does the value of your mutual funds (probably). Over time, the market has always bounced back eventually (so far), so investing has remained a good long-term strategy.
PROS: Diversified investment, little work on your part, good long-term strategy
CONS: Starting investment required, subject to market fluctuations, no control of what you invest in
FEES: Fee to buy or sell, sneaky hidden fee of running the fund that you should minimize
If I invested $1,000 on 1/1/14, it would now be worth: around $1,134 (based on VOO).
ETFs (exchange-traded funds) are similar to mutual funds in that you are giving your money to an investment institution and they are investing it in a variety of companies for you (diversification = good). The way they work on the back end is different, but as far as it is relevant to dumb investors like me, ETFs mean no starting balance required. ETFs act like stocks, meaning you can buy or sell a single share, so the starting cost is very low.
For mutual funds, stocks, and ETFs, there is a wait period between selling and having money in your grubby little paws. It should be available for reinvestment almost immediately, but if you need to spend outside the stock market (for example, the hospital bill when your dumbass brother thinks he can parkour) it’s going to take a few days to turn into a form you can use.
PROS: Diversified investment, little work on your part, good long-term strategy, low minimum investment
CONS: Subject to market fluctuations, no control of what you invest in
FEES: Fees to buy or sell (unless you use Robinhood)
If I invested $1,000 on 1/1/14, it would now be worth: What stock did you buy? If you bought AAPL, it would be around $1,362. If you bought WFM (Whole Foods), it would be around $873.
Ah, stocks. You are the master of your domain. You know what you want to buy and you buy it. Trouble is—you’re probably not very good at this (I mean, you’re reading this article, for chrissakes).
Buying stock means you own part of the company. Stocks can be divided into high-cap (large companies), mid-cap, or small-cap. Diversification (i.e. buying different things) is a good idea to avoid having all your eggs in one basket. High cap stocks are a surer bet, but since they are already big and (probably) grow more slowly, you will (probably) make less money than if you pick a really good small-cap stock. There are different calculations you can use to determine if something is a good stock (or you can check Motley Fool or Morningstar and see what others say). But did you see all the work that you are supposed to do when buying a stock? I will tell you right off the bat, I have bought two stocks based on totally irrelevant “logic” (a company with my initials and cool electric cars are totally legit buys, OK?) (Actually, both were recommended by Business Insider) and have lost money thus far (Screw you, Business Insider). Most of the advice I’ve read says don’t invest in individual stocks unless you’re prepared to lose the money.
PROS: Master of own domain, potential to outperform inflation long-term (if successful), low upfront cost
CONS: Requires research, more subject to market fluctuations, you probably don’t know what you’re doing
FEES: Fee to buy or sell (unless you use Robinhood)
Like I said, I am new to this and in no way an expert (bonds? Roth IRA? indices? Please talk more about things I do not understand), so this should NOT be taken as investment advice. This is only meant to be primer of things to look into, and how to go about making your personal decision. The important thing is to think about where your money is going and look at long-term strategies so you can retire on the beach with a piña colada. Another resource I use to learn more about personal finance is https://myinforms.com.
And don’t stress about it too much! I know it’s overwhelming, but no one can really and truly predict what the market is going to do. Just try some things and see how it goes!
Also, invest in your 401(K). We should have an article coming out about this someday.
I mention Vanguard funds specifically (as did Warren Buffett, who is pretty good at investing) because they are famously low-cost for investors.
All returns are approximate (I used percentages of shares, which you obviously cannot buy). Also, please note that past performance does not indicate future success.
You have to pay taxes on income earned from investments. This means if you sell stock/ETF or cash out of a mutual fund, you will have to pony up (you have to pay taxes on bank interest, too). You also get a tax break if you lose money, so at least there’s that. Thankfully, if you use a free efile program for your tax return then there should be a section devoted strictly to any additional income earned.
I linked to this earlier, but if this is all overwhelming and you just want to give someone your money and have them do stuff with it, Betterment or similar may be worth a shot for you (they basically invest your money in a bunch of Vanguard funds for a fairly low fee).
I AM NOT GIVING FINANCIAL ADVICE PLEASE DON’T SUE ME.