If you’re like me, you love learning about how other people invest their money. Partly because you’re a bit of a snoop, but also because it’s the best way to figure out what you should (and shouldn’t) be doing with yours.
My approach to investing is SUPER simple yet effective. If you’re ready to start making money moves this year but you’re scared of losing money and not quite sure where to start, I’ll share exactly when to invest, where to invest, and how to invest as a beginner.
Let’s get into it!
My Super Simple Approach to Investing
For a long time, I was incredibly intimidated by all things personal finance. In fact, most of my financial decisions were made out of fear.
I was afraid of being broke, so saving money came naturally to me. However, I was also terrified of investing in the wrong things, so much so that I refused to invest my money at all. Instead, I stockpiled thousands of dollars in my Chase savings account, earning 0.01% interest for YEARS. Little did I know that by doing so, I was losing money each year to inflation (not to mention all of the potential gains I could’ve been making if I wasn’t afraid to put my money to work).
If you’re also afraid of losing money and overwhelmed by all the financial advice out there, trust me when I say that you’re not alone. With so many financial gurus giving contradictory advice, it’s hard to know what to listen to. My two cents? Listen to the people who have similar investing goals.
You may think that everyone has the same goals when it comes to investing – to make money. But there’s actually some nuance here.
Your investing goals boil down to two factors: how much risk you’re willing to take and how much effort and time you’re willing to spend managing your money.
Considering you clicked on this article, you’re scared of losing money. So, you’ll want to avoid high-risk investing.
So, where should you invest your money?
The Best Investment Types if You’re Scared of Losing Money
You may have heard people talk about how it’s important to ‘diversify your investments.’
Diversifying your investments essentially means investing in a collection of different assets (stocks, bonds, cryptocurrencies, ect) instead of just one.
A collection of different assets is called a fund.
Picture this: a fund is like a big bouquet of flowers. Instead of just buying one flower (or one stock), you can purchase the entire bouquet with a variety of different stocks in it. Funds diversify your portfolio and lower your risk. So, if one company isn’t performing well and its stock drops, by investing in a fund, there are tons of other stocks that could be doing very well and offset that loss.
The most common types of funds to invest in, especially if you’re concerned about the risk of losing money, include:
- Mutual Funds
- Index Funds (which are a type of mutual fund or Exchange-Traded Fund (ETF))
In the next section, I’ll break down the key differences between a mutual fund and an index fund and discuss which one is considered the best option.
Index Funds vs. Mutual Funds
A mutual fund is an actively managed fund, which means an investment manager on Wall Street is handpicking the assets that go into the fund and then investing for you.
Index funds, on the other hand, are passively managed funds. They’re managed by an algorithm or formula, not a person. Their algorithm mirrors the performance of a specific stock market index like the S&P 500, which tracks the 500 largest companies listed on the US stock exchanges, the Dow Jones, which tracks the 30 largest US companies, and the NASDAQ, which focuses on tech trading around the world.
It’s important to understand that it costs money to invest, whether you invest in a mutual fund, an index fund, or anything else for that matter. This fee is called an expense ratio.
It costs more to invest in mutual funds than index funds because you’re essentially paying someone to manage your fund.
Mutual fund expense ratios are usually around 1 to 2%, while expense ratios for index funds are only around 0.05%. With this being said, there are mutual funds out there with MUCH lower fees. For instance, the expense ratio for the Vanguard Wellington Fund (VWELX) mutual fund is only 0.25%.
Should You Invest in Index Funds or Mutual Funds?
The question is, should you invest in index funds or mutual funds?
The general rule of advice for beginner investors is to invest in index funds.
Here’s why:
- Index funds are generally less risky and more predictable because they mirror the stock market, while mutual funds attempt to outperform the market.
- Although mutual funds attempt to outperform the market, the irony is that index funds generally do better. According to Investopedia, the S&P 500 index outperforms 80% of mutual funds.
- Index funds have lower fees.
Warren Buffet, one of top investors in the world, is always recommending index funds as the best way to invest your money as an everyday investor. In fact, in 2007,Buffett bet a million dollarsthat over the course of a decade, a simple S&P 500 index fund would outperform a basket of hand-picked hedge funds. He picked the Vanguard 500 Index Fund Admiral Shares (VFIAX) and won!
As an example, let’s compare a well-respected mutual fund and an index fund:
- Vanguard Wellington Fund (VWELX): This mutual fund was founded in 1929 and is the nation’s oldest balanced fund.It has returned 5.91% over the past year, 4.93% over the past three years, 6.70% over the past five years and 7.14% over the past decade. (source)
- Vanguard Institutional Index Fund Institutional Plus Shares (VIIX): This index fund mirrors the S&P 500. It has returned 10.12% over the past year, 10.34% over the past three years, 11.00% over the past five years, and 11.16% over the past decade. (source)
Later in this post, I’ll be sharing exactly which funds I have in my investment portfolio.
When to Start Investing
Now that you know the basics, you may be thinking, is right now a good time to start investing?
Before you start investing, you need to make sure of two things:
- You have an emergency fund saved up (most experts recommend having 3 to 6 months of basic living expenses).
- You have paid off all of your high-interest debts.
Why You Should Have an Emergency Fund
Having an emergency fund saved up before you invest is crucial. Life happens, and you don’t want to have to pull out your investments to take care of a financial emergency. After all, the only way to actually lose money investing is to take it out when the price of stocks is low. Investing should be a passive, hands-off approach. It’s about putting your money in and forgetting about it.
By having an emergency fund saved up, you won’t have to pull your money out at a time that’s not advantageous.
Personally, I keep $10,000 in my emergency fund, which is around 5 months’ worth of basic living expenses. You may be thinking that this is a lot of money to just be sitting around not earning any interest. And you’d be right. That’s why I keep my emergency fund in a high-yield savings account, specifically Marcus by Goldman Sachs online savings account.
This account earns a 4.50% annual percentage yield (APY), meaning that I earn $450 per year for just holding my money there. This rate is guaranteed, and I literally do NOTHING. After I’ve built up a decent amount of interest, I’ll transfer this cash into my brokerage account.
If you’re interested in opening an account, click here to sign up using my referral code and earn an extra 1.00% APY for the first 3 months. So instead of earning 4.50%, you will earn 5.50%!
Click here to explore other high-yield savings account options.
Why You Should Pay Off Your High-Interest Debt
You’ll also want to pay off your high-interest-rate debts before you start investing.
Some credit cards can have interest rates up to 10 or 15%. If you’re not paying off that high-interest-rate debt, it doesn’t matter if you’re making 10% returns in the stock market because you’re accruing all that back in high-interest-rate debt! You’re basically canceling out any gains you’re making. So, before you start investing, address your debt first.
The best way to get a handle on your debt is to start budgeting, and guess what? I’ve written MANY articles on my blog about budgeting.
Below are some of my favorites:
- 10 Low Income Budgeting Methods to Save Money
- 100+ Budget Categories and Subcategories to Include in Your Personal Budget
How to Start Investing
If you have an emergency fund saved up and you’re not paying off any high-interest loans, then the best time to start investing was, well, yesterday!
After all, if you’re trying to take a more hands-off approach to investing, where you aren’t constantly monitoring what’s happening in the stock market, it isn’t about timing the market (buying when stocks are at their lowest); it’s about time in the market. The longer your money is invested, the more it can grow!
In this section, we’ll delve into how to start investing.
1. Check for Employer-Funded Investment Accounts
The first thing you’ll want to do is check if you have any employer-funded investment accounts through your work, like a retirement account or health savings account (HSA).
If you already contribute to these accounts, you can skip ahead to the section titled ‘Create an Account With a Brokerage Firm’.
Benefits of Investing in Your Employer-Funded Retirement Account
The most common employer-funded retirement accounts are 401(k)s or pension plans. If you have either, make sure you’re contributing! These accounts often come with an employer match, which means you get free money. Plus, your contributions to these accounts are made with pre-tax dollars—meaning the money goes into your retirement account before it gets taxed. This lowers your taxable income, resulting in owing less in income taxes for the year.
As a public employee, my retirement plan option is a pension plan. I contribute 6.36%, and my employer matches 2% of my pay. This happens automatically, so I never see or think about this money.
If you don’t have a retirement account through your work, that’s okay! You can still save for retirement. We’ll discuss some other retirement plan options later in this post.
Benefits of Investing Your Health Savings Account (HSA)
Depending on your health insurance, you may also have a health savings account (HSA). Typically, you would have an HSA if you have a consumer-directed health plan (CDHP) which has a lower monthly premium and a higher annual deductible than other medical plans.
Having an HSA is a great avenue for investing! HSAs offer a triple tax advantage – contributions are tax-deductible, the account grows tax-free, and qualified withdrawals are tax-free. That’s right, you pay ZERO taxes on any of it. Plus, HSAs are portable, meaning the account isn’t tied to a specific employer. If you change jobs, you can still keep your HSA.
You usually have the choice to invest your entire HSA or keep some cash in your account at all times. Personally, I keep $1,400 in cash in my HSA, which is the annual deductible on my health plan.
The best part about an HSA is that sometimes your employer will contribute to it as well! My employer contributes $58.34 per month into my HSA, and I contribute $50 per month (which is automatically deducted from my paycheck).
It’s important to note that you can only use your HSA for qualifying health expenses, which is why I only invest $50 into it each month.
Where do I invest my Hsa?
When it comes to investing your HSA, you’ll usually have a handful of options to choose from.
I invest my HSA in the Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX), which is an index fund that tracks the performance of the S&P 500. It has a low fee of 0.02%. If you’re interested in this fund, keep in mind that the VIIX is aninstitutionalfund, meaningit can only be accessed through an employer-funded retirement plan, or in my case, my HSA.
If you’re not sure how to invest your HSA, it usually involves creating an account with an HSA administrator. For instance, mine is Health Equity. You can always reach out to your company’s human resources team if you need help investing your HSA!
2. Create an Account With a Brokerage Firm
You can’t exactly buy investment funds through Amazon. So, after ensuring that you’re taking advantage of any employer-funded investment accounts you may have through your work, it’s time to create an account with a brokerage firm!
Some popular brokerage firms include:
I chose Vanguard because they have a reputation for being great for investors looking to minimize costs (aka lower expense ratios). In fact, the average Vanguard mutual fund and ETF (exchange-traded fund) expense ratio is 83% less than the industry average.
Since I invest with Vanguard, I’m referencing Vanguard-specific funds throughout this post simply because I know the most about them. I could invest in non-Vanguard accounts, but there would be a fee to do so.
3. Open a Brokerage Account
After you’ve created an account with a brokerage firm, you’ll want to open a brokerage account (or multiple!).
A brokerage account is an investment account from which you can purchase investments.
The most common types of accounts opened through brokerage firms are:
- Individual Retirement Account (IRA)
- Individual Brokerage Account
Let’s first break down investing into an IRA first.
Investing in an IRA
I’m a big believer in saving up as much as you can for retirement. So, even though I have a pension plan set up through my job, I’ve also opened an Individual Retirement Account (IRA).
When it comes to IRAs, you have two options: the Roth IRA and the Traditional IRA.
Both the Traditional IRA and Roth IRA are retirement savings accounts in the United States that offer tax advantages. It’s important to note that you commit to locking up your money until reaching the retirement age of 59 1/2; early withdrawals typically incur penalties.
I went back and forth about whether to open a Roth IRA or a traditional IRA and ultimately went for the Roth. It wasn’t an easy decision to make, as there’s a LOT of debate about which is better.
In the next section, I’ll share how I made my decision.
Roth IRA vs. Traditional IRA
According to Investopedia, the main difference between these retirement account is that traditional IRAs allow you to deduct contributions now and pay taxes on withdrawals later, whereas Roth IRAs require you to pay taxes on contributions now but offer tax-free withdrawals later.
I chose a Roth IRA based on my current salary. It’s recommended that if you expect to be in a higher tax bracket during retirement, you should open a Roth IRA because it means that you will likely pay taxes on your contributions at a lower rate.
Making this decision isn’t easy though since you’re essentially predicting your future earnings. As a basic rule of thumb, folks in entry-level positions, recent college graduates, or those in residency, like doctors, or doctors, should opt for a Roth IRA since they’ll probably earn more in the future.
Keep in mind that there are income eligibility rules for Roth IRAs. This means that if you make over a certain amount, you can’t open one (sorry, 25-year-old techies making ballin’ salaries, you’re out of luck).
Traditional IRAs don’t have income eligibility rules, but if you make over a certain salary, you don’t get a tax deduction, which means contributing to a Traditional IRA won’t do you much good. Salary thresholds change annually, but if you earn under 100K, it’s safe to say you qualify for both. If you make over 100K, I’d look deeper into the eligibility rules to ensure you qualify.
My Roth IRA Investment Portfolio
I invest my Roth IRA equally into the following:
- Vanguard S&P 500 ETF (VOO): I went back and forth between investing in VOO or the Vanguard 500 Index Fund Admiral Shares (VFIAX). The returns for both have been nearly identical since they both track the S&P 500 index. However, VFIAX has an expense ratio of 0.04% and VOO has an expense ratio of 0.03%. This makes VFIAX costlier to invest in, so, I opted for VOO.
- Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX): This index fund offers exposure to the entire U.S. equity market (it tracks the Spliced Total Stock Market Index and the Dow Jones U.S. Total Stock Market Index). It has a low fee of 0.04%.
By investing in both, I’m exposed to different stock market indexes (which lowers my risk).
After maxing out my Roth IRA contributions (which is $7,000 for 2024), I start investing in my brokerage account.
Investing in a Brokerage Account
Moving on to the brokerage account.
A brokerage account is a personal financial account that allows you to buy and sell stocks, bonds, mutual funds, ETFs, and other investments.
I opened my brokerage account because Roth IRAs have a yearly limit, and I want to invest more than that limit. Plus, I wanted to have an investment account that I could take money out of before I retire if I needed to.
For my brokerage account, I divide it among the accounts below:
- Vanguard S&P 500 ETF (VOO): Same as my Roth IRA.
- Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX): Same as my Roth IRA.
- Vanguard Wellington Fund (VWELX): I like the idea of investing in one actively managed mutual fund, just to diversify further. If you want to invest in an actively managed mutual fund too, take notice of the expense ratio. I’d recommend only investing in funds that cost less than 0.5%. This one costs 0.25%. Click here to see the performance of VWELX.
If I had more money to invest, I would invest in more accounts. However, since I realistically only have $5,000 to invest in my brokerage account each year, it doesn’t make sense to me to have tons of accounts if the ones above are the ones I have researched a ton and believe will perform well.
Summary
There’s no right or wrong way to invest; investing is a truly personal decision. But, this is essentially my strategy:
- $10,000 emergency fund in a high-yield savings account
- Employer-sponsored retirement plan
- Invest $25 a month in my Health Savings Account (HSA)
- Roth IRA (maxing out the limit each year, which is $7,000 for 2024)
- Brokerage account with mutual funds/index funds
As I mentioned at the beginning of this post, I LOVE learning about how other people invest their money.
In the comments below, let me know how you invest your money! I’d love to learn about the investment accounts you have and what your ‘financial priorities’ are.
