How To Start Investing in Index Funds: The Definitive Guide - Bitter to Richer (2024)

At one point I made an article discussing index funds and the hype around them, but this time I want to help you get started investing in them today!

The first thing you need to decide is how much you want to invest up-front, and then how much you want to invest regularly. The regular investments should be a goal that won’t break your bank, that you can set up with automatic deposits. Of course, if you can, you should aim to invest more than just what you set up automatically – that should just be a minimum. Regarding the up-front amount, ideally you want it to be as much as you can afford to invest at the moment, without pulling from your emergency fund. I’ll explain part of the reason why next.

What Do I Need To Consider When Making My Initial Decisions?

Depending on the brokerage and type of fund, there may be minimum deposits for you to get started. If you have several thousand dollars ready to invest, great, you can pick just about any major brokerage and any fund to get started. If you don’t have that amount of raw cash ready to go, don’t worry, you still have tons of options with low minimum deposit requirements.

With that being said, if you have more than the minimum amount to invest, you should still invest that additional amount. The more you invest, the more you’ll gain in the long run. Remember, index funds are all about the long-term results and growing your portfolio for years to come.

What Should My Investment Goals Be?

As I said, to get started you need to know the amount you’ll invest, how often, and the timeline you’re looking for to see results. If your goal is a retirement that is decades away, your strategy should be pretty simple. You can afford to take on a lot of risk, and you can just pump money into retirement accounts like a 401k or IRA. If your employer offers 401k matching, that should be your first investment goal.

You should aim to save at least 10% of your income and invest it for your financial future. Honestly, saving 15% gives you a lot more security, and if you want to retire early you may need to save as much as possible (even as much as 50%). If that sounds impossible for you, just focus on 10% for now and work your way up. For investing goals that are more short-term, like one year, index funds may not be the best option for you.

Opening a 401k through your employer is fairly easy, if you have the option. Additionally, starting an IRA is a painless process that many brokerages like Vanguard and Fidelity over. Another option, and a personal favorite, is M1 Finance which has retirement accounts as well as standard accounts. I personally like M1 Finance because it makes building a portfolio a breeze – a bit of a “set it and forget it” solution.

Is There Anything Else I Need To Know Before I Start Investing?

An important tip – if you’re investing for the long-term and using index funds, don’t look at their performance all the time. If you’re constantly checking their status you’ll go crazy. In the short-term they can go up or down by a large margin, but over the long run they have a history of performing well.

Another takeaway (and I really hope you remember this one) is to aim for low-fee index funds. Yes, index funds perform well. Yes, index funds usually have lower fees than many other types of mutual funds. However, not all index funds have low fees, and those fees can eliminate huge swaths of your earnings over time. So, when you’re looking at index funds, make sure you look at their fees in addition to their performance.

If you want to try trading stocks, that is a popular decision, but tends to result in losses – especially for beginners. Few traders are able to beat index funds over the long-term. You could be one of those few, but I would play it safe if you try to trade. Start slow and build your investments (and your experience) up. In general, because of how hard it is to beat index funds, that’s part of what makes them my preferred option. Instead of spending time fretting over stocks or trades, I can just buy and hold for long periods of time.

Now, even though index funds are a very simple and straightforward type of investment, you’ll probably want to invest in a handful of good index funds. Diversification is key to a healthy, growing portfolio and will make you less prone to drastic fluctuations. For example, you might invest in one fund that is for large companies in the USA, one fund for small companies in the USA, and another fund for international markets. There are even index funds by industry if you want to invest that way! If all of that confused you even more, be sure to read my article explaining what index funds are.

Here Are Some Great Low-Fee Index Funds & ETFs

• Fidelity ZERO Large Cap Index Fund (FNILX) – an index fund with a fee of 0% and no minimum investment, making it one of the better choices for beginners (yes, you read that right – 0%)
• Vanguard S&P 500 ETF (VOO) – another great fund with a low fee of .03%
• Vanguard Growth ETF (VUG) – a bit of a “riskier” and more expensive fund, it has an expense ratio of .04%
• Fidelity 500 Index Fund (FXAIX) – another solid pick with a fee of .015%
• Schwab Total Stock Market Index Fund (SWTSX) – with an expense ratio of .03%, SWTSK is another great option
• Vanguard Total Stock Market ETF (VTI) – a big part of many portfolios, it only has an expense ratio of .03%

When picking an index fund, I recommend checking the fee, historic returns, and the minimum investment requirement. If you don’t know the general details of an index fund, don’t invest in it. Also, this isn’t an exhaustive list of the good or best index funds, nor does it necessarily make an ideal portfolio – it’s a starting point for you.

Here Is A Common Priority List Of Investments

1. Your emergency fund, for emergencies of course (yes, I consider this an important investment)
2. Your company’s 401k match, if they have one
3. Be sure to eliminate any eliminate any high-interest debt if you haven’t already
4. Max an IRA – traditional or Roth depends on the details of your household, but I think a Roth IRA is generally a good investment
5. Consider contributing more to your 401k – there is a LOT of debate on this, and I think it comes down to when you want to be able to pull money out of your investments. If you want to retire early, you may want to look at other options like contributing to a standard account with a brokerage
6. If you’re happy with where you’re at and how your investments are going, think about donating more or contributing to some account (like a 529) for your kids

Again, this isn’t the end-all priority list for everyone, but it’s a place to start to get you thinking about your personal priorities.

Here Is How To Open A M1 Finance Account

• Follow this link to get started
• Sign up quickly and set up an email and password
• You’ll be prompted to create the type of account of your choosing (standard, IRA, etc.)
• Link your bank to M1 Finance so that you can set up deposits – you can make automatic deposits too if you want!
• Set up a portfolio with the funds of your choosing – M1 Finance makes it easy to set and forget, your deposits will automatically be distributed to your portfolio

If you want to invest outside of a retirement account or are looking to invest just a little at a time, again, I highly recommend M1 Finance.

Conclusion

The sooner you start, and the more consistently you’re able to invest, the better off you’ll be. Make it a priority to invest as soon as possible, and make sure you budget in some routine investments. If you’re really struggling to get started, try out Acorns. Think of it a bit like training wheels – it will get you started on your investments and teach you a lot of the fundamentals that you need to know.

If you have any tips or recommendations, let us know in the comments. For more content like this, and a free budgeting template and financial goals worksheet, be sure tosign upfor the Bitter to Richer newsletter!