Do you know the biggest mistake people make when it comes to investing?
Not doing it.
Look, I know it can be intimidating — the world of investing is full of confusing terms and opaque language. You may have questions: How do I know I’m ready to invest? How do I start investing in stocks? How much money do I need before I start? (Spoiler: a lot less than you probably think.)
With a little bit of education, investing doesn’t have to be scary! In fact, I’m going to teach you how to start investing in stocks and bonds TODAY.
How to Know You’re Ready to Start Investing
Excited by the promises of a big payoff, people sometimes make the mistake of starting to invest before they’re financially prepared. This can prevent them from getting any benefits from investing.
It’s like starting on a long road trip when the gas tank is nearly empty and the oil light is on — you’re pretty much destined for a setback. So, before you hit the accelerator on investing, ask yourself these two questions:
Do you have high-interest debt?
What it is: debt with an annual percentage rate (APR) over 7%, such as credit card debt. If you have low-interest debt like student loans or a mortgage, don’t worry about this.
Why it’s important: you want to make sure that your investments are earning you more than your debt is costing you in interest. Otherwise, it’s like trying to pour water into a cup that has a hole in the bottom; no matter how much you pour in, you’re never going to get ahead. You need to address the problem first.
If you have high-interest rate debt, your next step is to pay it off. You can check out our FREE “5 Days to Debt Free” training course if you want some support.
Do you have an emergency fund set aside?
What it is: having an emergency fund means that you have enough money in your bank account to live off of for the next 3-6 months.
Why it’s important: You never know what life is going to throw at you. You could lose your job. You could discover your house has termites. Your kid could break his leg. You don’t know when things are going to go wrong or what could happen. (I mean, just think back to everything that happened in 2020.)
Investments only start to substantially pay off over a long period of time. Prematurely pulling money out of your investments to address an emergency can end up hurting you; for example, if your car breaks down while the market is low and you don’t have enough money in your bank account to fix it, you may end up selling stocks while the market is down. Not only are you losing out on the long-term growth of that investment, you may lose money on those individual stocks because of poor timing.
So, if you don’t have an emergency fund yet, your next step is to start saving.
If you don’t have high-interest debt and already have an emergency fund, great news! You’re ready to invest!
What Are Stocks and Bonds?
There are a lot of things you can invest in — stocks, bonds, real estate, cryptocurrency, gold, etc. But for now, I’m going to focus on how to start investing in stocks and bonds, since those investments don’t require a ton of market knowledge.
(Again, my goal is to get you to start investing ASAP.)
A stock is a tiny piece of a publicly held company. For instance, when you buy Google stock, you own a small piece of Google. When the company is doing well, its stock price increases, along with the value of your stock. If the stock price goes up and you sell your stock, you make money.
Stocks have historically returned 8-10% on average, which is a great return. For comparison, the average home value increase is 3.5% per year; 8% is more than double that.
But there is a bit of a catch. The reason the return is high is because the risk is also high. There’s always the possibility that the company you invest in will go bankrupt and the value of your stock will drop to zero.
The entire stock market runs on the relationship between risk and return. High risks offer the chance for a big payoff. Lower risks deliver a lower return.
Bonds are IOUs from a company or the government. Instead of going to a bank, the company or government collects the money from investors in exchange for bonds, which are a promise that the company or government will pay investors back with interest.
Bonds have historically returned around 4% on average, which is good, but about half the return of stocks. That’s because investing in bonds is less risky than stocks. Low risk, low return.
Ok, now that you have a basic understanding, let’s get to the good part — how to start investing in stocks and bonds.
Tips for Successful Investing
I’m going to tell you how to start investing in a moment. But first, here are a few tips to keep in mind as you start investing:
- Start as soon as possible. You’re probably tired of hearing this, but investing is a long-term game. Your investments need time to grow. As soon as you’ve paid off high-interest debt and saved an emergency fund, start investing!
- Don’t make emotional decisions. After the stock market crashed in 2008, many people got nervous seeing their investments nosedive, so they pulled their money out. But the stock market has always recovered. If they had just left that money in, it would have multiplied by now. So, expect ups and downs and just ride the waves.
- Diversify your portfolio. You’ve probably heard the Aesop’s fable about the girl who put all her eggs in one basket. While she’s dreaming of all the things she can buy with the money she’s going to make from selling the eggs, she drops the basket. Don’t make the mistake of putting all your eggs in one basket. Invest in high-risk options for a big payoff, but balance it with lower risks as a safety net.
Now that you know the principles of investing, I am going to tell you the best way you can start investing TODAY.
How to Start Investing in Stocks and Bonds
The EASIEST way to start investing — without having to learn anything beyond what I’ve already told you — is to invest in target date funds.
Target date funds are a mix of stocks and bonds. The exact mix of stocks and bonds is based on your age and changes over time.
To choose a target date fund, you select the year you’re planning to retire. So, if you plan to retire in 2050, you’ll look for target date fund 2050. You can do a simple Google search to find one. But pay attention to the fees (aka expense ratios)! You don’t want to pay more than .15% in fees for one of these funds.
Now there’s a lot more I could teach you about investing — about index funds, mutual funds, ETFs, alternatives, diversification, and portfolio allocation. But I’m not going to do that.
Like I said earlier, the biggest mistake people make when it comes to investing is not investing. You don’t need a 6-figure salary or a ton of money in savings. You don’t even need to know everything there is about investing in order to make a smart investment.
The sooner you start investing, the longer your money has to grow. It’s ok to start small — just start! It can be a turning point in your finances…and your life.
So, now that you know how to start investing in stocks and bonds, pick a target date fund and get invested TODAY!