It’s a common dilemma: You’re ready to grow your money, but you aren’t sure where to start. Investing gets a bad rep as complicated and time-consuming, but that was in the bad old days of the 20th century.
Today, online investing platforms (like Betterment) make it safe and efficient for you to start your retirement or investment account. What research has shown — including the work of two recent Nobel Prize winners — is that many basic investing choices are best done by automated methods that can help you choose the right mix of funds, save steadily and not make impulsive choices (even when the market sinks or skyrockets).
Here, four steps to get you on your way.
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Step 1: Leverage the years
The sooner you begin investing the better. The power of compounding can help your cash grow in a way that it never will again. If you start saving just $1,200 a year beginning at age 25— a mere $100 per month — by age 65 you’ll have about $185,700 (assuming a 6 percent return). But say you delay by 10 years, and start saving $1,200 a year from ages 35 through 65, earning the same 6 percent return. You’ll end up with only $94,800, nearly 50 percent less. If you’re starting in your 30s or 40s, don’t mourn the lost opportunity of investing when you were younger — congratulate yourself for getting ahead now.
Step 2: Rely on automation
Study after study shows that you will save more and reap better returns in the market if you use an automated system to help you save. If you don’t care for online investing, at the very least set up automated contributions to your 401k or IRA.
Step 3: Act now
Rather than put off investing because you wish you knew more, just get started with some basic options (and assume your knowledge will grow over time). Whether you have a 401k or you’re opening an IRA, put your money into an index fund that mirrors the stock market (like an S&P 500 index fund). Or if index funds aren't available in your 401k, use a low-cost target date fund (keep the expense ratio at 0.5 percent or lower). Note that these funds can be problematicbut, like training wheels on a bike, an inexpensive TDF can get you started.
Step 4: Be aggressive
While putting your money into stocks does entail more risk, it also provides you with more growth over the long term. Being more conservative and keeping your money in cash or bonds may feel safer, but the risk there is the potential to lose out on market gains.