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It’s easy for long-term money plans to get lost in the shuffle. After all, paying the rent or mortgage, planning your next well-deserved break, or finding the perfect outfit for that job interview are things you need to take care of now. The future? That’s decades away.
And yet, planning for your future by investing your money shouldn't be put off. It's one of the most important things you can do for yourself. Self-care, you might say. By putting money into the stock or bond market, your hard-earned dollars can grow faster than if you were to keep it in cash or a savings account.
“Money, in a capitalist society, is power. Women retire with two-thirds of the money of men. If you think about the means to have more power, getting a raise is certainly one of them. Investing is another,” says Sallie Krawcheck, CEO and co-founder of Ellevest, a digital financial advisory for women.
Despite its importance, many Americans aren’t investing. According to a 2018 survey by NerdWallet, 39 percent of Americans say they aren’t investing, with 28 percent saying it's because they don’t know how.
There’s a common misperception that in order to invest, you need to first amass a large fortune. That’s not true. You can open accounts with $0—you won’t earn anything, but you can open the account. With as little as $1, you can start investing in exchange traded funds, or ETFs. You’ll need to open an account with a brokerage, which you can do online. Some popular choices are E*Trade, Charles Schwab, or Fidelity. Which type of account is right for you depends on your goals and income.
Traditional or Roth IRA
There are penalty fees if you withdraw from these types of accounts before age 59½, so these are best used for retirement. A traditional IRA allows a maximum deposit of $5,500 a year ($6,500 a year for people 50 or over) of pre-tax money. You only pay taxes on it when you withdraw money. With a Roth IRA, you can put away a similar amount; the difference is the money is you put in after-tax money. Upside: no taxes when you withdraw.
529 college savings plans
The money in these accounts can only be used for education and typically have to be used within 10 years of the projected college enrollment date. Different states sponsor different plans and offer various tax benefits—check the details of individual plans where you live.
Joint or individual brokerage account
Saving for something other than retirement or college? This kind of account may be for you. The funds you put in are after-tax, so any money you make from your investments will taxed, but you won't pay a penalty if you withdraw while you're still young.
401(k) retirement account
This is offered by companies to their employees, so you can’t open one on your own unless you have your own business. If this is a benefit where you work, you should take advantage of that. Contributions to these accounts can be taken out directly from your paycheck and are pre-tax dollars. Some companies will even match your contributions up to a certain percentage. “That's free money,” says Lorraine Ell, CEO and senior financial advisor at Better Money Decisions.
Savings account, CD, or money market account
For short-term savings, there are savings accounts, CDs (certificate of deposits), and money market accounts. They all keep your money fairly liquid, meaning you’ll be able to withdraw your money as cash pretty easily. You won’t make much money from the interest on these accounts, but you also won’t lose money the way you could in the stock market. Interest rates vary depending on the type of account and the bank so you’ll need to do some comparison shopping and maybe check out the fine print.
Once you’ve opened an account, you’ll need to decide what to invest that money in. There are a lot of choices, but a good place to start is with funds, which are portfolios of stocks or bonds. Many financial advisors use exchange traded funds, or ETFs, almost exclusively. An ETF is a fund that holds a lot of different stocks, bonds, or commodities in one portfolio. When you buy, say an S&P 500 ETF, it’s like buying a bit of every company in the S&P 500.
Of course, this service comes with a fee. The fees for ETFs vary but generally fall between 0.02 percent and 0.05 percent of your entire portfolio annually. ETFs are what’s called passive investments. That means the funds passively track an index, like the S&P 500. By contrast, a mutual fund (similar to an ETF in that it holds a collection of stocks, bonds, or commodities) is actively managed by one or more professional portfolio managers. These managers rely on research, forecasts, and their own judgment to make investment decisions. Because it’s more work, mutual funds have higher fees, varying between 1 percent and 2 percent.
Funds come in many different flavors. They can track indexes or follow themes, like technology, energy, international tech companies in Asia, big companies focused on consumer goods, and so on. There’s also growing interest in what’s known as ESG investing, which focus on environmental, social, and governance issues. When comparing funds, look at fees as well as past performance.
Funds are a relatively cheap way to diversify your investments. And when it comes to investing, diversifying is key. Think of it this way: Investing in one company is risky because you're putting all your eggs in one basket. If something bad happens to that company, there goes your money. When you invest in funds, you’re able to spread the risk across many different stocks (or bonds or other securities).
Of course, markets can be volatile but research shows that over the long-run—like several decades—staying in the markets will help your money grow. More so than keeping it in cash.
“Right now, we're in what they're calling an aging bull market, which means we're going to see a lot of ups and downs. But over time, companies make money and stocks grow. If you're someone just starting out in your 20s, 30s, or even 40s, you have plenty of time for that money to grow,” says Ell. “Put it away, don't look at it. Just leave it there.”
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