Investing is one of the best ways to grow your money over the long term. When done with care, you can produce earnings on top of your principal year after year. Given enough time, that’s going to lead to a compounding effect that can multiply your wealth several times over.
However, 67 percent of Americans under the age of 35 report having little to no investments at all. Some remember the fallout from the Great Recession and are fearful. Others claim to either not know what to do or don’t have enough money to get started.
In this post, I’d like to show you how to get started investing using four simple methods that are low cost, simple, and effective.
Taking Advantage of Your Retirement Plans
By far, the easiest and most convenient way to get involved with investing is to start participating in your employer-sponsored retirement plan. This can be through a 401k, 403b, or 457 (depending on where you work).
401k plans have become the most common way for most working Americans to save and invest their money during their careers. The big advantage is that taxes are deferred when you make your contributions as well as while the investments grow. That ends up resulting in tens or even hundreds of thousands of dollars more than you’d normally have using a traditional brokerage account.
When it comes to investing, employer-sponsored retirement plans are usually limited to a small menu of various mutual funds and ETFs (exchange-traded funds). Based on your preferences for risk and growth potential, you can pick from securities that range from very conservative to highly aggressive.
If you’d like the idea of paying fewer taxes but would like more investment options, then you can also open an IRA (individual retirement account). This is another commonly used retirement plan that you set up outside your employer with any financial institution of your choice.
Because you’re free to go wherever you want for your IRA, this means you also can invest in stocks, bonds, mutual funds, ETFs, gold, … even real estate! If you open a Roth-style IRA, then your investments will not only grow tax-free but you also won’t owe any taxes when you finally start making withdrawals for retirement.
Use an Inexpensive Robo Advisor
If part of your fear of investing has to do with not knowing which types of funds to pick, then don’t worry – there’s an app for that! (Actually, there are several …)
Over the past decade, the financial industry has seen a dramatic increase in popularity among robo-advisors. A robo-advisor is just a computer algorithm that picks your investments for you (as opposed to a real human). It provides its recommendations based on your answers to a few short profile questions.
It’s easy to see why so many young people are embracing robo-advisors. They are simple to use, convenient, and they take all of the awkwardness out of having to meet with an actual financial advisor.
Beyond that, robo-advisors are cheap too. For instance, one of the most well-known apps, Betterment, charges only 0.25% annually and doesn’t require a minimum to get started. Considering other well-known financial institutions may ask for much higher fees and would likely require $1,000+ to get started, that’s pretty revolutionary!
Purchase Fractional Shares of Big-Name Stocks
Suppose you’re interested in picking up stocks from well-known companies that you know and use every day. But you don’t have $2,000 to $3,000 to spend on a single share of Amazon or Google. Even one share of Warren Buffett’s company Berkshire Hathaway costs $433,000+ (as of this writing).
In the classic way of buying stocks, investors have always had to order a whole number of shares. So with prices like these, it’s no wonder that expensive stocks like these can be a huge challenge for new investors who either don’t have a lot of money or don’t want to risk such a heavy position.
The industry has recognized the issue and many now offer what’s called “fractional shares”. Fractional shares are exactly what they sound like: The act of buying fractions of stocks instead of whole shares.
Fractional orders are placed based on your available dollar amount rather than the number of shares you’d like to have. So, for instance, if Amazon happens to be trading for $2,000 and you only have $1,000 to invest, then you’d have the chance to buy 0.5 shares.
This is a big advantage for people who want to get into stocks because it allows them to diversify into companies that might have previously been out of their reach. In turn, that’s going to result in better opportunities for diversification within your portfolio.
The downside is that with any new opportunity also comes new risk. Since stocks inherently tend to fluctuate in value, investors (especially new ones) need to exercise caution when they pick their stocks and base their decisions on speculation.
If you’d like to buy fractional shares, check out online brokers like Robinhood and SoFi.
Simplify with Low-Cost Index Funds
If you have no idea what kind of funds you’d like to invest in but would like to have the best chances possible of seeing long-term gains, then take a hint from investment legend Jack Bogle (the founder of Vanguard) and make the simple choice: Buy an index fund.
An index fund is simply a collection of assets that mirrors a major market index like the S&P 500. Because the securities it holds are already predetermined, there’s no need for a fund manager to actively choose what it should invest in. That’s why you’ll often hear these funds referred to as “passive funds”.
The big advantage to index fund investing is that it’s been proven throughout history that most investors would be better off putting their money in one. As many as 90 percent of active funds fail to beat an index fund.
Index funds are available as both mutual funds and ETFs. They are also some of the cheapest investment options available. For instance, the Vanguard 500 Index Fund (VFIAX) carries an expense ratio of just 0.04 percent ($4 for every $10,000 invested). The Fidelity ZERO Large Cap Index Fund (FNLIX) goes so far as to have a 0 percent expense ratio and no minimums to get started.
Once you decide how you’d like to begin investing, it won’t be long before you’re using more than one provider for different reasons (retirement plans, stocks, etc.). When that happens, you’ll want one convenient place to see all of your investments in one place. For that, Buxfer can help.
Buxfer’s Investments feature gives you the ability to connect with each of your financial institutions and combine them into one seamless real-time report. That means your 401k, IRA, and any other brokerage accounts. Buxfer can also provide you with some insights like your overall asset allocation, gains/losses over certain time periods, and a whole lot more.
Image credit: Unsplash