Starting Your Investment Journey Early
Building wealth takes time, patience, and commitment. Most of us haven’t learned about the importance of budgeting, saving, and investing at school. Many families, such as mine, find it taboo to talk about money. When you combine all that with the complexity of investing, it can be overwhelming to get started.
All over social media and Reddit blogs, you hear stories about people making a lot money in a few months, weeks, or even days. Let’s be clear, that is gambling, not investing.
Building your wealth, and eventually generational wealth, starts with a plan. When you know your goal, your timeframe, and your expected returns as early as possible, there’s no reason why you shouldn’t find success.
In today’s blog, we’ll talk through a few tips on how to get started on your investment journey and set you up for success.
Set Up Your Goals
Start simple, get complicated later.
Are you browsing Zillow for your dream home?
Are you planning on getting married and want to afford that amazing honeymoon?
Are you looking to start a family and need to prepare for the associated costs (medical, food, clothing, education, etc.)?
Do you want to retire early and be financially independent as quickly as possible?
Write all those things down, along with a target date and estimated pricing.
Review Your Budget
Next, take a look at your budget. If you don’t have one, it’s critical you get this started. Nowadays, there are many apps that link directly to your banking accounts and do it all for you. I’m old school and like to keep track of it in Excel.
What’s your disposable income look like? In other words, after you take away your normal monthly expenses (utilities, car, food, debt, etc.) how much do you have left?
What’s your desired lifestyle? Do you like to eat out or have a few drinks with your friends after work? Do you like to get new clothes, tech, gadgets, etc.? Set some funds aside for fun. Designing a plan doesn’t have to be so strict, and you need some room to enjoy your life.
Once you’ve settled on your current monthly amount that’s left over, now what?
Review Your Goals
Use the Compound Interest Calculator to enter your principal (initial amount to start), your monthly deposit (based on your budget review), and enter your expected annual rate of return (S&P 500 index has averaged ~10% per year, note: this is not a guarantee) and enter the amount of years until your first goal. Example below:
Assumption: $200 initial principal, $200 monthly deposit, with a 10% expected annual growth rate, for 5 years from now.
Result: 5 years from now, if I stick to my plan and my investments perform as expected, I should have around $15,800 in my investment portfolio.
Did that chart look good, especially in the later months/years where you start receiving more meaningful interest? That’s the power of compound investment. The earlier you get started, the longer you’re in the market, the more your money works for you.
How did that result compare to your goal?
If my goal was $15,000, then we’re on a good track, but need to make sure we’re consistent, and nothing can go wrong.
If my goal was $20,000, then we either have to find a solution (assume higher monthly deposits or assume higher growth rate) or adjust our goal.
Note, as with any investment, if you are expecting an aggressive growth rate, you are accepting to take on more risk.
Repeat the same steps but change the year(s) based on your other goal(s).
Do the results meet, exceed, or fail to meet your goal? For those that may feel discouraged, don’t worry. This is part of the learning experience and can become a big motivator. Remember, this calculator doesn’t take into consideration any promotions, bonuses, or any other supplemental earnings that may come along the way. It also doesn’t include better-than-expected investment returns.
Based on this exercise, determine if you need to readjust your goals or plan.
Determine Your Investment Strategy
Now that you’ve got your plan and have some confidence that you’ll be able to achieve it, we need to figure out how to execute on that expected annual growth rate.
If you’re comfortable with an annual rate of return of ~10%
You’ll likely want to consider diversifying into a few broad market index funds that span different regions and sectors. Review their historical performance, fund manager experience, sustainability scores, expense ratios, and volatility metrics. Determine the weight you’d like to use for each of the index funds.
If you’re hesitant and would prefer lower risk and would feel more confident with a lower annual rate of return
You’ll likely want to consider fixed-income securities, like preferred stock, corporate bonds, certificates of deposits, and high yield saving accounts. If you’re young and have a long timeframe (5+ years) before your first goal, I would highly encourage you to include some highly graded broad market index funds.
If you’re confident you can achieve higher rates of return
It’s great to have confidence, but remember that the higher your expected rate of return, the riskier the assets you’ll have to invest in. Many aggressive investors lose most, if not all, their funds by trying to “time the market”. Building wealth takes time, patience, and commitment.
As you do your research, remember to be careful not to fall into typical new investor traps — you are competing against financial institutions that have better, quicker information than you. There are articles published by individuals whose interests may conflict with yours. New aggressive investors often hear about “once-in-a-lifetime” opportunity and get stuck in confirmation bias (essentially only reading or listening to research that agrees with you). Remember to diversify your portfolio. Having an investment advisor can help.
Execute on Your Strategy
Research the broker-dealer you would like to have your investment portfolio with. The most popular ones are Fidelity, Charles Schwab, and TD Ameritrade. Consider whether you’d like commission-free trading on the securities you identified in your investment strategy. Consider the value the broker-dealer brings to your investment experience (sleek design, easy-to-use, reporting quality, execution performance, etc.). Make sure to review all fees, including account management & closing fees.
Once you’ve selected your broker-dealer, create an account, and link your checking account. You’re now ready to fund your account. Consider setting up an automatic withdrawal from your checking every week or month to meet your plan target.
Once the funds are available to trade, purchase the securities you identified in your investment strategy every month. Certain broker-dealers will allow partial share purchase, if you can’t afford a full share. Review once every month the performance of your account and ensure your allocation stays on target with your investment strategy. For example, over time, certain funds/stocks may outperform the rest of your portfolio. It’s worth considering selling some of the high-performing funds/stocks and reallocate those funds. You’ll also want to make sure you consider the tax implications of doing that.
Closing Thoughts
The power of compound interest is amazing, which is why it’s so important you get started on your investment journey early. The longer you’re in the market, with a sound investment strategy, the more benefit you’ll receive later in your life. Budgeting is a key pre-requisite to building your wealth. It’s important to set some funds for fun, as long as it doesn’t dramatically impact your plan. Lastly, don’t underestimate the value of an investment adviser in establishing your investment strategy, (re)allocating your assets, and monitoring your performance. It’s often an expense that is automatically deducted from your investment account, as a small percentage of your assets.
