One of the most common misconceptions about investing is that you need a lot of money to get started.
Sure, having a large lump sum of money to begin investing with would be all well and good, but the reality is that between student loans, high housing costs, and other living expenses, it can be difficult to find the spare change to even open an account.
We get that!
The most important thing to honestly, just getting started.
When it comes to the “investing recipe”, time is one of the most important ingredients. Why? Because of that magical effect we know and love so much: compound interest.
Compound interest is the process that allows your money to grow from reinvesting your earnings over time and it can make a HUGE impact on the growth potential of your investments. The key? Getting started ASAP. In general, the more time you allow compound interest to impact your investments, the better off you’re likely to be.
So…how can you get started on a small budget?
First things first, make sure you’ve adequately protected yourself financially by having an emergency fund and/or the proper type of insurance for your situation. If these two things are in place, you’ll next want to make sure you’re also able to meet all of your current financial obligations consistently (i.e. bills, student loan payments, paying down current debts, etc.).
If those ducks are in a row, then you can get started investing.
If you only have a small amount of money to start with, you’ll want to make sure you are diversifying appropriately, keeping costs low, and getting the most you possibly can for your money. Consider investing in low cost ETFs (Exchange Traded Funds) or index funds that largely mirror the general stock market. This way, you’ll get a fair amount of exposure to the market without the significant costs or fees associated with pricier actively managed portfolios.
If you’re wondering how to go about investing this way, keep in mind that you can do so a few different ways.
The two main ways to invest are to either work with a financial professional or to take a more DIY approach and do it on your own.
If you’re unsure of how to proceed, consider the following:
-Do you have time to manage this on your own and do all of the necessary research?
-Do you feel confident in your overall knowledge of the available investment options and styles enough to do it alone?
-Do you trust yourself to not get too impulsive or emotional when allocating or making big decisions with your money?
If so, then definitely give investing on your own a try by opening up an online account with any reputable brokerage or robo-advisor (here’s a list of some of the best options!)
If instead, the thought of adding one more thing to your plate seems incredibly overwhelming and believe us…we get that…then you may consider working with a financial advisor who can get to know you, your goals, your risk tolerance, and can help you build a portfolio that will work best for you.
There is no one right way to do this, but if you do feel that you could benefit from working with an advisor, we’d be happy to help pair you with one in our network. Just send us a note or contact us on our website and let us know. We’d be excited to help!
A few other things to consider: No matter which investment direction you choose, be sure you understand the fees associated with your investments, the tools and resources that will be provided for you, and finally – make sure to rebalance or revisit your portfolio at least twice a year to ensure everything is on track.
One other note: when making your investment decisions, be sure to do so while keeping in mind your tax obligations as well. If your investment experiences a capital gain (or increases its overall value), you will be expected to pay taxes on this gain in the coming year. The amount of taxes you’re required to pay will depend on how long you’ve held that investment for. If you’ve held the investment for less than a year, then you will pay a short-term capital gains tax on the profits, which equals the same tax rate as your ordinary income tax rate or your tax bracket.
If you have held the investment for longer than one year, you’ll pay a long-term capital gains tax on the profits. These rates can vary from 0% to 15% or 20% depending on your taxable income and filing status.
When working with a financial advisor or doing the investing yourself, make sure you understand your tax liability and invest in tax-advantaged accounts to mitigate your tax exposure. Also, be sure to invest according to your tolerance for risk and incorporating proper diversification so as to make sure you avoid having “all of your eggs in one basket”, so to speak.
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