Investing is not as mysterious as it seems. It’s actually pretty easy. We’ll teach you how to invest money like an expert without being one.
Personal Finance 101
If you would have to choose the three pillars of personal finance, they would probably be budgeting, saving, and investing. While the first two pillars may not be automatically intuitive for everyone, with a little reading, you can get the hang of them pretty quickly.
But that third pillar is where many of us run into trouble.
We know we need to invest money, especially for long-term goals like retirement. But there are so many unfamiliar acronyms and terms; mutual funds, Roth IRA, Traditional IRA, ETFs, robo-advisors, index funds, money market accounts.
And that’s only a fraction of them! No wonder some people just give up even trying to invest their money, never mind how to invest money like an expert.
And it’s not like we want to invest to become our hobby. We don’t want to become experts. We just want to know the best way to invest money.
This article is for us casual investors. We’re going to show you how to invest money like an expert without being one.
You’re Ready to Get Started
You have paid off your high-interest credit card debt by taking out a consolidation loan with Lending Club. You’ve paid off your student loans (or at least refinanced them to a lower interest rate) with Earnest. Your emergency fund is fully stocked with six months or necessary expenses.
You’re ready to start investing. But you don’t know much about it, so you’re considering hiring a financial advisor. Don’t do that.
Why not? Because they aren’t going to do anything for you that you can’t do for yourself for free. And no one is going to care as much about your money as you will. We will show new investors how to invest entirely DIY.
These are some things you can do in the next week to get started investing. You don’t have to know much about investing to check these things off the list.
We like to think of Betterment as the gateway drug. It is a low-cost way to invest, there is no minimum to create an account, and you only need to answer a few basic questions that will help Betterment determine your asset allocation.
Asset allocation within Betterment means merely how your money is invested as a percentage of stocks and bonds. Stocks are riskier than bonds, but stocks have higher returns.
More risk for more reward.
You have a risk slider (pictured) which you adjust according to how risky you feel. You can move this slider as often as you want and the change is immediate. It’s not a good investment strategy through to continually tinker with your allocation.
You set it and forget it for the most part. The younger you are, the heavier your asset allocation should be weighted towards stocks. When you invest in the stock market, you are making a long-term investment, money that you don’t intend to access for at least ten years. Short-term investing is different.
The closer you get to retirement, the more weighted you become towards bonds. But that’s a change you make maybe once per decade, not every time you log into your account!
I have been using Betterment for years; it was the first thing in my investment portfolio.
Sure maybe you can make more money investing it yourself in penny stocks but really, how reckless do you want to be with your hard earned cash?
With Betterment, your money is SIPC insured so should some wacky stuff happen, your money is guaranteed by the federal government. Haven’t heard of SIPC? It’s similar to FDIC insurance only it’s twice as good because you are covered up to $500,000 instead of $250,000.
eToro – Track and Mirror The Investments Of Professionals
Betterment and eToro live in the land of investing account hybrids, but eToro is closer to an actual investment account. With eToro you can’t just withdraw your money as you can with Betterment. You will need to choose which equities you want to sell when you want to withdraw cash.
The idea behind eToro is that you aren’t an expert investor. You know there are people out there who are better at investing than you. eToro lets you see what trades those people are making.
You can search people and drill down into every decision they’ve made since joining. Like what you see? You can mirror their actions. When they invest in Apple when it’s low and sell it high, you see the same gains they do.
You will also see the same losses so tread carefully. There are many very successful people on the site, and you can tell by the amount of money they are investing that they are serious about doing well. These people know the best way to invest money.
That said, diversity is critical.
eToro lets you mirror as many people as you want. You can choose to follow Andrew with 20% of your holdings, your investment banker brother-in-law with 15% of your earnings and so on so that no one person is responsible for what happens to your hard earned savings.
This is riskier than Betterment and not foolproof. You need to be vigilant and keep an eye on your money.
The benefit here is you get to experience potentially higher returns than you might see with Betterment knowing the people whose investments you’re mirroring are much more experienced than you.
eToro has a $500 minimum. The fees charged depend on the type of investments you’re making. You can see them all here.
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Once you have your Betterment and eToro accounts set up, you’ll want to level up. The next step in your investing strategy is to start at least one retirement account.
While retirement investing isn’t exactly difficult, you will need to know a little more than you did to invest with Betterment.
Retirement accounts require a little more research and understanding because they have rules and advantages very different from other types of investments. Retirement accounts have tax advantages and regulations about when you can withdraw money from them.
Regular saving and investing aren’t enough. Investing in retirement accounts is a critical part of your personal finance plan.
Unforeseen illnesses, the financial needs of your dependents, and the uncertainty of Social Security and pension systems are but a few of the factors at play. A secure nest egg will do wonders to help you cope with the challenges of your life’s later years. The challenges of your younger years is finding a way to set that up.
A 401k is an employer-sponsored retirement savings vehicle that allows you to invest part of your paycheck, pre-tax, where it grows tax-free until you are ready to start withdrawing from it after age 59 1/2.
Most plans are made up of mutual funds that include stocks, bonds, and money market investments.
The money is taken directly from your check, so it’s a built-in way to save consistently which is a significant component of successful investing. A 401k also lowers your taxable income. If you earn $5,000 a month and invest $1,000 into your account, you are only taxed on the remaining $4,000.
What’s even better than an employer who offers a 401k is one who gives 401k matching. If you invest 6% of your income, for example, the company will match 3%. Always invest at least enough to get the match.
There is a limit to how much you can invest in your 401k per year. For 2018, it’s $18,500. If you’re over 50, you can contribute an additional $6,000 for a maximum of $24,500 per year.
When choosing between 410k investment options, be sure to know what fees and how much you’ll be charged. Investing fees can eat up a significant portion of your long-term investments over time.
Read the fee disclosure statements for each plan your employer offers and choose the fund providing the lowest fees. If all of the choices have high fees, you may want only to contribute enough to get the match from your employer and put the extra money in an IRA.
Personal Capital’s Fee Analyzer can show you how much you’re paying in fees.
If you withdraw from your retirement savings before turning 59½ years old, you will be taxed on the money and may face a 10% penalty too.
There are two types of IRAs, Traditional and Roth but both are tax-advantaged retirement accounts.
A Traditional IRA is not taxed upfront but at the point of withdrawal. The money grows tax-deferred. Upon withdrawal after age 59 1/2, the money is taxed as income.
For 2018, you can contribute up to $5,500, $6,500 if you are aged 50 or older. Putting money into a Traditional IRA also lowers the amount of taxable income for the year you made the contribution.
Withdrawals from a Traditional are considered regular income, and if you are younger than 59 1/2 when you make the withdrawal, the amount you take out will be hit with an early withdrawal penalty of 10%.
A Roth IRA is taxed upfront and not upon withdrawal after age 59 1/2. For 2018, the contribution limits are the same as for a Traditional IRA.
Roth contributions (but not earnings) can be withdrawn without penalty and tax-free at any time. After five years have elapsed after the first contribution, you are allowed to withdrawal up as much as $10,000 of the earnings penalty-free to pay for certain qualified expenses.
Which type is better?
During your working life, a Traditional because it’s likely that your tax rate is higher now than it will be after retirement. After you leave your job, you will have less taxable income. During this time, you slowly roll the Traditional IRA to a Roth. This rollover counts as ordinary income so to do this tax-free, convert a dollar amount equal to your tax deductions and exemptions.
We have a whole article that will explain this strategy in greater detail.
Like any investment account, IRAs have fees. Be sure to understand what fees you’re being charged and how much each fee is.
At LMM, we love passive income. It’s money that makes money while you do nothing! One of our favorite forms of passive income is through real estate investing. Don’t worry; we promised that you wouldn’t need to be an expert to invest and that’s true, even when it comes to real estate investing.
Real estate investing, even on a small scale, remains a tried and true means of building an individual's cash flow and wealth.Tweet This
We have two great ways that you can get your foot on the real estate ladder without any particular expertise, but it will require more due diligence on your part than the other investment options we’ve already discussed.
I know you think you have to have tons of money to invest in real estate but you’re wrong. Do you have $500? Then you can invest with Fundrise.
Fundrise allows individual investors to invest in commercial real estate online through an eREIT (Real Estate Investment Trust) or an eFund.
Their crowdsourcing model sets them apart from a traditional REIT allowing the average investor to participate in deals for as little as $500. Since the Fundrise eREIT is sold directly to investors cutting out middle-men, they can have fees lower than 90% of the competition
A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate.
Unlike publicly traded REITs that often hold other publicly traded assets, all of Fundrise’s capital is invested in properties they pick. As a result, they can’t just pull out money from a deal without selling the actual property.
However, to provide better liquidity, Fundrise has quarterly windows during which existing investors can cash out.
So, while you can’t withdraw your cash whenever you’d like – you can do it at four times throughout the year without a penalty.
The offerings in the $500 starter plan are a 0.85% annual asset management fee. In addition, investors pay a 0.15% annual investment advisory fee, which may be waived under certain circumstances.
So you want to be a landlord. Well, you don’t because it’s a major hassle. But you do because owning rental property is a great source of passive income. Roofstock gives you the best parts of being a landlord without all the headaches.
Roofstock is an online single-family home marketplace for real estate investors. Listed properties are independently screened, appraised, and certified so that the investor has a full picture of what they are buying. Properties also have tenants in place so that investments can cash-flow from day one.
Roofstock currently offers properties in nearly two dozen cities. What if your city isn’t one of them? It doesn’t matter. The majority of buyers live more than 1,000 miles from their property, and every aspect of the transaction and subsequent management can be done online. You never even have to lay eyes on your house in person!
Roofstock is the answer for those looking for a turnkey real estate investing experience. You can buy a home for as little as 20% down, and they have prices starting as low as $40,000.
Invest like an Expert Without Being One
The important takeaway here is that even if you haven’t dedicated your life to following the stock market, you can still earn more than “nothing percent” on your hard earned money.
The picture below is an example of what you would be turning down if you chose to stay with your no-growth savings account. As per Betterments analysis, a $10,000 deposit now is exceptionally likely to be worth $200,000 in 30 years. It’s even more likely that it will be worth more than that as opposed to less.
Every day you wait is another day of lost growth. I encourage you to do something with your money instead of leaving it idle. Invest like your future depends on it. Because it does!
Featured Image Photo Credit: “Money” by Pictures of Money on Flickr