Welcome to Day 23 of the 30-Day Financial Wellness Challenge.
Each day will comprise of financial exercises, some short and others a bit longer, to help you become financially fit. The goal is to tackle different aspects of personal finances one day at a time.
After the 30 days, you’ll have a stronger understanding of your financial health and an action plan to improve your financial wellbeing. Review Day 22: Pay off Debt.
On day 23, you’ll start investing to grow your net worth.
When you’re no longer exchanging most of your time for a paycheck then you’re moving nicely on the road to financial wellness. Investing is a strategy that can make that possible by having your money work for you.
If you’re contributing to a 401k or similar employer retirement plan, then you’re already investing. You probably think of it as “contributing” instead of investing, but it’s the same thing. The big difference is the tax-advantaged benefits when investing for retirement. On day 24, we’ll go deeper into retirement contributions.
Now, what comes to mind when you think of investing?
Does it conjure up fear and anxiety? Do you feel lost or out of your league? It’s understandable. There are so many graphs, analysis charts, and acronyms. It can be overwhelming. But it doesn’t have to be. Sure, investing comes with risks but with it comes historically higher returns too. That’s compared to having your money sit in a savings account or in a dresser drawer.
On Day 1, you were challenged to calculate your net worth. What’s included in your asset column are investment accounts. If you have brokerage accounts, then you’re familiar with investing in the stock market and this challenge can still be helpful. It can give you more insight and discover other opportunities to invest to create wealth. If you’re new to investing, then this is the perfect challenge for you.
Let’s go over some basics.
Start Investing Basics: Difference between stocks and index funds
Investing in stocks is a great way to grow your net worth. When you’re looking at a long-term goal, stocks and index funds are good investments even during periods of economic uncertainty and market volatility.
Stock investing doesn’t have to be complicated. The biggest reason many are apprehensive is due to the many ways you can invest in stocks.
To further clarify, today’s challenge is about investing, not trading or speculating in the stock market. Trading is when you’re actively buying and selling shares. On the other hand, speculating is when you’re betting on high-risk stocks with hopes of a short-term higher return.
For you, stock investing boils down to two investment activities:
If you’re looking to own stocks of a particular company, this is the route you can take to buy shares of a company. In fact, you can buy just one share of a company. You can build your own diversified portfolio of different stocks in various industries. It’s certainly doable but requires more time commitment.
Index funds or exchange-traded funds (ETFs)
These funds let you own many companies in a more efficient way. Exchange-traded funds and index funds are made up of several companies or entire industries. Basically, you own pieces of many companies when you invest in funds. For example, an S&P 500 fund tracks the Standard & Poor index by owning stocks of the companies that make up that index. There are many funds so you can build a diversified portfolio of them.
Choosing an investment activity
It all depends on your risk tolerance and commitment to research and executing trades. For many, a simpler strategy of buying funds helps them passively create wealth through inherent diversification and less risks. However, stocks that are chosen with luck and perfect timing (which are hard to do) can have big rewards.
So which investing approach is right for you? For most, passively investing using index funds suits the needs of creating long-term wealth. But some do a mixture of both often using “play money” to buy stocks.
How to start investing
There are many investing strategies but we’re going to stick with the basics that work for most successful investors. Generally, this means investing in funds as opposed to individual stocks. Warren Buffet famously said that low-cost index funds tracking the S&P 500 were the best investment for most Americans. He also said if you believe in a company’s long-term growth then choosing individual stocks can work out well.
If you want to keep things simple, then build your portfolio of low-cost index funds. If buying individual stocks is appealing, it’s best to learn how to research stocks. In this challenge, you’ll get to choose one or both approaches then determine which can work for you. It’ll take time but I’m confident you’ll realize what’s best for you.
Step 1: Decide how you want to start investing
As mentioned there are different approaches to investing in stocks. Choose how you want to start investing.
The DIY active type who is interested in choosing stocks and funds. This requires a more hands-on approach. You’re the perfect investor for brokerage accounts.
The passive type who understands stocks can help grow your net worth but want the process managed. You’re a match for robo-advisors that offer low-cost investment management.
Many brokerages offer both the ability to actively invest in stocks and funds while also offering managed investment services. The great thing about robo-advisors is how it democratized investment planning without large asset requirements.
Step 2: Open your investing account
To get started owning stocks or funds, you’ll need an investment account. Many online brokerages offer benefits like $0 minimums, no-commission trades, and other perks.
Option 1: a self-directed (DIY) brokerage account
With an online brokerage account, you can quickly start investing in stocks and funds. Evaluate brokerages based on minimums, costs and fees, and perks like investor research tools.
Option 2: a robo-advisor brokerage account
With a robo-advisor, you can still get the option to invest in stocks and funds but you’ll get the most benefit from the investment management. These companies will ask you about your goals and have you complete an onboarding process to build a portfolio for you. The cost to use robo-advisors are drastically lower than traditional investment management.
Step 3: How much to start investing
New investors often have questions such as how much money is needed to start investing and how much to invest.
If you want to own individual stocks, then you’ll need to have money to afford the price of the stock. For example, Facebook stock costs $182 per share, so you’ll need $182 to own a share. With ETFs, they trade like stock which simply means you’ll need to buy them for the share price.
Investing is an essential strategy to grow your net worth. Throughout the challenge, you’ve been making calculations and identifying goals. And after funding your goals (e.g. savings, affording expenses, and debt payoff), you’ve determined how much money is left for investing.
Maybe there isn’t extra cash to invest excluding your contributions to a retirement plan. This is where cutting back on expenses and increasing income comes into play. Both activities improve your cash flow to enable you to invest.
Day 23 Assignment
- Choose how you want to invest to grow your net worth. Select one or do all.
- The recommended apps are great for beginners.
- Consider the following:
For DIY brokerage:
For robo-advisor account:
M1 Finance – a robo-advisor investment platform ideal for new and experienced investors with no hidden fees, 100% free investing tool, commission-free trades. Choose your portfolio of stocks, fractional shares of stock, ETFs. (an alternative Stash app)
Bonus: If you’re looking to test the waters, a great starter app is Acorns that help you invest by rounding up your purchases to the nearest dollar. Acorns account uses your spare change to invest in ETFs. It’s great for beginners. It’s simple to use and affordable way to micro-invest. Get Acorns with a $5 signup bonus.
|Opened Account||Initial Deposit||Bonus Received|
|Webull||Yes [ ] Date:_______ No [ ]||$|
|M1 Finance||Yes [ ] Date:_______ No [ ]||$|
|Acorns||Yes [ ] Date:_______ No [ ]||$|
Congrats, you’ve started to invest money. This is a big step and in time you’ll gain a better understanding of investing. In fact, many of these investing apps offer educational articles and games to help you.
Start Investing Tips
- Set up transfers to automate your investing on a schedule. With investing, consistency will serve you well.
- Don’t get tempted with trading and speculation. Remember, your goal is long-term investing to grow your net worth.
- Be active on the app for the first month. Get to know the features and read up on the articles and advice shared.
- Review the apps. After 3 months, determine if they are meeting your needs. If you gain a preference for one app, close the other apps, and transfer the investments into your main brokerage.
- Perfect Portfolio Course – a course for new investors who are looking to get started and looking to avoid major losses in the investments they choose.
- Read Broke Millennial Takes on Investing. A comprehensive beginner’s guide to investing that helps you understand it in easy terms.
Next Daily Challenge: Day 24: Retirement Savings