Chapter 16 – Getting Started Investing

Saving and investing doesn't have to be complicated. You can master the investment process with just a little bit of the right information!

The terms “saving” and “investing” are often used as if they have the same meaning. However, in financial planning, we define each differently. Savings occurs any time your income exceeds your expenses. It happens automatically when you have income today that you do not spend right away. Instead, you keep it available for use in the future. Investing is the process of using money that you have saved to earn interest and grow your wealth. You invest when you use your savings to buy investment assets that are expected to grow in value over time and increase your wealth. You can save without investing, but you cannot invest without saving!

When should I start investing?

We use four criteria to determine when a person should begin investing.

1. You are able to live on less than you earn. In other words, you need to have some extra income available to invest. If you don't have extra income then you can't begin saving and investing. You can have extra income available to save by either increasing your income or by decreasing your expenses. Most people find it easier to find ways to maintain their lifestyle for less money than to just make more money.

2. Your emergency fund is full or nearly full. You need to protect yourself from negative financial surprises. An emergency fund can protect you from needing to sell your investments in case something bad happens. It's very bad for your investments to sell them early. An emergency fund can prevent your from being forced to sell your investments too early.

3. I have all the insurance I need. Adequate insurance can protect you from large surprise expenses just like an emergency fund. Investing without protecting yourself is like building the walls of a house without building

4. I can save regularly each month. The best way to invest is with regularly monthly contributions. While it is not bad to invest just a bit here and a bit there, you will get better results and your financial situation will be more stable if you can save regularly.

Why we invest

Investing today provides income for your future self. If you do not invest your money now, then you will not have the income you want when you retire, and you will not be able spend your retirement years doing the things that you want. Instead, you may find yourself trying to find whatever employment is available to you. Few people want to spend their retirement years working. Investing your money carefully is the best way to avoid this fate!

One of the biggest problems that investor’s run into is that they forget their objective. Remember that the goal of investing is to be able to maintain your standard of living when you retire. The amount of money that this will take needs to be carefully calculated. This amount of money is your investment objective. However, investors frequently get caught up in the investment process and they begin trying to get very high returns, rather than focusing on reaching the goal. This causes them to take unnecessary investment risks and to miss their investment target.

Steps to get started investing

It's not hard to start investing. It’s only slightly more difficult than opening a bank account! Follow these steps to open an account for investing and get started.

1. Select a brokerage to hold your account. A brokerage firm (sometimes just called a “broker” or "brokerage") is a company similar to a bank. They offer investment accounts the way banks offer savings accounts. There are many brokerage firms available. Do some research online to find one that offers the lowest cost services available. Most of the services that brokerages offer are not necessary for most people, so you’re better off not paying for any fancy tools or gimmicks. The most important factor in the brokerage you choose is the fees that they charge.

2. Once you have selected a brokerage firm, their website should have a link to open an account. Click on this link and start entering your personal information as instructed.

3. Select an account type. Most brokerages will offer all of the basic retirement accounts, such as IRAs, as well as taxable accounts. Unless you have a specific reason for doing so, you should select either an IRA or a Roth IRA. More information about these accounts is found in Chapter 19.

4. Deposit some money. Just like when you open a checking account, you have to put some money into the account to start with. The broker’s website should walk you through this process step-by-step.

And that’s it! Congratulations, you are now an investor!

Definitions:

Savings: occurs any time your income exceeds your expenses

Investing: is the process of using money that you have saved to earn interest and grow your wealth

Brokerage Firm: a financial service company that offers investment accounts that enable you to buy stocks, bonds, mutual funds, and other investments.