It’s probably the question I field more than any other. There are people who want to get started investing but don’t know if they have enough money. That’s a tough question to answer because so much depends on how soon you’ll need the money and your appetite for risk. To answer that question we’ll need to make some assumptions about your financial situation and you’ll have some background work to do in order to get started.
To get started you’ll need to have your debt mostly under control, especially credit card debt. There isn’t anywhere you can invest where you’ll earn more than you pay in debt service on a credit card balance. While I hate to put off anyone with the urge to save, you really should make revolving debt your first financial target. Other types of debt, like student loans and a mortgage, that is longer term type debt, at a lower interest rate, and you can definitely start investing while carrying those debts.
Start With An Emergency Fund
I realize this sounds like a broken record but you simply must have an emergency fund that’s NOT a credit card to get started investing. Most experts suggest your emergency fund should be six months salary but that’s a big target for most people starting out. If you have three months liquid cash, then you can invest in safe, short-term instruments until you have a bigger financial cushion.
Start Safe
Okay, you have your credit cards paid down and some cash in the bank to get you over a job loss, major car repair or medical bill. I’m going to assume that, until you build up your investments, you won’t really have any money you can afford to risk. So, the stock market is out, at least for a while. So, your first investments will be tiptoes that don’t earn a big return but don’t carry much risk, either. The first stop is your bank, which likely offers CDs in three and six month installments. Okay, I get it, that’s not exactly Warren Buffett territory, but keep adding to your savings and we’ll step up to the next level when you have $2,500 to invest.
Opening a Brokerage Account
Next you’re going to need a low-cost brokerage account somewhere like Fidelity, which offers a wide variety of funds. Do shop around as many investment houses have programs for those just starting out in the investment game. Whichever brokerage you pick look for a fund like Fidelity’s GNMA Fund (GMNX). That’s a low fee, relatively safe government bond fund that pays much better interest than a bank CD. The fund’s 12 month trading range is $11.50 – $11.70, so we’re talking minimum volatility here. It’s also a no transaction fee fund so you can sell it if you suddenly need the cash. In the meantime, keep making small regular cash contributions to your account until you’re up to $10,000.
Adding Some Risk
Once you’ve built up $10,000 and you’re sure that you can let the money sit for at least five years, then you can take your first tentative steps in the stock market with a fund like the Spartan® 500 Index Fund – Fidelity Advantage Class (FUSVX). That’s another no transaction fee fund that mirrors the performance of the S&P 500 index. Because you’re investing $10,000, which is the minimum for this fund, you get a break on the management fees.
Adding Structure
Okay, so now you have $10,000 in the stock market and $2,500 in a bond fund, plus your emergency cash. You now have a baby diversified investment portfolio made up of stocks, bonds and cash. The ratios may not be exactly right because I don’t know how much cash you have, your age and no way to gauge your appetite for risk. To get that you’ll have to do some reading on diversification or talk to a financial planner.
What I outlined above is a good beginning. You start off with relatively safe investments and build up to the more risky. Even if the stock market completely craters, you still have safe money you can tap in cash and the bond fund. That’s why we started with safe but low return investments. Once you get to this point, you’ll want to start thinking about adding hard assets, like high quality gold and silver bullion from the U.S. Mint and then diversifying within asset classes.
There’s a lot to learn and it can be frustrating but take it slow, start safe and you’ll surprise yourself with your account balance someday.