Dear Finance Diary,
There’s a popular misconception that you need to have tens of thousands of dollars to start investing, and this is simply not true. You don’t need a lot of money, you can start with only a few dollars!
I believe the misconception comes from older generations working with high-net-worth-focused brokers and portfolio managers. These are investment professionals that will only take you on as a client if you have $$$ to invest.
Since you don’t have $$$ to invest, then you might turned off entirely by investing, but it doesn’t need to be that way!
What You Actually Need to Start Investing:
1. You should probably pay off your loans before you start
This is a general rule of thumb to follow. If your interest on your debt is high (i.e. on a credit card, payday loans,etc.), you should focus on repayment before you start investing.
If you are willing to undertake some risk (as always, consult a certified finance professional before you do so), you can invest if you think your returns are going to be higher than the interest on your debt.
For example, if you have a mortgage at a 2% interest rate, and the average annual return on investments is around 8%, then you could see the value in investing if your home is not paid off.
To do this successfully, you should be very familiar with the interest you are paying on your loans, and the terms that go with them.
I suggest you make yourself a spreadsheet with the different loans you have, the payments you’re making, their interest rates, terms, timelines and other important information before you make a decision.
Overall, waiting too long to start investing is something you will come to regret later. After all, time is the best factor with investments as they generally tend to grow over time. The longer you hold them, the greater value they gain (generally).
2. Have your emergency fund stocked
The year 2020 probably helped you realise the importance of an emergency fund. We realised that no one is really ever safe from financial hardship, and bad situations can occur at any time.
Some experts recommend that you have 3 months worth of expenses saved in your emergency funds, some recommend as little as 1 month. I would tend to say that it’s always better to be more prepared, but maybe that’s just because I have a Jewish mother.
It’s important to note that since your emergency funds should be readily accessible, this money shouldn’t be invested. Instead, try put it in a High Interest Savings Account. You can find these kinds of accounts online, and look for a recommendation from a certified professional.
3. Understand Your Investing Options
There are a lot of different ways we can invest now, and this has changed greatly with the internet. Again, this isn’t like your parents’ time.
The two fundamental branches of investing depend on whether you want to be in charge of your investments or not. This brings up the self-directed portfolio versus a managed portfolio. (There’s also nothing saying you can’t have both).
If you want to start off small on your own, you can make an investing account relatively easily on your phone or computer, and start making small trades. There’s really nothing stopping you from doing that right now. Just dive in.
If you’re not sure you’re able to keep up with your portfolio and putting your money in the right places, then having your portfolio managed is probably more for you.
You can pick between a certified company with humans that will manage your portfolio, or to have a computer-generated one. More on this in a new blog coming this week.
4. Understand that you will make mistakes, and you will lose some money
Not everything you invest in will be an instant overnight hit. You’re not going to open your first trading account and find the next Apple or Tesla overnight.
But over time, you will understand what you’re doing more. You will get a hang of what to do and what not to do. You will improve, you will know what to look out for.
But remember that there are always factors (within your control and out of your control) that can make your investments go belly-up and lose your money. This is why we diversify.
5. Diversifying your investments
Another thing that 2020 probably taught you is that no industry is safe. Stocks like Zoom boomed overnight, while airlines stocks took some of the biggest hits since the 2008 recession.
This is why when building your portfolio, you should be spreading your risk out. This is done by investing in different industries, different kinds of investments (stocks, bonds, GICs, real estate, classic cars, art, etc.). So if something takes a hit or loses value, you’re not completely bankrupting yourself.
6. How much should you be investing?
This will depend on every person’s individual goals and risks. That being said, the best thing you can do is to invest regularly (if you forget, you can set up automatic contributions to your investing account).
A rule of thumb is 10-15% of your income should go towards your investments. The less you contribute, the longer it will take to reach your goals. Alternatively, the more you invest, the less time it will take to reach your goals. Everyone’s situation is different, and speaking to your certified finance professional about your situation will help you have a better idea of what to contribute.
The word “investing” might have left a sour taste in your mouth before you read this article. I’m hoping by the end of it, you feel more empowered to take on your first investments and to make a plan to do so.
You don’t need a lot of $$$ to start investing, you just need to be prepared and to take the leap!