How did the “Little Engine that Could” get up that big mountain? We all know the story, and it’s useful for teaching our kids life lessons like “believe in yourself and have confidence”. Positive thoughts are powerful motivators. The grumpy old train that told him he couldn’t do it? Another great lesson - ‘ignore the naysayers’ and ‘grumpy people give grumpy advice’. (Ha! If that’s not an existing quote I’m going to coin that one!) But the most basic, but most complicated lesson, is that he needed to start up the mountain if he was ever going to reach the top.
As simple as it sounds, starting something is hard. A diet, a new habit (stop smoking, eat healthier), get out of debt, look for a new job, start your own business, start a blog, train your cat to jump through a hoop). It’s easy to think about doing it, wish for it to be done, imagine doing it, etc., but hard to take that first step.
So this article is how to take a small first step towards investing - micro investing. In my blog posts, Learn how to improve a graduates life, and Beginners Guide: Retirement, I talk about the power of compound interest and how time is the most important thing to give your money a chance to double. For example, if you are getting a 10% interest rate, your money will double every 7.2 years, (8% rate - double in 9 years, 6% rate - double in 12 years). But if you don’t have a lot of money to start investing, it can be hard to get into any funds that have higher interest rates. Savings accounts at banks are 1% or less, and you often need $2-5K to get into mutual funds with higher interest rates. And, as we’ve seen, the higher the interest rate, the faster your money can possibly double. Micro-investing is a good way
around that problem.
But first, who should be investing?
It’s kind of a trick question, since the answer is everyone who will be retiring someday. But, there are a few caveats to address first.
Ideally, an investor should:
Have an emergency fund
Have paid off non-mortgage debt: credit cards, student loans, personal loans, Home Equity Line of Credit
This is a chunk of money that is for….. an emergency! “What counts as an emergency?”, you may ask. The answer is anything that you couldn’t have reasonable planned on having to spend money on and must now spend money to address.
Emergency: medical event, flat tire, loss of job, dramatic life event
Non-Emergency: television is not flat enough, car needs new tires, kids have grown and need new clothes, Christmas
You can save up money for non-emergencies! (try making some extra bucks with a side hustle or selling some things around the house!)
How much should you have in an emergency fund? If you have debt, then you should have $1,000 in savings and then focus on paying off your debt. If your debt is gone, then you should have 3-6 months of basic living expenses.
Where do you keep your emergency fund?
Since this is something that you need available, potentially quickly, your emergency fund needs to be kept in a savings account. Yes, the interest rates suck. But, this isn’t an investment fund, it’s a security fund - as it it provides you security for an emergency.
The super savvy ones out there are asking me now, “What’s the difference between saving and investing?” Such a good question!
The answer is RISK. Theoretically, barring an alien invasion or zombie apocalypse or complete banking collapse, our savings accounts don’t have risk. When you "invest," you have a greater chance of losing your money than when you "save." Unlike FDIC-insured deposits, the money you invest in securities, mutual funds, and other similar investments is not federally insured. You could lose your "principal," which is the amount you've invested.
Pay Off Debt
This is a tricky topic because people try to rationalize their debt and get smart with their interest rates. If they have a low interest rate on a loan, but can get a higher interest rate in an investment, is it a smart decision to keep the money in the investment or pay off the debt?
Well, that’s a difficult question! It depends on your risk tolerance and if you are still accruing debt. We just discussed that investing is a risk and you could lose your principal and not make any money at all. Your debt, however, is not going away, unless you pay it off. It will be growing at some interest rate, and getting bigger every year.
It’s smart to pay off your debt. It might be ‘on paper smarter’ to leverage debt and get the highest rate of return, but like I mentioned in my article, How Dave Ramsey’s Financial Peace University changed my life, managing money isn’t just about the numbers. It’s about emotions, needs, wants, habits, and numbers end up playing a small role.
Are you ready to start investing? Do you have an emergency fund and have your debt paid off?
Great! Then let’s start you off investing! Remember that higher returns often come with higher risk. So, it helps to first ask yourself “What am I investing for? Do I need a specific amount? When do I need it by?” A new graduate might be starting out saving for a car. A new parent might be investing for college. Everyone should be thinking about investing for retirement!
But we are just starting small. It’s easy to start small! Just take that first step. Find $5 and get started with micro-investing! This is a way to develop a good habit of saving or investing - start small, do it frequently, and build your way up!
Micro investing is a way to start investing without the large start up capital and uses an ‘as you go’ approach. You can use several different investment apps that can help you figure it out. I have provided info on just three:
Stash is investing, simplified. When you sign up for a Stash account you get access to over 30 different investment options and personalized guidance to build a portfolio that reflects who you are. To make an investment, you’ll need to connect a checking account. All it takes is $5 to make your first investment. You buy fractional shares so you can invest what you can afford. That’s it – sign up, customize your portfolio, and boom, you’re an investor.
There is a monthly fee of $1 and all new investors get their first month free. Once your account reaches $5,000, it switches to 0.25% of your account per year.* (that’s $12.50 a year for a $5,000 portfolio).
Is the most established of the apps. There is no initial cost, no minimum investment amount and an annual fee of 0.35% for account balances below $10k. Betterment provides personal advice tailored to your needs and provides recommendations on decisions like how much to invest and how much risk to take on in your portfolio. Then, they invest your money and provide further financial information, on taxes, and savings. This program does have an additional increased fee of $3/month if you do not make a minimum deposit of $100/month.
This app is designed to help users invest their spare change by rounding up purchases to the dollar. By linking your checking account and credit cards to the app, it can take everyday purchases like your $25.01 gas charge and round it up to the nearest dollar, which in this case would be $26. Your round up amount would be $0.99 for this transaction. Once you’ve accumulated $5 in round-up savings, the app invests the money for you in a portfolio of your choosing. The app does make recommendations on portfolios based on your age, how long you’re looking to invest, your income, your financial goals, and your risk tolerance. The fees for Acorns is similar to Stash, $1 per month for accounts with $5,000 or less, and an annual fee of 0.25% of the account value for balances over $5,000.
All the apps provide security in that investments are protected by the Securities Investor Protection Corporation (SIPC).
Once you have accumulated $3,000, you will be able to start ‘regular’ investing and should contact a financial advisor to help you get some advice! I always recommend my local friend, Brad Lineberger at Seaside Wealth in Carlsbad. When I last spoke to Brad about this topic, he thought that micro-investing was a great way for beginners to get into investing, and he recommended that at $3k, people should switch to Vanguard.
Be like the little engine and ‘think I can” your way to some financial security! Emergency funds, paid off debt and investments - are all in your future if you just get started!