Tips for the first-time investor

Man in a row boat in a photo illustration

In a recent post regarding the survey of how people invest, the most glaring observation was that over 70 percent of respondents who have yet to experience a recession do not invest at all — not even a tentative first-time investor — nothing.

Since the survey didn't record the ages of respondents, it is fair to conclude that those who had not yet experienced a recession would be aged in their mid-20s.

Why doesn't this group of people invest? Several reasons were advanced in the comments and in other articles about the phenomenon. Some might feel they don't have enough money to invest while others might be afraid to invest. But whatever the reason, teaching about investing can help address some of these concerns and hopefully get people started on their way — and for young people, this is especially important because they stand to gain the most.

Related >> How to Start Investing in Stocks

So, what is it they need to learn?

You Must Invest

Look around you at anyone over 60 or 70. How are they living? Chances are you will see or know some who is barely scraping by, and others who are living well. What is the difference between them? More likely than not, the difference between those who live well and those who scrape by is that one group invested and the other did not. Which of those two futures do you want to have? There is only one way to get that future: You have to invest. And it doesn't have to be risky. We aren't talking Wolves of Wall Street.

Related >> Best Lower Risk Investments for the Average Saver

1. The early bird truly catches the worm

Some may agree that it is wise to invest … but not right now. That is just foolish, and here is why: If you look at the chart below, you see that it shows the value of a $100 monthly investment yielding an average of 8 percent a year (the typical long-run yield on index funds):

Investment value over time

If you delay investing for, say, five years, you might think all you will be missing is the first $9,300, i.e., your investment's value after five years. But you would be wrong, though — very wrong. The five years you will be foregoing are not the first five years, but the last five years. In other words, you'll be foregoing the last $21,000, which is the difference between the $60,000 value after 20 years and the $39,000 value. That's more than 50 percent of your investment's value after 15 years.

It's called the power of compounding — and it is a wonderful thing, but it needs time to work its magic. To get the full value of that magic, you have to start early.

Where do you get the money to invest, especially if you are still making “young money?” It has to come from spending less than you earn. It isn't a popular answer, but it's the only one that works. Far better to pull in your belt when you have a choice (now) than when you don't have a choice (later).

How Do You Get Started?

The strategy that has stood the test of time the best is to pay yourself first. What that means is you need to set aside the amount you decide to invest before you pay anything else, from rent to the cell phone bill. And here are some ways to do that:

  • If you have a job with a matching 401(k) or similar retirement plan and the employer offers to match a certain portion of your contributions, start by contributing the maximum the employer will match. That is free money, and it will double the growth of your investment. Passing up that free money will end up costing you dearly over your years of investing.
  • If you don't have an employer matching plan, consider opening an IRA. Most online brokerages offer those for free, with but a modest starting balance. If your employer offers online deposits for your paycheck, they usually will pay the amount you designate directly into your IRA — which is just another way to pay yourself first.

How to Open a Roth IRA


The link above discusses the basics and walks you through the process of opening a Roth IRA. It's a great resource with just about everything you need to know, including:

  • The four steps to opening a Roth IRA
  • The information you need to open an account
  • How to evaluate a Roth IRA provider

One thing few people talk about, but which ended up being one of the best things my wife and I did, was simply to open up a savings account and dump all the unexpected monies we received into it. Everyone that I have spoken to confirms this, and you will be amazed at how much out-of-the-ordinary money you get. Just this week we received a $21 rebate from our insurance company because of some changes we made to our policy. In the past, that would simply have been spent without a second thought; but since we opened that special savings account, all those amounts automatically go into it.

At the end of each year, that year's “bonuses” were put into one of our IRAs. Over time, those little breadcrumbs add up to surprising amounts. We also observed a funny phenomenon: Once you start looking for breadcrumbs, they increase. You see more opportunities to score those mini-bonuses when you are always on the lookout for them.

Stay the Course

Every successful investor will tell you the same thing: Successful investing is boring. Success comes from patience, diligence and perseverance more than anything else. Brilliance and aggressiveness are more likely to cost you than add anything to your bottom line. Even Warren Buffett famously admitted that the secret of his success is that he mastered “the art of doing nothing,” his phrase for doing simple things and being patient. In short, let compounding do its work by giving it time and staying out of its way.

As you can see from the chart above, even if you start with small investments to begin with, they will grow to a sizable sum if you stay the course. Investing is not rocket science; it amounts to paying yourself first every month, even if you have to do without some small thing in the short term.

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Nick @ Millionaires Giving Money
Nick @ Millionaires Giving Money
5 years ago

Very interesting post. After experiencing my first full blown recession in 2008 I started a quest to save money. I guess the recession came to me at a great time when I was in my mid twenties and this has helped to strengthen my financial position mainly through being frugal and making more money. I now save about 80% of my income and invest in assets that pay income. The fear of being affected by the recession is still inside me but I think it has helped me to wise up about money.

Curtis@PayOffMyRentals
5 years ago

“Success comes from patience, diligence and perseverance more than anything else.” Excellent recipe for success. I just posted my “Accomplishment and Celebration” post yesterday as I have paid off the second of three rental mortgages in 24 months totaling $114,487. I am changing directions due to some life adjustments I mention in the post. Similar to investing, I mention that in my experience debt pay off and reduction requires three ingredients: 1) A plan 2) Determination and 3) Time. Those are the ingredients for successful debt reduction and investing. Warren Buffett also mentions the importance of temperament (akin to patience)… Read more »

Steve @ Live Smart Not Hard
Steve @ Live Smart Not Hard
5 years ago

Curtis I’ve followed your posts for a while and love seeing the updates!

DealForALiving
DealForALiving
5 years ago

I’m still new to the investing part of the personal finance equation — it seems like yesterday that my focus was saving every penny and putting it into a very low interest bearing savings account at a national bank.
But now that I’m no longer in crisis mode, I find this guide very helpful and I plan to take my first investing steps (outside of 401k which I use).

Dennis Frailey
Dennis Frailey
5 years ago

This is a good article and I recommend it to all, especially younger people. But the initial premise is flawed. It’s a good example drawing a conclusion from causality when all you really have is correlation. The author states “the most glaring observation was that over 70 percent of respondents who have yet to experience a recession do not invest at all” and goes on to suggest that these are people in their twenties. I would ask the question “what percent of respondents who are in their twenties do not invest at all?” If it turns out to be the… Read more »

Siddharth
Siddharth
5 years ago

Good Article, reminds me of my three and a half year journey and quench of creating a passive income stream. I got my first real job in Singapore in 2011 and didn’t have much to start Investing here locally, so instead started with small amounts and invested in India and continue to do so even today but the amount has increased substantially, also make it a practice to increase the amounts every year in proportion to increase in income. Today I save about close to 60% if not more, of my income and though my employer does not have any… Read more »

getagrip
getagrip
5 years ago

I think the point about “losing” $21,000 by not investing a small amount now should be stressed when talking to people. This is why working another year or two near retirement can be such a big deal, because the nest egg is so big the earnings are potentially rolling in those last few years. The flip side is the sooner you start the less likely you’ll need to worry down the road and you may not have to work those extra years. Another problem is combating the fear when not understanding the market. You always see these nice, pretty, smooth… Read more »

Emily @ Simple Cheap Mom
Emily @ Simple Cheap Mom
5 years ago

I do believe the advice given here is good. I think it might be harder for people just starting out to follow because of the higher student debts and unemployment/underemployment for youths, but it’s still good advice, even if it’s not easy.

Jerome
Jerome
5 years ago

I have never understood why it is so difficult to start investing when you are young. When young you have not yet become accustomed to an expensive way of living. I started saving as soon as I started my first job. I was easy because I suddenly had so much more money than I had as a poor student. And once you start, it is very easy to keep it up, and find even more money to save. On the other hand, as soon as you have gotten used to a high level of spending it is very difficult to… Read more »

Jordan
Jordan
5 years ago

I’m so glad people like you encouraged me to start investing before I was used to spending what I made.

Kandice
Kandice
5 years ago

Hi. This article is a really good one for me. I learned to save more in my late twenties and it hasn’t been easy, but it’s been hugely rewarding. I recently paid off a credit bill of $9000 in two years. I am now ready to pay off my student loan and build up my emergency savings.

My question is whether it’s too late to invest at 37? I am saving and paying off these debts (and maintaining my mortgage)but I wonder if I should still invest beyond my retirement account?

I’d love to hear from others.

Thank you.
KK

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Kandice

37 is certainly not too late to start saving. Heck, I’m nearly twice that age and still saving. I find that one of the best techniques is to simply pretend your income is lower than it is. If you’re starting out, you pretend your take home pay is 20% less than it actually is and you put half of that into a Roth IRA (for retirement) and the other half into savings (to build up your emergency fund). Once you reach an emergency fund level of 9 months of income (think – taking time off work to have a baby)… Read more »

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Kandice

One last point – about those student loans you are paying off. If the interest rates are comparable, always pay off student loans before other debt. The reason is simple: in most circumstances, student loans cannot be discharged in bankruptcy, whereas other debt can. Imagine, for example, that you have $50,000 in student loan debt and $50,000 in credit card debt, both at 8%. If you had a serious setback and had to declare bankruptcy, you could wipe out the credit card debt but not the student loan debt through the bankruptcy process. So if you had paid off the… Read more »

Terri
Terri
4 years ago
Reply to  Dennis Frailey

I also factored in that most student loan debt is discharged upon death of the former student. As a non-traditional student, I felt waiting until last to pay off the lower rate student loan debt was the better option for my family long term.

Jeremy Tarone
Jeremy Tarone
4 years ago
Reply to  Kandice

I’m replying to an old comment, but the question is still relevant. It’s never too late. It’s always prudent to have an emergency fund and there are investment vehicles that will protect money from government programs that are income tested. (depending on your country of course, I’m from Canada and the US has some similar laws and registered investment programs) I am investing in a combination of indexing and growth dividend stocks. Both will continue to compound even when I stop adding money to the investments. Allowing them to grow is simply a matter of ensuring less is taken out… Read more »

Pearl
Pearl
5 years ago

Hi. I am in my twenties and don’t invest as much as I should. However I would like to mention that I, and many other twenty somethings, graduated directly into the last recession, the effects of which are still impacting current wages. We have not just seen it but lived it. I would also like to 2nd Dennis’s point: correlation is NOT causation. But even your correlation is suspect IMHO. Lastly, while your topic of “save money, over time, because compound interest” is good and timeless advice, it’s not exactly earth-shattering. Would have liked to see more about the specifics:… Read more »

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Pearl

See my response to Kandice for my suggestions on most of what you are asking about. And feel free to ask me more. One important point: the more you educate yourself about investing, the better off you will be. And remember the name of this site: get rich slowly. That’s how you do it.

Mario
Mario
5 years ago

Could you tell me where I can invest at 8% as you wrote?

I don’t know any investment that pays so high

Thanks

Ben
Ben
5 years ago
Reply to  Mario

Mario,

There is no investment in the stock market that can guarantee you an 8% return. However what the author is talking about is that over time index funds have been shown to consistently return about 8%. I think the author did a good job of stressing that the important part for this 8% return is that it happens over time, not over night.

So given time, index funds can yield 8% returns.

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Ben

Especially if you re-invest all dividends! That makes a bigger difference than you might think due to the “magic” of compound interest.

Mario
Mario
5 years ago
Reply to  Ben

But: 1. what happens if you start investing in for example in january 2007 and you get the crash in 2008? 2.What about inflation, it is not considered in this article.$60.000 are no the same today than in 2034. 3.Which index fund do you recommend to invest? Only one or many? The SPY?the DOW?the NAsdaq? 4.If after 5 or 10 years you account grows, wouldn´t ir be wiser to diversify? Thanks please help me understand. I am from Argentina and renting Real State ROI right now is around 2% in US dollars. I spent months looking for other options but… Read more »

Ben
Ben
5 years ago
Reply to  Mario

1.For me, if I began investing in 2007 and the market crashed in 2008 I would be really happy. But this is because of my financial situation, I can’t invest large sums of money at a time. I put in $100 every month so a market crash is great because I am buying more with every dollar. If you have a lot of time (I have 40 years until an early retirement) what the market does today makes no difference if you are steadily investing. Like Dennis said, re-investing dividends and capital gains is the golden ticket to really getting… Read more »

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Mario

Ben covered some of this. Note too that there are complications when you live in one country and invest in another – see below for more. Re #2: Inflation. Over the long haul, stocks outperform inflation. If inflation averages 3% and stocks average 8%, you’re still ahead by 5%. That’s still going to serve you well over the long haul. If you aren’t willing to accept the risk of stocks, which is relatively low for a 30+ year horizon, you can go for a balanced fund (I mentioned several in an earlier reply), which has both less upside potential and… Read more »

Ben
Ben
5 years ago

At the beginning of your article you state that young people that do not invest are a phenomenon, but you do not provide any evidence to support the argument that in previous generations young people invested in their future. Is it out of the ordinary for the 20-something generation to not be investors? If we consider the current generation that is about to retire, where most of the baby boomers are working longer than they expected to in order to retire, doesn’t that provide evidence for the argument that regardless of what generation you are from young people do not… Read more »

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Ben

I’m a pre-baby-boomer (“war baby”), now in retirement (sort-of – I still work part time just to keep myself occupied in something productive). Many in my generation saved early, but largely because our parents had lived through the depression and drilled it into us that we needed to save for a rainy day or the future – my father’s goal was to “not be a burden on my children” after retirement. Also, for many of us, our employers sort of forced us to save for retirement(see one of my earlier replies). Even so, it was indeed tough for us to… Read more »

Ben
Ben
5 years ago
Reply to  Dennis Frailey

Dennis,

Thank you for your insights. It would be truly interesting to me if there was some way to look at generation by generation how much was saved given what generation your parents were from to see if there is any relationship there. I would suspect there is but as all generations have gone through different situations seeing the variability in response by the next generation would be pretty cool.

Pearl
Pearl
5 years ago

What Ben said. Also, what Mario said. Is 8% something I can actually expect to earn? My student loans are at over 6%, so it occurs to me that paying those off first is a better bet since that 6% is guaranteed. Also, debt could be a contributing factor as to why young persons do not invest.

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Pearl

There are, indeed, many good reasons to pay off those student loans (see my earlier comments on this), but it is also a good idea to at least start a Roth IRA (when your income is low enough that your tax rate is relatively low, you are eligible to contribute to a Roth, and to start the clock ticking since some of the benefits require you to have had the Roth IRA for at least five years). As far as the 8%, that’s a long term number that includes re-investing dividends in a low cost, highly diversified index fund or… Read more »

Ben
Ben
5 years ago
Reply to  Dennis Frailey

I would also add to Dennis’ comments about the Roth IRA. Pearl, if you have not attended school for any part of 5 months throughout the year and make less than ~$30,000 a year you can get the Retirement savings contribution tax credit that can lower the amount you pay in taxes (excluding social security and medicare) between 10-50% depending on a wage scale (link to the credit below). This was honestly the most convincing reason to me to really up my retirement contributions last year. You can open and make contributions to a Roth IRA until April 15, 2015… Read more »

Mario
Mario
5 years ago

If i use this calculator:

http://www.investor.gov/tools/calculators/compound-interest-calculator

.Starting with $0
.Saving $100 per month
.During 40 years
.At 8%(which I thin is a lot)

Will give me $ 310.000 in 40 years when I will be 81 years old.

And $310.000 in 2034 will be around $150.000 aprox of today´s value.

It´s not much money, and I really believe that 8% is a very optimistic interes rate.

Which index would you use, the SPY?

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Mario

1) If you don’t save that $100 per month you will have nothing at age 81. 2) If you save $100/month and that’s 10% of your income, it means your income is about $1000/month, which means you are making $12,000 per year. That’s pretty low, especially for a lifetime average. If you have adjusted to living on $12,000 per month, then $150,000 will seem like a lot when you are older. 3) If your income grows with inflation, so should your contribution so what you would actually contribute is $100 plus inflation, which would increase your numbers quite a lot… Read more »

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Dennis Frailey

That should say “if you have adjusted to living on $12,000 per year”.

Dennis Frailey
Dennis Frailey
5 years ago
Reply to  Dennis Frailey

A thought experiment about retirement. I found this helpful in explaining things to colleagues. Let’s say you want to start working at age 22 and retire at age 62. That’s a 40 year career, and is fairly typical for many. Then you retire from age 63 to age 83, at which point you pass away. That’s also fairly typical. This means that you will work for 40 years and live for another 20 years, which means that you should live on 2/3 of your income during your working years and save the other 1/3 for your retirement years. Sounds pretty… Read more »

getagrip
getagrip
4 years ago
Reply to  Mario

You are basically saying you don’t see the point of having the equivalent of $150K when you are facing old age. $150K could: – Pay off your home mortgage so your Social Security check will be enough to let you remain in your home for many years. – Allow you to build an in-law addition to a kid’s home so you could stay with them and help with the grandkids. – Let you move to a lower cost of living area, maybe buy a small place outright and pays taxes on it for a decade or so. – Let you… Read more »

Mario
Mario
5 years ago

Dennis,

For foreign investors is very easy to open an account in an online brokerage like TD ameritrade.

For Argentinians and Venezuelans is more difficult as we are not allow to exchange our currency for foreign currency.

Thanks for your answers

Pearl
Pearl
5 years ago

Dennis and Ben, thanks for taking the time to write such detailed responses here!

Emma | iHELP Student Loans
Emma | iHELP Student Loans
5 years ago

Useful advice. Certainly investing is not optional, and the sooner you start, the better.

Passive Income Mavericks
Passive Income Mavericks
5 years ago

Good article! I look from the perspective when I can be financially independent (FI) and when my passive income covers all my expenses. So, my portfolio and all side incomes should be able to generate income to support. As a beginner investor, I would start with VTI, SPY, MDY, or DVY and other income funds and slowly diversify towards individual growth dividend income stocks like JNJ, PEP, PG, CL, KO, MCD, WMT, UL, and others to accelerate the income. I agree completely with 32 that commodities are really speculative and as Buffet says total gold produced on this earth can… Read more »

Vania
Vania
5 years ago

Invest in my fiancial education and then pay myself first..

Jerome
Jerome
4 years ago

In addition to my comments from 2014 some additional comments: Investing in a low-cost and broad index is very wise and prudent. But has one big disadvantage: you do not actually learn a lot. At least you learn far less than when you actually invest in stocks yourself. The 8% mentioned is a long-term average and as such realistic. But for planning purposes I think it is too high. I plan with 5.5%, and HOPE for more. My actual year-on-year profit over the last 9 years (i.e. including the crisis of 2008) is 7.8%. But I still plan with 5.5%.… Read more »

fieldsy
fieldsy
4 years ago

I wish I knew earlier…

I started at 28, I am almost 32. I guess I started early with Roth’s and being serious about my 401k?

Raverick
Raverick
4 years ago

What type of investment type should i look for and where can i find them??

Lets save if i can save 100 per month, who should i seek for in helping me to invest?

Katie Ryan O'Connor
4 years ago
Reply to  Raverick

Hi Raverick,
Thank you so much for stopping by. While I can’t give you specific investment advice — everyone’s situation is different — there are great low-risk options that you can certainly take advantage of if you are on track to save $100 per month for investing. The best advice I could gather for you is to find a low-fee online broker with excellent reviews/reputation and see what they have in terms of mutual or index funds with low expenses and a smaller cost of entry. You can definitely find some for only $100. Good luck!

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