When I started working full-time in my early 20s, I had very little financial literacy. Ironically, I was working in a bank, and most colleagues didn’t know a whole lot other than “our 401(k) plan is awesome.” As I went through the required new hire training courses, the 401(k) section talked heavily about the benefits to contributing when you’re young and consistently throughout your career. Sound advice, BUT I still had no idea what to do, where to go, or who to talk to for guidance on how to manage money.
It is really interesting/disheartening how many of my peers have no concept (or interest) of investing beyond 401(k)s. A lot of them talk about wanting to invest in real estate too but comment that they wish they had the money to do so. Most have all their wealth tied up in their house or retirement accounts. No liquidity! I’m sure my experience would be a little different if I associated with more finance types, investment bankers, wealth managers, tax accountants, etc. Nonetheless, many of my friends are college graduates, corporate professionals, and making six-figures or close to it. When I bring up the concept of investing in the stock market, many ask “well how do I really do that outside of my 401(k)?” We need to get you opening/funding taxable brokerage accounts. And we fund these accounts with safe funds that will grow slowly over time. After sufficiently funding retirement accounts and a little emergency fund, your brokerage account should be receiving your extra money! A savings account isn’t earning you anything. Let your money sit and grow in your brokerage account funds and it’ll provide good returns on your extra cash and liquidity if/when you need it.
I should make it clear, I’m not calling my friends stupid or making fun of them. Just trying to illustrate the ignorance we have regarding how to invest for the future AND NOW. I was ignorant to it too only a few years ago. My working career started right in the middle of the Great Recession. The thought of investing in the stock market was (still can be) terrifying!
Now I’m not going to draw up a whole diversified portfolio or give you a silver bullet, but here are some ways you can start investing outside of your 401(k):
- Select a brokerage firm – There are dozens of these. Maybe you’ve heard of Fidelity, Charles Schwab, or Vanguard. You can use any of these, but for beginners, I suggest a robo-advisor like Wealthfront or Betterment. Many of the fund options at Fidelity or Vanguard have investment minimums of $3,000 or $10,000. They also don’t really guide you to find the mix of funds that’s right for you. Fees can be higher at these firms too. You only need $500 to open an account at Wealthfront and $0 at Betterment. Fees are also really low here: 0.25% annually to manage your money, execute trades, etc. Most DIY brokerages are closer to 1%. I use Wealthfront, and they actually manage your first $15k for free with my link. Robo-advisors are as close to “set it and forget it” as there is. Answer a few questions, transfer them money, and they do all the trades for you and track your performance. After you get your feet wet, Wealthfront is still a good option, but you may have interest in transitioning to Vanguard to expand your options.
- Select and open your account – I’ll write another post about different account types in the near-future, but this post is really to encourage you to learn of taxable brokerage accounts. The account opening process will be very similar to opening any bank account. SSN, verify identity, set up username and password, and maybe wait a few days for your account to fund.
- Select funds – If you use a robo-advisor, they select your funds. They balance your portfolio (continually ensure your eggs are in the right baskets) based on your risk tolerance and other factors. If you’re not in a robo-advisor, start doing your research on some mutual funds and ETFs. Legally, I can’t tell you what you should buy. Start buying. Watch them fluctuate over a few months, and continue to research to decide if you should change. Many (myself included) encourage investing in index funds. Some suggestions on finding funds: Best Vanguard Funds, Best S&P 500 funds, Best Emerging Market Funds, Best International Funds. Depending on your firm, there may be costs to buy certain funds. I suggest starting with funds without purchase fees, especially if you think you may pivot to new funds after you get a hang of it.
- Continue buying more shares – Set up automatic transfers, so that you continue to invest frequently. Don’t try to time the market too much. Just put money in consistently. The sooner you invest, the longer your money has to compound and grow. And take your found knowledge after reading up on index funds to make sure your 401(k) and any other accounts are positioned properly too.
Starting is very important. Pivot later if you find a better course, but don’t lose out on the ability to grow your nest egg and learn what you’re doing along the way.
(Disclaimer: These are my opinions based on personal research and public information. I’ll make some generalizations, but take them as opinion when making your own decisions.)