30-Minute Investing Start-Up Kit
When it comes to getting started investing, I've heard all the excuses. You're not good with numbers. You don't have a lot of money. You don't have enough time.
You just don't know what to do or where to go. The task may seem daunting, but you don't have to be a math whiz sleeping on a pile of cash to be an effective investor. You don't even have to dedicate an entire weekend to the project. In the time it takes you to watch a Simpsons episode, wash a load of laundry or order a pizza, you could set yourself on the path to riches.
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Consider this: If a 22-year-old invested just $50 a month and made an average annual return of 10% on the money, he would have $432,000 saved by the time he turned 65. He'd only need to save $116 a month to be a millionaire by that time. (Think you don't have enough money to invest? See 20 Small Ways to Save Big for ideas on where to find money in your budget.)
So put your excuses away. Follow this step-by-step guide for all the specifics you need. I'll even tell you where to put your money. You'll be calling yourself an investor by the time you finish reading this article. It really is that easy.
STEP 1: Decide if you should invest
Don't get me wrong, I think everyone should start investing as soon as possible. You want to give your money plenty of time to grow. But you need to pay down your high-interest debt first. It doesn't do you any good to get a 10% return on your investments if you're paying 18% interest on a credit card. Paying off that high-interest debt is like netting a guaranteed 18% return on your money. That's tough to beat. For help, see Tame Your Credit Card Debt.
STEP 2: Identify your goal
Are you saving for the short term, such as building your emergency reserves, saving for a house or planning a nice vacation? (Typically, a short-term investment is money you plan to use within the next five years.) Or are you investing for the long term -- such as retirement or a child's education? Your time frame will impact the next step:
STEP 3: Find a place to put your money and open an account
FOR SHORT-TERM INVESTMENTS: You want to put your money somewhere safe to protect it and someplace accessible so you can take it out when you need it. (No, your underwear drawer doesn't qualify.) You also want the bank to pay you a bit of interest while you wait to use the money. The solution is a high-interest online savings account. Two good choices are HSBC Direct and ING Direct. HSBC currently pays a higher interest rate -- 5.05% vs. ING's 4.5%. That's a 55-cent difference for every $100 in the account. However, ING, in my opinion, has a more user-friendly interface. You can decide for yourself which is more important to you.
No matter which one you choose, you can open an account even if you've only got $1 to deposit. And it only takes less than ten minutes at the banks' Web sites to sign up. Have your checkbook handy. You fund the accounts by transferring money directly from an existing checking account at your regular bank. You'll need your bank's routing number and your account number (found on the bottom of your paper check) to give to the online folks.
While you're signing up, enroll in the automatic savings plan. You can arrange to have a certain amount of money deposited into your account on a regular basis -- a surefire way to keep your savings goal on track. (Learn more ways to put your finances on autopilot.)
FOR LONG-TERM INVESTMENTS: You want your money to appreciate a little more -- but that means taking on more risk. You can afford it, though, because you have a long time period to smooth out the market's ups and downs. Your simplest option is a one-stop target mutual fund. A nice choice when you're low on cash is the T. Rowe Price Retirement funds. These funds are a ready-made portfolio in a single fund. They invest in a variety of other funds (so you're not putting all your eggs in one basket), and they gradually tone down your risk as you approach your target date.
Fidelity and Vanguard also have top-notch target funds, but they require $2,500 and $3,000 respectively to get your foot in the door. The nice thing about T. Rowe Price is it'll let you invest with as little as $50 a month when you sign up for its automatic investment program. So go to www.troweprice.com/welcome, click on "open an account" then "mutual funds." It'll ask you what type of account you want. A tax-free Roth IRA is a fine choice (learn more). Or, for a regular taxable account, select "individual" or "joint."
Then choose the target fund with the date closest to your goal. For example, a 25-year-old investor might select the Retirement 2045 fund for a retirement goal of age 63. You'll then tell the site how you wish to fund the account. Make sure you click on "AAB" for the Automatic Asset Builder program, which lets you invest for $50. Then you can tell it exactly how much you want to contribute and when. You'll need your checkbook when signing up to plug in your bank's routing number and your account number from the bottom of your checks. T. Rowe Price also will ask you a few questions about your credit history to verify your identity and your bank account. So be prepared.
What are you waiting for? You may think you'll come back and open an account later, but deep down you and I both know you'll probably get sidetracked and forget. So go ahead and do it right now. I'll wait.
STEP 4: Sit back and watch your money grow
Voilà. You're all set. With the automatic payments in place, you don't even have to remember to write a check or look for stamps each month. Just check in every few months or so to make sure your goals are still on track and let your account ride the road to riches.
We now return you to your regularly scheduled programming.