Should I invest if I'm broke?
<div class="user-question">Hi Frich! I have a question that's been stressing me out for a while now. How can I get into investing if I feel like I don’t have enough money to put aside for it? I know it’s important to start early but I’m a bit anxious to do it and I’m afraid I’ll lose the money or need it in an emergency.</div>
Investing and building wealth can seem like an intimidating process, especially if you feel like you don't think you have enough money to spare. The idea of potentially losing money or needing it for emergencies can add to your anxiety. However, starting early is crucial because the earlier you start the more money you will have, and with the right approach, you can begin your investment journey even with limited funds!
✅ Before You Invest
Before diving into the world of investing, there are a few critical questions you need to ask yourself to ensure you're financially ready and secure.
Do you have 1-3 months of cash savings?
One of the most important financial habits to develop is saving. Having 1-3 months of cash savings set aside for emergencies or unexpected expenses is essential. This emergency fund ensures that you don't have to sell your investments at an inopportune time when you need liquidity. This safety net provides peace of mind and financial stability, allowing you to invest without constantly worrying about needing the money for immediate needs.
<div class="frich-tip">Make sure to keep your emergency fund in a HYSA. Here are our team's favorites.</div>
Are you a long-term or short-term investor?
Understanding your investment timeline is crucial. Most new investors start as long-term investors, adopting a "set it and forget it" approach. This strategy involves depositing your money into investment tools and holding them for an extended period, allowing them to appreciate passively over time.
On the other hand, short-term investors seek quick gains by selling investments within a year. However, short-term investments are subject to higher capital gains taxes, making long-term investing more tax-efficient and potentially more rewarding in the long run.
Do you care about capital appreciation or dividend income?
When investing, you can focus on capital appreciation or dividend income. Capital appreciation refers to the increase in the value of your assets over time. You can calculate this by subtracting the purchase price from the current value.
Dividends are periodic payments made to shareholders from a company's profits. Reinvesting dividends can lead to compound interest, where your earnings generate even more earnings over time. Deciding whether you prefer capital appreciation or dividend income will help you choose the right investments for your goals.
- Example of Large Cap stocks: Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL & GOOG), Facebook (FB)
- Example of Mid Cap stocks: Ambarella (AMBA), Stitch Fix (SFIX)
- Examples of Small Cap stocks: GameStop Corp. ( GME), Cassava Sciences Inc. ( SAVA), Pacic Biosciences of California Inc. ( PACB)
How risk-averse are you?
Assessing your risk tolerance is vital. Larger, well-established companies (large-cap stocks) are generally less risky but offer smaller returns. Smaller, riskier investments, including crypto) can have significant price swings but may provide higher returns. Understanding your risk tolerance helps you build a portfolio that matches your comfort level and investment goals.
Are you willing to lose everything you have invested?
Although the probability of losing everything is low if you diversify properly, it’s important to acknowledge the risks. Some investors lose significant amounts by over-investing in volatile stocks or cryptocurrencies. Always keep the potential for loss in mind, and never invest money you can’t afford to lose.
✅ Now on to the Fun Stuff!
Now that you have taken care of the basics (i.e., savings, retirement investing), you can start investing some of your personal money. When people talk about investing, this is typically what they think about. Follow these steps to open your own personal brokerage account and start investing!
Open a Brokerage Account
A brokerage account is a type of investment account that allows you to buy and sell securities such as stocks, bonds, and mutual funds. There are many brokerage firms to choose from, and it's important to select one that suits your investment goals and preferences. Factors to consider when choosing a brokerage firm include the fees, the range of investment products offered, and the quality of customer service.
<div class="frich-tip">Start easy by investing the roundups from each purchase you make with Acorns.</div>
Transfer money
Many brokers don't require a minimum amount, so you can start investing with just a dollar. When it comes to crypto, you can actually buy partial shares. With apps like Acorns, you can round up all of your purchases to the nearest dollar and start investing by the cent.
The 100 Rule
There are several ways to construct your portfolio and choose what to invest in. The 100 rule helps determine how much money to allocate to stocks and bonds: subtract your age from 100 to get the percentage of your portfolio to invest in stocks. Your age as a percentage should be the amount of money invested in bonds.
However, this rule may not work for everyone. If you are risk-tolerant or see better investment opportunities, you might prefer different allocations. The 100 rule is a guide for those who are not as tolerant to risk, close to retirement, new to investing, or unsure where to start.
Typically, there is an inverse relationship between how much risk you can tolerate and your age: the older you get, the less risky your investments should be to protect your money and make it more accessible as you approach retirement.
Ultimately, the decision to invest in stocks or funds depends on your investment goals and risk tolerance. If you're comfortable with taking on more risk and have the time and knowledge to research individual stocks, then investing in stocks may be the right choice for you. However, if you prefer a more hands-off approach and want the benefits of diversification and professional management, then investing in funds may be the better option.
It's important to note that there are different types of mutual funds, including index funds, actively managed funds, and exchange-traded funds (ETFs). Index funds track a specific market index, such as the S&P 500, and offer low fees and broad diversification. Actively managed funds are managed by professional fund managers who aim to outperform the market but come with higher fees. ETFs are similar to index funds but trade like stocks on an exchange.
Before investing in any type of fund, it's important to do your research and consider factors such as the fund's past performance, fees and expenses, investment strategy, and management team. You can find this information in the fund's prospectus, which is a legal document that provides details about the fund.
Another option to consider is investing in a robo-advisor, which is a digital platform that uses algorithms to create and manage a diversified portfolio for you. Robo-advisors typically charge lower fees than traditional financial advisors and offer a more accessible and convenient way to invest.
Overall, the decision to invest in stocks, funds, or a robo-advisor depends on your investment goals, risk tolerance, and personal preferences. It's important to do your research and consult with a financial professional before making any investment decisions.
Btw - here's how others are doing👀
It might seem like everyone's already a millionaire by the way people speak about investing on social media. But the truth is, most people don't invest (for many different reasons). From the ones that do invest, this is the average amount ⬇️
How much do you invest each month?
💸 Average answer: $783
Good luck!
xx, Kristina
