my two cents

How Do I Invest My Money for the First Time?

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How do I invest money and when am I supposed to start? It’s probably the ideal time for me to do so because I’m young (23) with no debt and minimal expenses (cheap rent, parents’ health insurance, work-subsidized commute), but I have no idea how “investing” works. I currently put 5 percent of my paycheck into my TSP [a type of retirement plan for government employees, similar to a 401(k)] so I get the full match.

I’m aware that investing is important and good and you should start early, et cetera, but I don’t understand how to actually do it. Do I hire someone? Buy stocks? (Where do you buy them?) The internet is full of definitions of different kind of investments, accompanied by advice like, “What kind of stocks to buy depends on what you want out of your investments, so think carefully.” Uh, thanks.

Great news: You’re investing your money already. That retirement plan that swallows 5 percent of your paycheck every month? It isn’t just a black box of savings you won’t see for decades; it’s the most important investment portfolio you may ever have. Now is the time to milk it for all it’s worth.

Isn’t it ironic that the first years of your adult life are the best time to save for your last ones? The benefits seem so distant and abstract that it’s easy to put off. “The longer you wait, the heavier lift it’s going to be to reach your longer-term financial goals,” says Christine Benz, the director of personal finance at Morningstar. “Take advantage of those early days when that compound interest benefits you the most.” So you’re already on the right track — and it’s more straightforward than you think.

“For most people in their early 20s, the only money they’d want to invest is for their retirement,” says Manisha Thakor, the founder of MoneyZen and director of wealth strategies for women at Buckingham and the BAM Alliance. The primary reason is this: You want to lay a strong financial foundation before you begin fiddling around with additional investments (i.e., those outside of your retirement accounts). That foundation includes creating an emergency fund, building good credit, and aiming to put at least 10 percent of your paycheck toward long-term savings (including at least 10 percent into your retirement fund — ideally more).

The second reason is that you want to play the long game. “The rough rule of thumb is to not invest any money in stocks or bonds that you’ll need to spend for the next five to ten years,” says Thakor. On average, the stock market has posted negative returns once every four years since 1926 — a risky proposition if you’re saving for something with an approaching date. “If you put money into the market for a shorter period of time, it’s possible that when you need it, there’s a downturn and you’ll be forced to sell at a loss,” explains Thakor. In other words, it’s two steps forward and one step back, so you want to give your money a long and flexible runway.

The third reason is simple and depressing: Most people (and particularly women) don’t save enough for retirement — or even come close. This leads to bummer statistics and sad debt stories about elderly women who become financial burdens to their children. And our generation could be in an even tougher spot because we’ll live longer. But not you: You’ll enjoy your golden years motorcycling through Argentina or breeding exotic cats or doing whatever else you want, as long as you stay aboard the investment train.

So, back to your retirement account: First, you need to find it. If you root around in those dense, “learn about your benefits!” emails that you and everyone else ignored during your new-hire orientation, you will find a login link to access your retirement plan (or, you know, reset the password you forgot). If you don’t want to deal with the above, email your HR department. I did the latter when I was in your situation in my 20s, and wrote something like, “Hi, this is embarrassing, but could you send me a link to my 401(k)? I haven’t looked at it since my second day of work.” The point is, you will not be the first, last, or most clueless person to ask about this.

Then, voila — meet your portfolio. If you weren’t feathering this nest yet, I’d tell you to start there. But since you are, you now understand how easy it is. See, you can invest your money without even realizing it! Of course, you do want to be more hands-on than that, but not by a lot. “What about those people who invest in Bitcoin and make a zillion dollars from it?” you ask. “Should I try to do that?” The answer is no. For every success story, there are hundreds of failed day traders who thought they could make a quick buck. Steer clear.

Assuming you haven’t examined your retirement account before now, your money is probably invested in the “default” option. Many employers — including the government — do this to prevent people like you from making the mistake of just leaving their money in cash, so it sits around and leaks value thanks to inflation. That default is usually a target date fund (also known as a “lifecycle” fund), which is a broad mix of different stocks and bonds that’s calibrated to be worth the most when you hit retirement age (you can begin tapping into it when you reach the bizarrely specific age of 59½ — do so any earlier, and you’ll get hit with a debilitating tax penalty, which isn’t worth it).

As investment strategies go, most target date funds are great. They’re defined by a vague estimate what year you plan to retire, so that your portfolio becomes more “conservative” — or more geared toward stability than growth — as it approaches. It seems absurd to think that far in the future, I know. But just to give you an idea: I’m 33, so I’m invested in a target date fund for 2050 (when I’ll be 65). That doesn’t mean I have to retire then, or even start using that money — I can move it around or never even touch it, if I please. But as Benz puts it, “Once you’re participating in a target date fund, inertia is your friend.” So, for the sake of keeping things simple, here are your marching orders: Pick the target date fund that follows your timeline, make sure its “expense ratio” (a.k.a. annual fee) is less than 1 percent (ideally under .5 percent), pump as much money into it as you can, and don’t worry about it otherwise. You won’t have to call any brokers or “buy” anything — simply adjust your “contribution allocation” settings, and portions of your paycheck will get funneled in a big basket of different stocks and bonds that are managed for you. If you can max out your contributions (i.e., put in $18,500 per year, which is the cap, per the IRS), do it! It’s a good goal to set, even if you don’t accomplish it for another ten years.

As for saving up for grad school: You’re better off keeping that money away from the stock market entirely. “What if the market drops by half right before you go to grad school, when your tuition is due?” says Thakor. “You’d have worked so hard to save that money, but you’d only have half as much at the moment you needed it.” Instead, she recommends putting short-term savings in a “safer” place, like a money market fund or a CD account, which won’t grow as quickly but won’t be volatile, either. You can transfer your money directly into either of these vehicles online; your bank will offer CDs (short for Certificate of Deposit, which means you have to commit to leaving your money there for a set period of time), and you can use a low-fee website like Vanguard to open a money market account. Be aware that the latter usually requires a $3,000 minimum, so you’ll need to sock that away first.

Of course, you probably have some other financial goals between now and retirement — like most of us, your future holds an amorphous blob of potential money pits like a house, furniture that isn’t from IKEA, kids, bungee jumping in Australia, whatever. That’s where a Roth IRA can be helpful — it’s another type of retirement account that you can set up in addition to your employer’s, only you can begin withdrawing money from it after five years. I’d recommend doing so through online investment platforms like Stash or Ellevest, which walk you through the process and don’t have minimums — you can start with $5 and automate your contributions, so that you’re adding little bits every week or month. Like other retirement funds, IRAs are capped by the IRS — you can’t put in more than $5,500 a year — and you want to aim for that number. “By maxing out your retirement plans in your 20s, you’re acting on the most effective strategy you can, as it will have the most time to grow,” says Thakor. The future you will be grateful.

How Do I Invest My Money for the First Time?