Episode #56: How Much Should You Invest? Investing For Beginners.
In today’s episode we’re going to be talking about investing. More specifically, when is it right for you to start investing? How much should you invest? How does one even invest? And how does investing work to grow your wealth and create future financial security?
If you’re still not sure about the concept of investing and whether you want to get started, the truth is that if you’re just saving some money for the future, but aren’t doing anything to get those dollars to grow, then you’re going to have a really hard time ever having enough money to stop working. It’s time to flip the script in your head, investing is not just for advanced finance bro’s, men in suits, or anyone with the letters MBA after their name. Investing is for everyone, it’s not as scary as some of the gatekeepers make it seem, and today I’m going to walk you through some of the basics to help you start wrapping your head around investing and how you can get started.
The first thing that most people want to know is ‘how much should I invest, and what should I invest it in?’. But that’s not actually the right question to start with. Instead we’re going to simplify even more and look at the question:
When is it right for you to start investing?
Even if you’re excited about getting started in the stock market, it’s important to make sure that you’re on solid financial footing first. There are three boxes you’re going to want to check off before you start investing. These boxes are:
Paying for your basic living expenses
Having an emergency fund
Paying off all your high interest debt.
Paying for your basic living expenses comes first above all else. If you’re having trouble covering rent, or gas or groceries, then focus on getting yourself on solid financial footing with your basic expenses first. Once you can comfortably and consistently pay your basic expenses to keep a roof over your head, your utilities turned on, your car full of gas, and yourself well fed, you can check this box off and move on to item number 2 on the list, which is creating an emergency fund.
I’m not going to get into detail on this topic today but I’ve created tons of emergency fund based lessons which you can search through the youtube channel or on the blog index. The key is that you need to have an emergency fund of some amount of your choosing BEFORE you start investing because this is what’s going to keep you safe and secure as different things happen throughout your life. It will also help you be rational when the stock market experiences corrections because you have a safety net, you’re going to be okay. Getting your emergency fund going is your first financial priority after making sure that your basic expenses are covered.
After that the final box you need to tick off before you start investing is making sure that all your high interest debt is paid off. This means any debt with interest rates higher than 7-10%, which is usually consumer debt in the form of credit card debt. The reason that you want to pay off your high interest debt before you start investing is that the interest rate on your debt is likely higher than what you can reasonably expect the rate of return to be from the stock market. In a very simplified example, this means that if you take $100.00 and put it in the stock market, you can expect a return of $7.00 if we assume a rate of return of 7%. If you’re carrying credit debt with an interest rate of 20%, then you’ve cost yourself $20.00 by choosing to put that money in the stock market rather than putting that $100.00 towards paying off your debt. This means that overall you’ve cost yourself $13.00 by starting to invest before you’ve crushed your high interest debt.
If your debt interest rate is higher than a reasonable rate of return you can expect from the market, it creates a tortoise and the hare effect, except the tortoise will never be able to catch up. Your debt will grow much faster than your investments and cost you a lot of money. So, plug that debt hole that your money is flowing out of, and make sure you’ve paid off your higher interest debt first.
Once you’ve checked these three boxes, you’re most likely in a place financially where you can start investing.
How much can you invest?
Once you’re ready to start investing, the next part of the equation to look at is how much you can invest. There are two ways to approach this. You can look at how much you’re recommended to save and invest, and how much you can comfortably afford to save and invest. How much you choose should depend on your current and future lifestyle needs and wants, your income, your expenses, and your time horizon meaning how long you expect to stay invested for.
Traditional investing information says you want to aim to save a minimum of 10% of your salary. I would argue that today if you’re a woman you want to aim for saving closer to 20% of your salary. Then, there’s the FIRE lifestyle groupies over in the other corner who are rooting for 50-90% savings rates. What I’m getting at here is you can try to follow someone else’s advice if it works for your situation, OR you can look at your own numbers, decide how much money you can start to save right now, and always work at it with the goal of increasing your savings rate over time.
Look at your income, look at your expenses, and look at the amount of money you have leftover after paying your expenses. This is your current potential savings rate that you can choose to save and invest. From there you could decide that you want to increase your savings rate, so you gradually start to find ways to cut back on your expenses, or you could decide that you have a higher savings rate than you currently need in which case you can start to divert some of your money towards other savings goals for example starting to put together the down-payment for a house.
As a rule of thumb though, if your savings rate is currently under 10%, you’re going to want to start working up towards that 10% savings rate or higher. If your savings rate is more than 20% then you can comfortably look at using some of that money for things other than investing if you so wish.
The one line in the sand rule here is not to invest money that you expect to need within the next 5 years or so years. There’s always the risk of the stock market going down right before you decide to take some of that money out, and sometimes it can take a while to recover. This means for example, not investing the money you’re saving to buy a house, because if the market dips right before you need to access that money, this could put your home buying plans on hold for quite a while.
What investing accounts and investments should you use?
This question deserves an entire lesson itself, actually it should probably be at least two lessons, but I’m going to give you a quick and basic overview here. There are multiple types of investing accounts that you can use. If you’re watching this video this likely means that you’re just getting started, so the most advantageous accounts for you to open up in Canada are called an RRSP and a TFSA.
Once you’ve opened your investing accounts, you then have to buy investments within those accounts. And this is where people get all freaked out about investing. Because the media portrays it as this Wolf of Wall Street or Trading Places type game, where people buy low and sell hgh, and try to predict the market, and some people make it big and some people crash and burn because they don’t get their orders in before the end of the day but STOP! That’s not actually what investing for the everyday successful investor looks like.
Instead it’s actually much more boring and decidedly unsexy. Rather than trying to choose the best stocks to invest in, one of the safest and easiest ways to invest is through buying ETFs, and then hanging onto them for decades as the market slowly goes up over time. ETFs are collections of multiple stocks. So by buying an ETF, you’re actually buying a small portion of many stocks. This makes them very safe to invest in because really the only way to lose it all is if the entire stock market crashes and every single company shuts down. In which case all the banks close, governments collapse, and your best investments are cans of soup and bunkers, which is honestly not really something worth worrying about.
Believe it or not, it’s actually that easy to get started. You open your tax-advantaged investing accounts, and you purchase bundles of stocks with unglamorous, steady rates of return within those accounts, and then you hang on to it for decades.
Sticking With It. Automate That Shit!
To really start to see returns on your savings and investments that will allow you to be financially free and wealthy in the future, you need to be consistent and to stick with your savings and investing plan. This is because the power of investing is achieved through something called compound interest, which is when you earn interest on top of interest on top of interest for years, so that your principal amount can multiply into a truly mind blowing sum. I’m going to walk you through an example of what you can expect.
Let’s say you’re 25 years old and you have your first stable job. You’re earning $60,000.00 a year, and you decided that you can afford to save and invest $500.00 a month, which is 10% of your income. You start this savings regime when you’re 25 and you keep it up for 35 years until you’re 60. This means that over the course of your life you save, $500.00 a month, every month, and this adds up to $210,000.00. Now because you watched this episode, you felt comfortable investing, so you deposited this money into your RRSP and TFSA accounts and used it to buy ETFs. Let’s assume a conservative rate of return of 7% from those ETFs over the course of that 35 year time span. Because you gave compound interest so much time to increase your money, and because you diligently saved and invested your $500.00 a month, your account has grown into $900,527.00. You have almost $1million dollars just from following this simple saving and investing regime.
One of the keys to success here is to start as soon as possible and to stick with it diligently. This means you don’t want to trust yourself and human nature to remember to diligently complete this chore every month for the next 35 years of your life. Instead, make your life easier and automate your savings routine. Your company might let you sign up for an automatic program where they deduct your RRSP contribution directly from your paycheck, or you can set up your own automatic transfer from your online banking account that withdraws your savings rate the day after your payments from work are deposited. However works best for you, the key is to automate this so you don’t accidentally fall off the bandwagon of transferring that money, or decide that some months you want to spend it instead. Automate it, automate it, automate it, and you will have success with this.
Investing For Beginners Recap
So, let’s do a quick recap because I know this can be a bit confusing when you first get started, and it’s important stuff to know. I always recommend writing things like this down when you’re learning them for the first time because it helps it stick better and it’s easier to refer back to.
So, the first point that we talked about is when should you start investing, and the answer is once you can comfortably pay for your necessary living expenses, you have an emergency account, and all your high interest debt is paid off.
Then we moved on to how much should you invest? The minimum recommended savings rate is 10% if your income, I would argue today it should be closer to 20% of your income, the FIRE folks will say start with 70%, and the real answer is it’s up to you but you’ll grow much greater wealth and achieve financial freedom earlier by saving and investing a higher percentage of your income.
After that we looked at how do you actually invest, what accounts do you need and what do you buy? You want to be starting off by using tax advantaged investing accounts, in Canada these are called RRSPs and TFSAs, and then you want to buy investments within those accounts. ETFs are a great, safe, and diversified way of investing.
Finally we wrapped up with what can you do to ensure your success? And the answer to this is to automate it. Set up automatic transfers to your savings and investing accounts so that you can ensure you’re saving and earning money while you sleep instead of trying to remember to move the numbers around yourself. Don’t try to beat human nature, just accept that you’re not perfect and use the joys of modern banking to automate this process.
I hope you learned something from today’s episode and are starting to feel a bit more confident about the idea of investing. I’m going to be creating so many more investing lessons over the upcoming months, so if you want to learn more don’t forget to hit subscribe to the youtube channel so you can keep up to date, or join our mailing list to be notified each week when a new episode is live.
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