As a young woman starting her career, investing isn’t exactly your first priority. At this stage of your life, it’s easy to think, “Why would I put money away that I’ll need in 30 years, when I barely have enough money now to make ends meet?
Becoming a financially savvy, capable investor is a life-long skill that can serve you well, and help ensure that you are fiscally stable and secure, no matter what happens down the road. Simply put, planning for your financial future is something every grounded woman with a drive for success should strive for!
Why you should be investing now
Not wanting to give up her money in the present was exactly what kept Nancy Trejos, reporter for USA Today and author of personal finance book Hot (Broke) Messes: How to Have Your Latte and Drink it Too, from saving in her twenties. But now that Trejos is a decade older and wiser, she knows that investing as early in your career as possible is a wise choice. “I waited years to start investing because I was scared. I wasn’t making much money and I thought I needed all the cash I could get my hands on to survive,” she says. But putting away even a tiny sliver of your income, says Trejos, is something you won’t ever regret later down the line.
Haiyang Zhang, Vice President of Marketing and Relationship Management at Checchi Capital Advisers, echoes the same sentiment. “It’s really never too early to start investing,” he says. “That’s because time is the most important thing. The more time your money has to accrue and compound, the better of an investment you’ve made.”
It’s a bit of a cliché, but women can—and should!—be just as savvy with their money as men. Not just because it’s 2015 and gender stereotypes need to be kicked to the curb, but because biologically and statistically speaking, women are more vulnerable.
“Women tend to live longer than men. We have to make sure we have enough money to survive on our own,” warns Trejos. “We can’t have the ‘Oh, I’ll be married and have a husband to help support me’ attitude. Marriages fail. Spouses pass away. Even if you get married, make sure you are saving your own money. You have to be able to stand up on your own.”
Where (and how) to start investing your money
The easiest, and most straightforward, place to start is with a 401(k) plan. A 401(k) is a tax-exempt savings accounts sponsored by your employer. In many instances, companies will match the amount of the pre-taxed amount you contribute to the fund, up to a certain percent. Usually 401(k) plans are managed by outside companies (such as Fidelity Investments or Vanguard) and the plans invest your money into a variety of mutual funds—stocks, bonds and money market investments.
Even if you’re living paycheck to paycheck, checking your bank account meticulously and scraping pennies together for those boots you really shouldn’t buy (but just can’t live without), you should still consider putting money into a 401(k). If they won’t match any of your contributions, most companies will at least have an outside organization that they’ve partnered with, and who you can call to set up an account. Consider putting in 2 percent of your paycheck, or even $10 a month—sure, that’s two of those expensive lattes you love, but it’s not such a huge financial sacrifice.
Outside of a 401(k), individuals can open brokerage accounts—a designated account with a licensed brokerage firm where an individual can put their money and then place investment orders for those funds. Brokerage accounts can vary between high-fee, intensely assisted services to low-fee, low maintenance accounts.
When you begin to invest, you’ll have options in different types of funds, including index and mutual funds. Index funds are a great choice if you’re looking for something with low fees, but is not actively managed. They work by investing money into a variety of sources. Mutual funds on the other hand, are typically actively managed, but have higher fees. Regardless, both types of funds are designed for diversification, meaning they invest your money into hundreds, if not thousands, of different companies. This portfolio diversification is key, says Zhang. “Buying a single stock and putting all of your money into one company is a risky move,” he explains. In other words, don’t put all your eggs in one basket.
If you invest in a mutual fund or a 401(k), you will have to make a lot of investment decisions. If you’re up for the challenge, keep two things in mind: quantified risk, and diversification.
“The younger you are, the more risk you should take in your portfolio,” advises Trejos. She recommends keeping a majority of your money in stocks, because they are “the best way to grow your wealth in the long-term.” Stocks are ownership shares in an individual company. In other words, when you buy a stock from Yahoo or Amazon, you own a tiny, fractional sliver of those businesses. When those businesses succeed, or fail, your money either inflates (or deflates) with the business, making stocks more of a risky investment.
Bonds are a safer investment because they are a debt security. Think of them as a financial IOU that people make money on. When you purchase a bond, you’re lending money to the issuer. The issuer is whomever you bought the bond from, whether a private corporation or the government. As a thank you for lending that issuer your money, you are given a promise to repay the face value of that investment, plus an interest rate—money that you will make over time for investing your capital into the bond.
Bonds are more stable and add reliability to a portfolio, but because they’re safer, the returns are usually not so great. “Bonds are less volatile, and important to have because you also need some reliability in your portfolio,” adds Trejos.
What to ask as you start investing
Now that you’re an expert on investment types, it’s time to start shopping for one! Whether you’ve gone with a portfolio that lets you have all the control, or have found an index fund that makes all the decisions for you, it’s important to understand the fund you’re choosing. Trejos offers some suggestions about which questions to ask as you look for the right company and person to invest with:
- How does the fund compare to other similar funds?
- What are the fees associated with investing in this fund?
- How has it performed in the past?
- How often do the investments change?
If you decide to go the other way, and simply choose a company to invest in and buy stocks of, there are a lot of important questions to ask yourself. Every company has to file a prospectus with the Securities and Exchange Commission. “The prospectus will contain financial statements, detailed information about directors and officers including their salaries, properties owned, any litigation that the company is involved in, and more,” explains Trejos. “You can see if the company is registered with the SEC through its EDGAR database. And make sure you do confirm that!”
Other questions to ask include:
- Who’s running the company?
- Do I understand what the company does, sells, or makes? (It’s a simple question, but you do really need to know what exactly you are investing in.)
- How has the company performed so far? Has it made money for investors in the past?
- What is the company’s plan for future growth?
Many people choose to offload the investing decisions, or decide to build a partnership with a professional who knows the ins and outs of trading. If you’re working with an investment professional, there are also important questions to ask that individual. The Women’s Institute for a Secure Retirement (WISER) suggests asking the following:
- How is the person compensated?
- Do they make a commission every time they buy or sell an investment to you?
- Do they charge you a percentage of your assets?
- If so, what’s the percentage? (If it’s more than 1 percent, keep looking.)
Though these questions may seem silly or unnecessary, it’s important to make sure you really understand what you’re getting into when it comes to your money. “Don’t be afraid to ask lots of questions and speak with a few advisors before selecting one,” says Kathy Stokes, a Senior Fellow with WISER. “No one will care about your money more than you, so do your homework before trusting someone with this important responsibility.”
Be aware of the fine print
Overall, it’s crucial to keep an eye out for hidden fees, which can run the gamut from personal brokerage commissions to investment portfolio minimums and trading charges.
“Sometimes, a stock will cost $10 but there will be a $9 trading fee,” explains Zhang. “A lot of time people just don’t realize there’s an added, but sometimes unnecessary cost, which can really hurt them.” Zhang says that, in general, anything you can do to keep the ongoing maintenance fees low will help you in the long run.
The future—your 40’s and 50’s that may seem ages away—is what to keep in mind when you’re investing. You’re young and single now, but in how many years do you want to have that dream wedding? Buy a house? Even have kids? Even if those things are a decade away, putting a few dollars away now to accrue interest is something your future self will seriously thank you for.
“You’re in this for the long term,” Zhang emphasizes. “The more consistently you can invest and add to your portfolio, the better. But also understand that in this scenario, time is your best friend. You actually don’t want to look at your portfolio every other day or every other week. All you have to do is keep adding to it and let the money sit there.”
In other words, it’s best to skip that monthly trip you make to Target (where you somehow spend $50 on nothing at all). Instead, put that money into your 401(k) or an investment bond. In 10 years, with the right interest rate and a consistent contribution, that $50 can turn into $500, or $5000 to be spent on the future you’re dreaming of. Investing may not be simple, but it’s also not as complicated as you think! By thinking long term, asking the right questions and avoid getting gauged by fees and hidden costs, you can start making money sooner than you realized!