On the Money is a monthly advice column. If you’re looking for advice on spending, saving or investing — or any complicated emotions that may come up when you’re getting ready to make a big financial decision — you canSubmit your question in this form. Here, we answer two questions asked by Vox readers, which have been edited and condensed.
Where do I start investing? How does the stock market work and how can I invest in stocks? How do I budget if it’s not too strict? How can I go about saving smartly?
Dear Future Investor,
These questions are answered in reverse order, so let’s begin.
Saving money smartly — which you should do before you start investing — reduces the difference between your income and your expenses. Many people are unable to save because their expenses exceed their income, and credit card debt drains most of their financial strength. Other people are able to save a small amount of money, but not enough to get them out of a paycheck-to-paycheck lifestyle. (One or two missed paychecks, or the equivalent of an unexpected expense, will empty them of whatever they’ve saved.)
Budgeting is one of the more effective ways to reduce your spending and save more money, especially if you really overspend in certain areas of your life. (Excessive spending, in this case, involves making purchases that may not bring utility or pleasure. Clothes you don’t wear, games you don’t play, food you throw away, and so on.) However, many people actually don’t. . Overspending, which makes their budgets seem overly tight.
That said, there are plenty of good reasons to take a look at how much you’re making and how much you’re spending. You can also create a budget to see how you’re doing. Any popular budgeting app will help you do the job. i use YNABWhich allows you to predict how much of your future expenses you can pay with your current income. If you’re interested in tracking both your budget and your investment portfolio, you might want to give it a try Monarch money. Cleo A budgeting app that uses AI to help you decide what you can afford to buy, though I haven’t used it myself so I can’t particularly recommend it. If you want to go the DIY route, you can open a spreadsheet and start tracking income in one column and expenses in another — I’ve budgeted this way for years, and it works.
Once you’ve completed a top-level assessment of your finances, one of two things can happen. Either you say, “Wow! I could save hundreds of dollars a month if I stopped buying all this stuff I never use!” Or you say – and this is the most likely scenario – “Um, looks like I need what I buy.”
This brings me to the most effective way to save more money, which makes more money.
Some people earn more money by improving their skills. Others turn an existing skillset into a side hustle. You may even be able to use your current skills to enhance, get a promotion or a better paying job.
You may be able to earn more money by investing. Many people turn to the stock market because they believe it’s the best way to earn enough money to achieve their biggest financial goals, whether they’re using a Roth IRA to save for retirement or a 529 plan to save for college. Other people successfully use the market as a way to achieve smaller financial goals, such as saving enough money for a down payment on a home. (Some people try to use the market as a get-rich-quick tool and most of them fail.)
When you buy stock in a company, you are predicting that the company that issued that stock will be worth more in the future than it is now. When you buy a share in a total-market index fund — which allows you to buy a representative portion of everything the market has to offer — you’re predicting that the entire market will be worth more in the future.
You are also, in a sense, helping to finance the growth of the companies and entities you invest in — which is one reason many people choose to invest in companies that meet social or environmental criteria.
Once you invest your money it’s gone. Literally. You’ve exchanged your money for stocks or ETFs or index funds, and you can’t count any of your investment app numbers as part of your net worth — no matter how high they are — until you exchange your stocks for money, which makes your investment ” is called perception.
In other words, and I can’t stress this enough – you have to sell your stock to become a reality.
There are two reasons to sell an investment:
- Your investment is worth enough to meet a specific financial goal for you, such as home ownership or retirement.
- You believe the investment will be worth less in the future than it is worth now.
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In either case, you’re at an advantage if you sell early. The first person who realizes the value of their investment makes more money than the second person (who makes more money than the third person, etc.). Each sale reduces the total value of the investment and the price will not start to recover until there are more buyers than sellers.
It can get complicated really fast, which is why many people navigate the bulls and bears of the stock market by following a strategy called “buy and hold.” Simply put, they believe that the long-term future of the market will be better than the present even though there are ups and downs in between.
The problem is that every now and then the market crashes – and although it has historically always recovered, it takes a while for those numbers to get back to where they were. During the Great Recession, for example, it took almost four years for the market to recover. If you need to sell your investment during these four years to cover the income gap due to unemployment, you may face a loss.
This is one reason financial advisors recommend saving three to six months of emergency funds before starting to invest. Since we all know how difficult it can be to save for six months of expenses, some people choose to invest a small amount of cash specifically to build their emergency fund, then sell the investments and move the money into a high-yield savings account or CD ladder. At that time, they can begin an investment strategy that can help them achieve their long-term financial goals.
After all that, investing is the easy part, all things considered. It’s just a matter of picking a brokerage and installing an app. From there, you can open an account, follow a series of prompts designed to help you build an investment portfolio, and determine how much money you can afford to invest. Some people choose to engage a financial advisor, but you don’t have to – there are a lot of Study Whether the average investor benefits from an actively managed portfolio and it turns out that passive management can be just as effective. (In other words, picking an index fund and sticking with it is just as good as buying and selling a bunch of different stocks and/or hiring someone to buy and sell your stocks for you.)
You may want to do some research before choosing your brokerage and your portfolio, but you can choose one of the more popular options and set yourself up with what they recommend. How much work you put into your investment decisions is entirely up to you. Some people read everything Warren Buffett writes. Other people spend part of each day conversing on investment forums. Most people let their investor app guide them to a balanced portfolio, which is perfectly fine! You don’t have to master the art of investing to earn a modest return on your investment.
On the other hand, if you find the market interesting and want to invest both time and money in understanding it, go ahead. Buy low and sell high, don’t invest anything you can’t afford to lose, and remember that past performance doesn’t guarantee future results.
