Photo-Illustration: by The Cut; Photo: Getty Images
The majority of Americans are not invested in the stock market, and until a few years ago, my friend Chris was among them. Then she learned about an app that enabled her to round up all her purchases and invest the difference — “Basically just investing my loose change,” she explains. It was low stakes, a way for her to dip a toe into something that previously seemed out of reach. “I’d always felt like investing was for rich people — trust-funders and Wall Street types,” she says. “But then, just making regular, automatic investments and seeing my money grow, I realized it wasn’t that difficult to do by myself.”
Chris eventually moved her investments into a larger brokerage account online (she has used both Vanguard and Schwab, although there are many platforms to choose from) and set up automatic transfers of $100 a month from her checking account into her portfolio so that she never has to think about it. “Every time I look, I have more money in there than I ever could have saved otherwise,” she says. “It’s comforting to know that it’s growing, even if everything else in the world is going to shit.”
Most people who don’t invest their money in the market cite the following reasons: They can’t afford to, they don’t understand how it works, they think it sounds like gambling, or they’re worried about the ethical implications or a recession or both. These are all valid concerns. It’s scary to put your money into something that seems out of your control, especially right now with the threat of tariffs, economic uncertainty, and oligarchy hanging over us all.
But consider this math: If, at the beginning of 2020, you had put $100 in an S&P 500 index fund (one of the most common ways to invest), then it would be worth about $198 by the end of 2024, almost double the original amount. (To be clear, this rate of growth is unusual — the stock market has seen a historic surge over the past four years — but still, it’s real money.) By comparison, if you’d kept it in a high-yield savings account, you’d have significantly less: about $120 at best.
No matter how you feel about the economy and the forces that currently shape it, there’s no question that more money will give you more options, freedom, safety, and power. Investing may not make you rich, but it will most likely make you richer than you would be otherwise. From a purely mathematical perspective, it’s the most sensible thing to do with your money over the long term. “By not investing, you are leaving money on the table,” says Manisha Thakor, a certified financial planner and the author of MoneyZen: The Secret to Finding Your ‘Enough.’ “The best time to start is right now.” If you’re still on the fence — or just not sure where to begin — here’s a quick primer.
Best-case scenario, you might be investing already. Many people don’t realize that the retirement benefits they signed up for in a haze during their employer’s onboarding paperwork (usually a 401(k), 403(b), or SIMPLE IRA) are technically a vehicle for investing in the market — and save you money in taxes, too. This is the lowest-lift option for first-time investors and one that you should take advantage of even if you’re trying to reach other financial goals at the same time, says Thakor.
If your employer doesn’t offer a retirement plan, Thakor recommends opening your own IRA, or individual retirement plan, and start investing that way.
Sure, saving for old age when you’re young seems ridiculous. You need money now! But like wearing sunscreen regularly, the earlier you start investing for your retirement — even just a little bit — the bigger the payoff will be down the road. That’s because investing works best when you play the long game. “Most 20-somethings don’t have much extra money to invest,” says Thakor. “But when you contribute to your retirement plans when you’re young, it will be the most valuable money you ever save, as it will have the most time to grow and compound over time.”
One key consideration: When you put money into most retirement investment accounts, you will need to leave it there until you’re almost 60 (you can take it out sooner, but you’ll get hit with a tax penalty that could wipe out most of its growth). On the one hand, that’s good because it gives your money more time to grow and discourages you from blowing it. On the other hand, if you think you might need to use that money earlier, consider investing via a Roth IRA, which still offers tax benefits but only requires you to leave your money in for a minimum of five years.
If these time restrictions make you nervous, you can also open a traditional brokerage account, which will allow you to cash out whenever you want (but doesn’t include any tax benefits).
On average, over the past century, money invested in the stock market has grown about 10 percent per year (adjusted for normal inflation, it’s more like 7 percent). That’s not every year, of course, but it accounts for the downturns as well as the upswings. And when you factor in compound interest — the snowball effect on your money’s growth — it adds up fast, especially since you don’t have to do anything besides wait. Play around with a compound-interest calculator to run different numbers and see for yourself.
If there’s a recession, the overall value of your investments will decrease, but you won’t technically lose money unless you sell your investments while they’re down. If you hang in there, the market will eventually rebound, as it has from every recession in history, no matter which party or president has been in power.
Anything is better than nothing — even a few dollars. But the more you invest, the more your money will grow over time. Still, there is such a thing as investing too much — i.e., savings that you might need to tap in the near future. “The rough rule of thumb is not to invest money in stocks or bonds that you need to spend for the next five to ten years,” says Thakor. “The reason for this is that there are unpredictable recessions. If you put money into the markets for shorter periods of time, it is possible that when you need to spend it, the market may be in a downturn and you’d be forced to sell at a loss.” In other words, you want flexibility here.
Ideally, you want to build up a cash emergency fund to fall back on in a pinch so that you won’t be forced to sell stocks at a bad time. But you can do that while investing, too. “A lot of people believe — including myself, in the past — that they need to meet all these financial benchmarks, like paying off debt, before they start investing,” says Jen Smith, a financial educator and the author of Buy What You Love Without Going Broke. “But you can pursue multiple goals at once. I’ve realized that a better way to look at it is to get started with a round number that feels doable, like $50 a month. Then move it up to a hundred and get comfortable with the habit. Once it feels sustainable, you can just automate the contribution so it’s not even an action you need to take.” Eventually, you can start setting more concrete goals, but at the beginning just aim to see what you can spare.
That said, if your employer offers to match a certain portion of your 401(k) contributions, you should take full advantage of it (free money!). But if contributing more than that infringes on your ability to pay down debt or save up for emergencies, don’t do it.
Many people think that investing involves picking individual stocks. But most of us should just stick to mutual funds and exchange-traded funds, which are basically large bundles of many companies’ stocks that are packaged and sold together. These funds enable you to have your eggs in a variety of baskets, hedging your risk; if one company or industry goes belly-up, the others can make up for the damage done to your account. This is known as having a diversified portfolio, which is a good thing.
If you, like Smith, were raised to believe that investing is just glorified gambling, here’s how it isn’t: “When you put your money in the stock market, you’re basically buying tiny pieces of the companies in your portfolio so they can use your money to grow their business,” she explains. “Then when their business grows, their stock value increases and you benefit from your investment.” Bonds are similar but considered to be lower risk — with lower payouts: “With bonds, you’re basically giving small loans to a government or business that they are committed to paying back with interest. It’s a little bit safer, even if you stand to make a little less money in the long run.”
Plenty of people simply invest in the S&P 500, a collection of the 500 biggest companies that are publicly traded in the United States. That’s a perfectly good place to start. Others may take issue with some of the companies that are included in the S&P 500, which is fine, too. If so, you can find other mutual or index funds that specifically exclude certain sectors like fossil fuels. ESG funds include companies that are held to specific environmental, social, and governance standards and are worth looking into if you want your portfolio to reflect certain values you feel strongly about.
Another way to balance out your investments is to put your money in a target-date fund, which will manage your portfolio according to the year you’ll want to start taking the money out. This is a particularly great idea for your retirement account. (For instance, I’ll be 65 in 25 years, so I have some retirement savings invested in a 2050 target-date fund.)
Watch out for high management fees, adds Thakor. Every fund will charge you a small percentage of the money you put in — to “manage” your funds. If you’re just starting out and investing online, there’s no reason for you to pick a fund with a fee higher than one percent, also known as 100 basis points. Ideally, it should be lower.
When a company is doing well, it might pay dividends — basically, a portion of its profits — to its shareholders. This enables you to make money off the stocks you own without selling them. The dividends are yours, and you can set up your account to either reinvest them or take them as a cash payout. “If you’re receiving them from your retirement account, you definitely want to reinvest them,” says Smith. “That enables your account to keep growing and earning more dividends in the future.” But at a certain point, you might be able to supplement your regular income from your job with the dividends from your investments — or even live off them entirely. “For a lot of people, their goal is to eventually do that,” Smith says. (Many FIRE communities focus on that objective.) But when you’re just starting out, you want to keep your dividends cycling back into your investment pool.
Lots of us are made to feel as though we need a professional to guide us with investments. But for most people, especially those just starting out, you really can do it on your own online without paying anybody to help. If you need someone to walk you through how to make these initial transactions, a customer-service representative from the brokerage you’re using can do that, says Smith; you don’t need to hire anyone special.
Still, if you want to talk to someone anyway, perhaps for a few specific questions, look for a certified financial planner who charges by the hour and book a one-off appointment, says Thakor. Good places to search are the XY Planning Network and the Garrett Planning Network.
Remember: Many people will make investing sound complicated because it benefits them to do it for you. Don’t fall for that, says Smith. The old adage goes that “time in the market beats timing the market” — the biggest factor in your financial growth is that you invested your money in a diversified portfolio and let it be.
Email your money conundrums to mytwocents@nymag.com (and read our submission terms here).
