Is cash king? For more than half of this country, the answer to that question is yes. A recent Bankrate survey found that 52 percent of Americans have not invested in the stock market.
The bulk of those people cite a lack of money as the reason they’re steering clear of investing. But a small, though still mighty, segment say their unwillingness to invest is due to fear — 21 percent say they don’t know enough about stocks to invest in them; 9 percent don’t trust stockbrokers or advisers; and 7 percent say the market is simply too risky.
Whatever the reason, if you’ve been avoiding the market, you’re doing yourself a disservice. Investing allows you to keep up with inflation and taxes; if you keep your money in cash, you are actually losing money over time.
Here are four tips for getting started:
Start small. Many people believe that investing requires a lot of money, but that’s not the case, says Claes Bell, CFA, banking analyst at Bankrate. “There’s a misconception that you have to have a lot of money to invest, when in fact if you apply relatively small amounts of money consistently over time, you can reap big benefits down the road.”
The key to enjoying those benefits is giving yourself a long time horizon. When you start investing early, you have compound interest on your side, which allows your money to grow at a much faster rate. An example: Let’s say you start putting away $25 a month. Invested at a 7 percent return, you’ll double the money you put away and have close to $13,000 in 20 years. If you wanted to build that much over 10 years, you’d need to put away $75 a month, and $3,000 more overall.
Make it automatic. Now that you know the power of investing, the best way to actually do it is to set up automatic transfers. If you’re offered a 401(k) at work, you can have the money pulled out of your paycheck before you ever see it (and get a tax break for doing so). If your employer doesn’t offer a 401(k), you can set up a similar system with an IRA by having money transferred into the account each month.
Start with whatever you can afford, then increase the amount periodically, says Ellen Rogin, a financial adviser and author of “Picture Your Prosperity: Smart Money Moves to Turn Your Vision Into Reality.”
“Getting into that habit is a really great way to start,” Rogin says.
Tackle your fear. If it’s fear, not lack of money, that’s holding you back, it helps to get some perspective. First of all, the alternative, says Rogin, is after-tax money earning very little in a bank account. “We don’t know what the market is going to do tomorrow, but if you invest over a period of time, you don’t have to try to guess what the market is going to do,” Rogin says. “And when the market drops, if you’re investing on a systematic basis, it’s actually a good thing because you’re buying shares on sale.”
Money that you need in the short term — say for a home down payment or emergency fund — shouldn’t be invested. This is money that you don’t want to subject to added risk, regardless of its earning potential.
Get some help. “I would urge people to go out and find a financial planner they can trust,” says Bell. “It’s money well spent.”
The vast majority of financial advisers are trustworthy, and there’s a process in place to help you vet them. I’d recommend looking for a certified financial planner professional who is fee-only, meaning they are paid a flat fee rather than a commission for putting you in certain investments.
Meet with several; get recommendations from friends, family members or co-workers, or do a search on NAPFA.org, the National Association of Personal Financial Advisors website, then run their names through the Financial Industry Regulatory Authority’s online BrokerCheck and at SEC.gov, the website of the U.S. Securities and Exchange Commission, which should dig up any violations or complaints.