The Five Ws (and One H) of Investing

There’s always a lot of questions when it comes to investing.  It’s hard to figure out everything you need to do.  How can you keep everything straight?

Well of course, you can use the classic rubric of 5 W’s (and that one H; there’s always one black sheep in every group).  If you can answer a few simple questions about investing, you can give yourself a guide to the financial world, as well as understand why you’re bothering with all this investment stuff at all.

Who should invest? The short answer is, just about everyone.  If you have enough money to meet your needs, you probably should be putting some money aside for your long term goals, such as retirement and major future purchases.  (What constitutes meeting your needs?  At bare minimum, earning an amount equal to the poverty line, although personally I’d be inclined to say that you shouldn’t worry too much about investing unless you’re making twice the poverty level.  Even that’s only about $20,000 for a single person and $30,000 for a couple; particularly in high cost of living areas, it could be hard to find money for investments in your budget.)

How much should I invest? That’s a tricky one; the minimum level most investing advisers suggest is 10% of your gross salary, although there’s plenty of mitigating factors that will push that up or down.  If you are barely earning more than the poverty line (or especially if you are below it), investing any amount should be the last goal you attempt to achieve.  On the other hand, if you are earning a good income, much more than you need for your immediate requirements, then putting much more than 10% into your investments will speed your progress to your investing goals.  In short, invest as much as you are able.

What should I invest in? There’s a number of possible investments to choose, perhaps too many if you’re just getting started at figuring out your money situation.  I suggested a variety of methods a few weeks ago, ranging from target date funds to index funds to individuals stocks.  Depending on your particular goals and desire to learn more about investing, you could choose any of these methods and still succeed.  My suggestion: stick with target-date or index funds unless you like investing enough to do a LOT of research.

Where should these investments be held? At a reputable mutual fund company (or discount brokerage, if you choose to go the individual stock route), preferably in a tax-advantaged retirement account.  Personally, I’m a fan of the Vanguard mutual fund family, although Fidelity and T. Rowe Price are also highly regarded.  At to which type of retirement account, either a Roth or traditional account, while either one can be good, the best one will depend on what the future holds (in terms of tax rates).

When should you start? As soon as possible.  The advantages of starting your investing early is that you’ll have more time for your investments to grow.  Compound interest is one of the most powerful forces in the universe, but it does require one thing to work properly: time for the investment to grow.  The longer you enable to your money to stay invested and grow, the less you’ll need to put into your investment account to reach your goal, whether that’s retirement or another long-term goal.

Why invest at all? The simplest reason is this: if you want to fund your retirement purely by saving, you’ll need to put aside a huge amount of money.  If you work for forty years, and think that you may live for forty years in retirement (a reasonable assumption, given the high and rising life expectancies in the Western World), you’ll need to save half your salary each year just meet your goal.  (Actually, unless you are saving in TIPS or another inflation adjusted vehicle, you’ll need to save even more to counteract the effect of inflation.  But saving half your salary is daunting enough already.)  By investing, you can greatly increase how quickly your money will grow, and thus decrease the amount of money you personally need to take out of your paycheck.

There you go, some of the most basic questions about investing asked and answered, so you don’t have to!

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