Welcome to Repository! This post is part one of a four part blog post series for teaching you about how to invest in the stock market with index funds.
Let me start with an introduction. My name is Colin. I’m a UX Designer who has a passion for financial literacy. I used to run a personal finance blog called Rebel With A Plan. I would write weekly articles sharing my thoughts on debt payoff, budgeting, saving, and investing.
While I don’t write that blog anymore, my interest in personal finance is still strong. Repository serves as a resource to help you make sense of what investing actually is, how it can help you, and how to actually get started.
Why investing in the stock market is essential
I’m going to drop a sad fact. Most of us are not trust fund babies or lottery winners. We’re not some prominent figure getting seven figure paychecks and living high in a mansion.
That doesn’t mean we still can’t build wealth.
Even if you have a “regular” job and “regular” life, you can (and should!) be investing. When you invest and start the path toward building wealth, you slowly but surely start to have more options. You achieve financial freedom. These means more flexibility to do the things you want to do.
A lot of the investing advice you see online is about investing for retirement. People become disillusioned by that. You’ve probably seen those anecdotes shared on social media about how the retirement age is 67 and average life expectancy is 78 in the U.S.
With investing, it doesn’t have to be that way. Saying “investing for retirement” doesn’t feel quite right. Investing for financial independence is a better phrase.
Because financial independence is a number, not an age. More on that in second, for now, there are a few things to keep in mind. Before you start investing in the stock market, you need to make sure you’re on a solid financial foundation. This means making sure a few things are in order first:
1. Creating a budget (YNAB)
I know, I know, budgeting feels boring. You still need to do it. Understanding how you spend your money and the difference in your income and expenses is important. I used to seriously hate budgeting. I casually used Mint on/off for several years. I would get a notification saying I went over budget on my eating out category…and I’d just shrug it off. I never felt any real change from using the service. Many others feel the same way.
You Need a Budget is different. Its focus is on giving every dollar a job. It’s basically digital envelope budgeting. You divvy up your bank account balance into different categories (rent, groceries, gas, auto insurance, etc).
Getting on a budget will allow you to better handle unexpected expenses and having a plan for your money. It will also tell you exact, fluctuating amount you spend every month.
This is important because once you have a general idea of your monthly spending, you can calculate your yearly spending. Knowing your yearly spending, you will be able to find your F.I. number (financial independence number).
Remember how I said financial independence is a number, not an age? According to a popular 1998 Trinity Study, in retirement, you can safely withdraw 4% of your portfolio every year and have a slim chance of running out of money. The study has been looked and reexamined over the years but the “4% rule” is still used as general rule of thumb.
Once you know your yearly spending (and I mean actually know it, not just an off the wall guess) you will be able to calculate your F.I. number. 4 x 25 = 100%. So let’s use an example.
$50,000 yearly spending x 25 = $1.25 million (F.I. number).
Get on a budget. Track your spending. Figure out your total yearly expenses. Find your F.I. number.
Use my referral link below to get your first month free! This isn’t sponsored, just a referral link. I recommend You Need a Budget because I personally use and love it.
Click here to get a free month of You Need a Budget (YNAB)!
2. Open a high yield savings account (Ally)
The savings accounts offered at big banks are not good. They usually offer 0.01% interest so you’re earning next to nothing on your money. They usually even have minimum balance requirements. You get hit with a fee if your savings account dips below the minimum. That’s crazy!
You can do better with your savings.
Online-only banks such as Ally are able to offer higher interest rates since they don’t have to upkeep brick and mortar locations. Ally has a long standing reputation as being one of best online banks. Their online savings account offers 0.50% APY, which is 5x the national average and comes with no minimum balance requirements.
Once you open your Ally savings account, you’re able to set up “buckets” within your savings account. This allows you to save for several different savings goals while still all being within one account.
Open your Ally online savings account
3. Create a debt payoff plan (Undebt.it)
You don’t need to be debt free to start investing. Many people’s debt payoff journeys take them several years. You don’t want to wait years and years to start investing.
The S&P 500 (the stock market index tracking the performance of 500 large companies in the United States) has had a historical average return of 10% over the long term. Adjusted for inflation, it’s around a 7% rate of return.
If your debt is below 7% interest, it’s generally a good idea to invest while paying off the debt. High interest debt could be categorized as anything over 7% interest. Focus on paying off any high interest debt before you start investing.
There is an amazing free tool you can use to help organize your debt payoff: Undebt.it. The platform allows you to choose between different debt payoff methods, see when your debt will be fully paid off, and has a percentage chart showing how close you are to being debt free.
The best part is it is free to use! There is Undebt.it+ which is $12/year and has some additional premium features and supports the creator of Undebt.it.
Click here to use the free tool that helps you get out of debt
4. Build a beginner emergency fund
Before you start investing, you need to have money set aside for emergencies such as job loss, your car breaking down, house repairs, or any other big expense that pops up. The general recommendation is to have 3-6 months of expenses saved in an emergency fund.
My experience saving for an emergency fund was a little different. A few years ago, my small savings were depleted after several big ticket unexpected expenses popped up. I knew saving the recommended 3-6 months of expenses before investing would take years to do.
I did what I could to build my emergency fund back up. I started using You Need a Budget (YNAB) to see exactly where my money was going every month. From there, the work started. I saved money from every paycheck and transferred it to my high yield savings account. I dropped the coverage levels for my auto insurance to bring the monthly premium down, saving me $27/month. I switched my cell phone service to Mint Mobile, a low cost cell phone plan. I cut one subscription costing me $10/month. Eating out was curbed a bit.
In total, I was able to shave $100/month off my expenses. Not a ton, but everything helps.
The savings were added to the money I was already saving from every paycheck I got. Wanting to save even more than what my job income could provide, I started to do Doordash, charge Lime scooters and donate Plasma. The Doordash experience was lackluster. My city is way oversaturated with food runners. Donating plasma was good. I had gotten a new donor promotion where I got $1,000 for doing eight donations.
All in all, after a few months, I was able to save up $4,600 in an emergency fund. Not a massive amount but enough to cover two months of expenses. I knew the amount I needed because I had set up a budget and could see the fluctuating but generally stable amount of my monthly expenses.
There is an exception. If you get an employer match with your workplace 401k plan, make sure to get that match! The company I worked for at the time had a 401k plan with 6% company match. Considering it’s free money, I didn’t want to turn it down, so I diverted 6% of my paycheck to my 401k.
After you have your financial foundation set up, you can start learning about investing. There are a lot of misconceptions about investing in the stock market.
It’s gambling! While there are similarities, investing is different than gambling. Gambling is limited and usually involves short term situations. Investing is for the long term. Your upside is unlimited. The stock market, despite having dips in performance, has always gone up over the long term.
I’ll just keep my money in a savings account. The purchasing power of the money in your savings account continuously decreases over time due to inflation. Inflation averages around 2-3% per year. While high yield savings accounts with 0.50% interest are good for short-term goals, they’re not good for building long-term wealth. Keep money in your savings account if you expect to use it within the next five years. If you won’t need it for 5+ years, then think about investing it.
Investing is risky! I don’t want to lose money! The stock market is volatile. Your portfolio can go up and down. However, the guaranteed way to lose money is if you sell your investments when they are down. While there are lows and highs, over the long run, the stock market always goes up.
Whew, okay, so that was enough for today. You learned all about how to set up your financial foundation before you start investing. Creating a budget, opening a high yield savings account, creating a debt payoff plan, and building up a beginner emergency fund.
In the next lesson, you will learn about stocks and bonds. What they are and what types people usually invest in.