How to invest as a beginner (and everything to do BEFORE that!)

Hi friends, welcome back to the channel. It's a new year and for me that means more financial literacy. Especially in my 20s, I'm really focusing on how to allow my money to earn more money for me instead of having to trade my time for money. And one of the best ways to do that is obviously through investing, but investing honestly sounds like a very overwhelming term. Where do I start? What do I do? What do I invest in? How do I manage it? Am I still going to be able to use that money? And over the last couple years, I have learned a lot about investing and I thought I would share some of the things that I learned with you. Now, of course, before we begin, I do have to let you know that this is not financial advice. What works for me may not work for you. However, regardless, I do hope that you find something insightful about this video and learn something new. My second disclaimer is that this video is in fact a video about money. I know not everyone likes to hear about money or talk about money. We're going to be talking extensively about money in this video, so if that's not your cup of tea, then it's probably best to click away now. Now, with that out of the way, I wanted to start with when do you start investing? You might have student loans, you might have car payments that you're making. Which thing do you prioritize? We always hear from people like, oh, you should be investing, you should be investing, but when? There are a couple of prerequisites that are higher priority that you want to make sure to check off before you start investing. There's actually this incredible Happy Panda FIRE flow chart. FIRE stands for Financial Independence Retire Early, and I'll pop it on the screen as well as link it down below. It actually gives you a very helpful step-by-step breakdown of your priorities. I think this chart is actually pretty common in the investing world slash tech industry where they are very into the FIRE movement, but honestly, I hadn't discovered this chart until a couple years ago, but it's incredibly helpful to figure out exactly which step in the flow chart you belong. So to summarize, the things that you should be able to do before you start investing. Number one, of course, is to pay all of your day-to-day expenses including your rent, utilities, food, insurance, etc. Number two is to make at least the minimum payments on your car loan, student loans, credit cards, etc. And number three, you want to make sure that you have an emergency fund of at least three months up to a year of living expenses saved up. Now you might be wondering, Miki, three months and one year are two very different things. Which one do I need to save up? Most people feel comfortable saving three to six months of expenses. If you are a freelancer, a contractor, something that's a little bit more unstable, or perhaps your paycheck looks very different month to month, then I would recommend something between six months to one year. I personally like to have one year of living expenses saved up just for safety measures because in this economy you never know what's going to happen. Now it's very important that this money is not just sitting in a regular bank account. You want to make sure to put this in a high yield savings account. A traditional bank account has very low or no interest at all. In the past there are literally years where I've gotten like one penny for all the money that I've kept in a bank account. A high yield savings account works exactly the same as your regular bank account does, but the difference is that it actually does pay you interest. So depending on how the economy is doing and what the interest rates are, the rate that they will pay you will fluctuate. Currently it's somewhere around four to five percent depending on which bank you sign up with. It works exactly the same way as a bank account where if you need that money you can transfer it out right away, you can use it right away. But I actually really really like to have my high yield savings account because it kind of puts my money in a different account that I don't see every single day. And so I'm not looking at that money in my bank account every day thinking that oh I have this much money to spend. That money is kind of segregated and put away. Now what happens if you just leave your money in a regular bank account? Effectively due to inflation the amount of money that you have in your bank account is not going to go as far in the future. For example a loaf of bread may have been five dollars in the past, but next year it might be seven dollars. And if you didn't put your five dollars in a high yield savings account then your five dollars will still be five dollars and you're going to be two dollars short to buy your bread. To explain it simply, let's say your high yield savings account is paying you five percent per year. If you put a hundred dollars in at the beginning of the year, by the end of the year you will have at least a hundred and five dollars. It's actually a little more than that because most high yield savings accounts compound the amount every month and so it'll actually be more than five dollars. But that's just the simplest way to explain it. It's something that takes minutes to set up. You can do it at home and you can find a bank that you personally like. I personally have been using Marcus by Goldman Sachs for as long as I can remember. It's the bank that my parents use. I've never had any issues with it. It's very easy to use, but there are so many different high yield savings accounts you can sign up for. You definitely don't have to pick that one. Next up, do I pay off my debt or do I invest? Now this answer really depends on the interest rate of your loan. What is your interest rate? If it is seven percent or higher, you're definitely going to want to pay off your debt first. The stock market on average returns about seven to ten percent annually and while that is the average percentage, the stock market is unpredictable. You don't know exactly when it's going to be high or low. Certain years will be below that threshold and certain years will be far above that threshold. However, if you have debt, if you've taken out a loan that has seven percent interest rate or more, that is a guaranteed seven percent. They will not somehow lower that rate just because the economy is better or worse. Since the seven percent interest on your debt on your loan is guaranteed and it would accrue regardless, I would focus on paying off the high interest debt first. Now if you have debt that is at a lower interest rate, let's say it's somewhere between three to four percent, then at the very least you want to make your minimum payments. But beyond that, you may be able to balance investing and paying off your debt simultaneously. Let's say that you have a house mortgage at three percent interest rate. It's much wiser to make the minimum payment on that house then take all of your excess money and invest that instead. And for those who have absolutely no debt, no loans at all, and you've fulfilled all the above requirements, then absolutely you should a hundred percent be investing. What amount of money should you be investing with? Again, the stock market is unpredictable. You don't know exactly when it's going to be high or low, so if there is any money that you need immediately, immediately meaning within the next three to five years, I would definitely be more cautious with that money. There's nobody on this earth who can accurately predict the stock market a hundred percent. If you need that money immediately within the next couple of years, then perhaps investing it in something volatile may not be the best option. If you're saving up for down payment, for kids, for education, anything that requires a lump sum in the near future, I would definitely be more cautious with this money. So any money I need within the next two years, I have it all just sitting in a high yield savings account because cash is liquid, cash is king for when you need it. One last upside. Now before we jump straight into the stock market and picking individual stocks and doing the whole shebang, there's one thing that we need to invest in first, and that's in your future, your retirement. There is no better investment than in your own future. Many workplaces offer some sort of retirement plan. This can come in the form of a 401k, a 403b. There are a million different names for these, but there are two most important things to know about this account. Is it pre-tax or post-tax? Pre-tax retirement accounts means that your contribution is coming directly from your paycheck before paying taxes. Therefore, you do not pay taxes on that money now, but you will have to pay taxes on anything you take out. All withdrawals are going to be taxable. In comparison, you have a post-tax retirement account, such as a Roth 401k. Post-tax retirement accounts means that your contribution comes out of your paycheck after you have already paid taxes. Therefore, your qualified withdrawals made in retirement are actually tax-free. You don't have to pay taxes on it again. This is a very big deal because over the next couple of decades, as your investments compound, you do not have to pay tax when you withdraw this money. Well, how much should I be contributing to my employer's retirement plan? Should I just contribute my whole paycheck? Well, you can't actually do that. Every year, the IRS lets us know the maximum amount that you are allowed to contribute to your retirement account. In 2024, it is $23,000. Now, whether or not you want to actually contribute that full amount or take that money and invest it elsewhere is kind of up to you. The most important thing to find out from your employer is if they offer any sort of match. Many employers will offer to match a certain amount of your retirement contribution. A common scenario may be that your employer is offering a 100% match on all of your contributions of the year up to a maximum of 3% of your annual income. Let's say you make $100,000. That means that they will match up to $3,000 of your retirement contributions for that year. This is guaranteed money. You should always aim to contribute at least the minimum to get 100% of your employer's match. For those who have spare funds, you may consider maxing out the entire retirement account through your employer completely. You might also want to consider opening up what's called a Roth IRA. IRA stands for Individual Retirement Account. A Roth IRA, again, is post-tax dollars, which means that your investments grow tax-free. In 2024, the maximum you can contribute to a Roth IRA is $7,000 or $8,000 if you are age 50 or older. I personally have all of my retirement accounts, my IRA accounts, and my investing accounts through Vanguard. There are lots of different financial institutions you can do this through. Fidelity is another very popular one. You can do your own research to see which one works best for you. What I would recommend is that you want to keep all of your accounts in one institution if you can so that you can see all your money in the same place. For example, if your employer uses Fidelity, then you may consider doing the rest of your investments through Fidelity as well. What's very important about these retirement accounts that I think a lot of people sometimes forget is that you physically need to go into the site and pick what to invest in. Just contributing the amount into the account does not actually invest it in anything. Your money will not grow. You're going to hear a lot of terms for things that you can invest in, small cap, large cap, mid caps, mid cap, emerging funds, social equity funds. There are so many different options. How do you know what to invest in? A lot of employers will set you up in some sort of target date fund. So the 2060 retirement fund, the 2070 retirement fund. Depending on what year you're targeting your retirement, the mix will look a little different. So if you're retiring relatively soon, then you may have something less aggressive, aka more bonds and less stocks. Whereas if you are pretty young and you still have a long time until retirement, it may have more aggressive things like stocks and less of bonds. I think the target date funds are actually great for beginners. It does automatically change your investments as you get older to go from more aggressive to more conservative investments. It's essentially autopilot for anybody who doesn't want to think too deeply about it. In the future, we can talk about more advanced strategies like the three fund portfolio, but we will save that for a different video. My Roth IRA personally is just tracking the S&P 500, also known as the Standard and Poor 500. It is a stock market index that is tracking the performance of 500 large companies in the U.S. Finally, now that we've gotten that all out of the way, let's talk about the easiest way that I like to invest as a beginner. Index funds. An index mutual fund or ETF, exchange traded fund, tracks the performance of a specific market benchmark or index, such as the popular S&P 500, as close as possible. You may be asking, what's the difference between an ETF and a mutual fund? So there are some differences, including the minimum investment, how they're traded, and how they're managed. The biggest similarity between them is they both represent professionally managed collections of individual stocks and bonds, which makes investing in them much less risky than investing in a single stock. So Vanguard's version for tracking the S&P 500, you have the ETF version, which is VOO, and then you also have the mutual fund, which is VFIX. What is the benefit of investing in an index fund? If you think about investing in stocks, you may hear somebody say, oh, I bought some Apple stock or I bought Netflix stock, I bought Snapchat or Tesla. Let's say, for example, Apple goes through a huge scandal and their stocks plummet like crazy. If you had bought a lot of Apple stock, then you would probably lose a lot of money. With an index fund, essentially you are buying a basket of stocks. The funds manager is essentially buying a representative sample of the stocks and bonds that it tracks. So for the S&P 500, it would either be buying stocks from each of those companies or some sort of representative sample. Now, if one of the things in your basket were to suddenly not do as well, it's only one part of your big basket, so it would not affect you nearly as deeply as if you had bought only the Apple in the basket. So it has a lower risk because it is more diversified. Number two, it also has lower costs. While you do have to pay an expense ratio to buy or sell these, it is still far cheaper than paying for a financial advisor or someone to actively manage your portfolio and tell you what exactly to invest in. And now for the most important question, are index funds even effective? Now, there's this very famous story from back in 2008. Warren Buffett actually challenged hedge fund managers to see whose investment portfolio would perform better. His theory was that when you included the fees, costs, and expenses, an S&P 500 index fund would actually outperform a hand-picked portfolio of hedge funds over 10 years. Lo and behold, his theory was right. The S&P 500 alone actually outperformed the things that were being hand-picked by these hedge fund managers. And over the last 100 years, you can look at the track record. On average, the return of the S&P 500 is about 10% every year, which compounded over the next couple of decades until your retirement, is an insanely large amount. My personal and simplest strategy is to buy index funds every single week. I buy and hold, which means that I buy it and I do not sell. Anytime you sell your stock, you do have to pay capital gains, if you made money, of course. And at this current stage of life, I'm not selling anything that I purchased because I don't immediately need that money that I'm investing. There's a saying called time in the market beats timing the market. You will never know for certain exactly when the stock market is going to be high or low. So I like to use a technique called dollar cost averaging. I'll pop up a graph to show you how dollar cost averaging is typically way more effective than trying to time the market and buy it when it's low. The way that I do it, I have it on autopilot to buy BFIX every single Monday. And at times when the stock market is extra low, I do sometimes go in and buy an extra amount. However, having it on autopilot and using the dollar cost averaging method ensures that I'm investing in something every single week, even when I'm not specifically looking at the stocks or seeing how they're doing. But I know that me buying, whether it's $5 higher, $10 higher today, it's still going to be much lower than me buying it 30 years from now. So anything when you think about it in the long run is quite low today. I'm here for the long game. I'm not trying to day trade and make a quick buck. If you look at the price of VOO today, the Vanguard 500 index fund ETF, it's currently at about $445. Now you might say to me, Mickey, I don't have $445 to invest. That's totally okay. You can buy what's called a partial share. So you do not have to have the full $445. Let's say you only have $100 or even $50. You can buy a partial share of that and you can contribute the same amount every week or every month. This is the easiest and simplest method that I have found that works for me. I'm never sweating or nervous. And I know that even in times when I'm not actively thinking about my investing, it's set on autopilot so that it's still being done for me. I made a YouTube short on exactly how to set up your automatic recurring investments through Vanguard. So if that is your financial institution, feel free to look at that video because it can be a tiny bit complicated to set up. But once you're done setting that up, you never really have to think about it again. This was a very beginner's overview for investing. I know it was still a ton of information and it's something that took me years and years and years to figure out. Just a couple of years ago, thinking about all this stuff made my head hurt and it was confusing and complicated and I still have so much to learn about financial literacy. I think money can be a really scary topic to think about, to talk about, but it's so important to be transparent with other people and share advice, learn from others. I've learned to not be scared of money because if you are scared of your money, you will never have the power to control it. We're not trying to grind until we die. We want to make our money work for us, not the other way around. If you have any additional questions or maybe you have advice for me and things that you think I could be doing better, I would love to see them and hear them in the comments. And if there are any topics that you'd like me to speak on for the future, please do let me know and I'll see you guys next week. Bye!