2021 Money Challenge: How to Start Investing

To celebrate the new year, CNBC Select posting a new one money challenge every day for the first week of 2021. Treat these affairs as your finances, based on expert advice, to help you align your money choices with what interests you most. These are simple tasks, but they require commitment. Are you participating?

This is Thursday and Saturday.

How to know if you are financially stable enough to start investing? It depends on whether you have enough cash in your monthly budget to cover your basic expenses with some remaining. It is also related to debt and interest rates.

If you’re paying more than 5% to 10% interest on credit cards and loans, it’s a good idea to prioritize debt payments, even if that means putting a pause on long-term investing. The exception is if your employer gives a 401(k) match. If they do, experts recommend contributing just enough to your retirement plan to get the free match (so if your employer limits their contribution to 6% of your friends, contribute 6% and no more).

On the other hand, if the interest rate on your debt is less than 5% APR, you can decide to prioritize saving and/or investing while paying it off slowly. Thanks to the power of compound interest, you can often earn what you pay in interest with the money you invest in the stock market. (Talk to your financial planner, just to be sure this is the right plan for your needs.)

Review your monthly budget from step two and decide how much you can afford to invest once you’ve met all of your financial obligations.

When you need or want to use your money will have an impact on how you decide to invest.

Stocks are more volatile, which means you can make more money over a longer period of time, with the possibility of some ups and downs in between. Bonds, on the other hand, are more stable but tend to earn less. You want to find the right balance of risk and return, depending on when you need the money.

According to the philosophy of McLay and the Finance Lab, you should choose the right asset allocation for your short-term and long-term goals.

Such goals may include:

• Buy a house
• Pay for your child’s education
• Regimental retirement or short-term retirement
• Pay for your wedding
• Paying for your child’s wedding
• Get a big tattoo
• Freeze your eggs
• Get a pet
• Buy a new car

Map out your goals according to their timeline. Keep the money you need for the next two years in a usable savings account. Once you have enough savings, financial advisors often recommend that you invest your money according to the following guidelines:

• Goals within three to five years: Make sure at least 40% of your investments are in bonds (less volatile than stocks).
• Goals within six to 10 years: Invest in 75% stocks and 25% bonds.
• Goals for the past 10 years: This is the most aggressive allocation because you have more time to weather the ups and downs of the market. Keep 90% of your investment in stocks and up to 10% in bonds. .

Retirement is the most common long-term goal that people have to prepare for: “The biggest risk in retirement is using our money,” Brownstein told CNBC Select.

Her advice is to attach some timeline to your retirement goal, as opposed to an age that can be oversimplified: “If I’m 40 and want to retire at 50, versus 40 and want to retire at 70, my risk tolerance and growth needs can be very different.I may need more growth if I am trying to retire in 10 years, instead of 30, but I will also be less likely to take risks.”

An alternative method

There is no doubt that managing your finances is a balancing act. The “team” method of asset attribution can work well if you have clearly defined, specific milestones that you want to achieve over respective timelines.

But if you’re not sure exactly what you want right now, leave it alone when An alternative strategy for you, says Brownstein, might be to simply pick a “sweet spot” and split your money between stocks and bonds.

Investment platforms come in many forms, especially today with the dawn of fintech and the complex applications that make investing at our fingertips.

Start by looking at costs, Egan advises.

“If you’re not paying for something, you’re the product,” Egan told CNBC Select. While many apps advertise trading and investing for free, they can make money by collecting data about your user behavior or simply by showing you ads that may be relevant or may not be in your best interests.

“You should at least know what other people’s preferences are,” says Egan.

This advice applies to all types of investment platforms. Whether you invest with an advisor or just use an algorithm-driven app, you should know if you pay per trade (every time you buy or sell a stock) or whether you whether you are charged a fee based on your earnings. Fee structure can make a difference to the type of information you see as a user (and therefore what decisions you make).

Also note the size of the fees: “Try and keep the total investment cost under 1%,” says Brownstein.

Fees vary depending on whether you use robotic advisors like Betterment and Wealthfront or membership plans like Ellevest, which charge a monthly subscription fee. Many platforms and programs come with consulting and coaching services, which can be an added value, but if you’re spending an arm and a leg on an investment, you should consider whether the service you’re getting. Is it worth the cost or not?