Put your money to work! There are so many books, blogs, videos, and podcasts out there telling you where you need to put your money and how you need to invest it in X, Y, and Z. If you’re like me, you may have thought investing money is only for people making 6 figures, but that’s absolutely not true.
Not everyone needs to be great at investing to make money at it, and not everyone needs to spend countless hours managing their investments either. You also don’t need to spend hundreds or even thousands of dollars every year paying an investment advisor, or a company who charges you way too much in fees. I have a different approach that you can try without needing to be a finance guru.
What is a low cost passive investment?
To me, a passive investment is one that is easy to set up, requires very little maintenance, and has steady returns that follows the S&P 500. Over a span of 87 years, from 1928 to 2015, the S&P 500’s average return was 11.41%, and the compound annual growth rate during that time was 9.5%. That means if you were to invest $1 in 1928 in your account you would’ve had $2,941 in your account to start 2016! The point being there’s a better way to save and invest your money than just sticking it in your savings account, and this guide is going to help you get started.
Sit back and make $182,836 (A quick-math example)
I recommend investing in an extremely low cost, low maintenance, and solid return index fund through Vanguard. With Vanguard you can select the Vanguard 500 Index Fund Investor Shares (VFINX), which will closely follow the S&P 500’s returns, so that you can sit back and enjoy the same returns over time with very minimal effort.
Let’s do some quick math here. You’re 26 years old and decide to initially invest $3,000 into this index fund. To help it grow faster, you continue to invest $100 every month until you decide to retire at age 56. So for 30 years, you’ve invested your money in a fund with a compound annual growth rate of 8% (conservative, 9.5% over history), giving you $39,000 in principal (what you contributed), and interest would’ve paid out $143,836.70, for a total account value of $182,836.71! Obviously not enough to retire on, but you get the idea.
As a more realistic example, let’s say you increase your contribution annually by $100, so in Year 1 each month you would contribute $100, Year 2 – $200, Year 3 – $300 and so on. Not unreasonable. At 56 you would have contributed $561,000 over 30 years, and made $976,432 in interest leaving you with a balance of $1,537,432!
Is this making sense?
I hope investing it starting to seem more realistic for you. First things first, you need to make sure that you’ve developed a solid budget, (Psst! You can get help with this using my personal budget template) You want to have that in place and establish good financial habits, so you don’t have to keep putting money in and taking money out of the index fund. A budget will also ensure you’re consistently contributing to your investment account every month. It’s not a requirement to invest every month, but the more you contribute, the more money you can make!
Let’s get you started.
If you’re interested in using Vanguard like I do, once your budget is setup you will go to investor.vanguard.com/home/. Follow the steps to open the account, and provide your banking information for money transfers. Vanguard is the largest provider of index funds in the country and will keep your information safe. John Bogle, a good friend of Warren Buffett, is the founder of Vanguard and created the very first index fund in 1976. Bogle is and has been one of the wealthiest men on the planet for a long time because he practiced what he preached.
Once you get your account open, you will need need to have an initial investment of at least $3,000 to invest in the Vanguard 500 Index Fund Investor Shares (VFINX). If you don’t have that right now, don’t worry. You can start saving up in your savings account where you bank and then move the money over once you’re ready.
When you have your contribution funds ready, search for VFINX on the Vanguard site. Once it populates, select the small “Buy” icon in the upper right corner of the fund, and deposit your $3,000. You can continue to contribute monthly to this account (recommended), or you can contribute quarterly. They also make it really easy so you can set up automatic deductions each month to make this a completely hands free process! You also want to make sure that you select to have your dividends reinvested into the account.
Best of luck!
Keep in mind there will be ups and downs with any investment strategy. The trick is to stick to it and get comfortable with the ebb and flow because the minute you pull your money out, the market will pick back up.
There are many other index funds to look into to diversify your portfolio. If you’re looking for an easy-to-understand book to learn more about investing, I recommend John Bogle’s book The Little Book of Common Sense Investing (Available on Amazon). Learn from the best, the very man who founded Vanguard! It’s great for beginners and will give you a deeper understanding of why index funds are so valuable.