Invest in the Stock Market As a Young Adult -- ASAP! Your 401k Won't Be Enough.

Generally, investing is not a topic we are taught is a necessity. "Save for retirement, the company who holds your 401k will invest it for you to get the most out of it they can." Okay, great, you do that, I'll build my savings and hope for the best.

NO! It's not enough. According to a report by the Natixis Global Retirement Index, 36% of American adults don't believe they will ever have enough money to retire. And 55% don't believe they even make enough to save for retirement.

In these instructions you will learn about investing in the stock market, and I don't mean "buy low, sell high!" because duh! I am not going to teach you investment strategies or tricks because whatever worked last week, month, or whatever isn't going to work anymore because people used it and now it's dead. Here is what to expect:

First, you will learn why you should start investing now, and what is most important.
Then you will estimate how much you can start investing, future investments, and calculate the financial impact.
You will learn why numbers are not everything and that building your investment mindset is just as important as your investment portfolio.
After learning why and how, I will show you one of the options of what: index funds.
Once you know what an Index fund is, I'll show you how to compare funds to make decisions.

Let's Go!

note. I didn't start investing until 29, I wish I would have started at 20! That being said, it's never too early. If you are underage, get a trusted adult to open an account for you and transfer it when you turn 18!

Supplies

Before we start, you will need to understand the stock market and what it does, watch this short video from Ted-Ed

I will be using

Excel
My Charles Schwab investment account

You will need the following:

To open the Excel file below
A general idea of how much money you make or have; check your account if needed.
An estimated salary for the career you are pursuing
And about 15 minutes. Did you really think it would take 5?

You can access my Excel file online here.

You do not need to open an investment account to follow these instructions.

Step 1: Understanding Your Most Valuable Commodities

You don't need a career, savings, or a large deposit to start investing. You could start with a dollar. Let's consider the two most important factors when investing:

Let's talk about the big guy. Warren Buffett. Buffett is most known for being considered the most successful investor of the 20th century. He became a millionaire at 32 and is now worth nearly 104 billion. However, his average ROI (return on investments) is less than the average US investment portfolio. So, what made him so successful? It's simple; when he was ten, he read his first book on finances, and from then on, everything he made when into savings and business investments. Buffets billions can be attributed to these two things more than anything else:

Knowledge; he educated himself. He learned at a young age how to prioritize, how to manage his time, and in his own words to be "fearful when others are greedy and greedy when others are fearful"
Time. Time. Time. I cannot stress this enough. The more time you have the more money there will be. The more money there is, the faster it will grow.

“The greatest investment a young person can make is in their own education, in their own mind. Because money comes and goes. Relationships come and go. But what you learn once stays with you forever.” - Warren Buffett

Consider this: Investment accounts make compounding interest similar to credit cards -- Investment accounts are beneficial for the same reason credit cards are dangerous.

Read below if you want a review on how credit cards use compounding interest (APR) Or skip to next step!

A review on APR: An APR (annual percentage rate) of 19% means there is a monthly interest charge of of 1.58%. By dividing the annual 19% by 12 months, the interest amount is added to the account balance each month, which makes the total balance for the next month higher, making the interest charges increase or 'compound'.

Example:

| Balance | Interest|
| 1000.00 |  15.80  |
| 1015.80 |  16.04  |
| 1031.84 |  16.30  |
| 1048.14 |  16.56  |
| 1064.70 |  16.82  |

As you can see, each additional interest charge raises the next months interest charge; by charging interest on interest.

Your total interest after 12 months with a19% APR would be $207. Which means you have paid closer to 21% than 19%

The Longer you have a balance on your credit card, the larger it gets. The larger the balance, the faster it grows.

Step 2: How Much Can You Invest? and What Is the Future Impact?

The Estimated Investment Calculator

Open the Excel file I included, If you didn't open it already; you can access it online here.

You get to fill this out with whatever information you want, let's walk through it.

Block 1

Present value: you can leave it at 0, if you chose to you could invest a lump sum up front, a chunk of savings, birthday money, $10, etc.
Monthly income: If you have a job, go ahead and put your monthly paycheck there. If you don't you can leave it at 0 or if you decide to skip lunch with friends once a month and invest it, enter whatever lunch would cost.
Investment %: 10% is a great amount to invest, mostly because it's really easy to do the math in your head. However, I started at 5%. If you want to make it super easy, have your employer split your paycheck. 10% of whatever you make will automatically go into your investment account, your checking account won't even know what it's missing. (if you put your lunch money in, put 100%)
Years invested: from here on is all predictions, how long will you be at this job?
Expected annual return %: The stock market average is 10%. However, it's important to remember that the market is basically a bouncy ball and inflation sucks. A safe parameter of guess work is probably between 4-10% but hey, throw a 13% in there, dream big!

| Years | Avg Return | Avg Return Adjusted for Inflation |
|   5   |  17.04%    |    13.64 %                        |
|   10  |  14.83%    |    12.37 %                        |
|   20  |   8.91%    |     6.40 %                        |
|   30  |   7.31%    |     7.31 %                        | Information spanning up to 2021

Block 2

PV is automatically entered. New stage of life, new job. This is where people usually start thinking about retirement. But, not only do you have an existing investment account, but now you are familiar with the market, and your own strategies.
Some changes to block two. Big new job, you get a 401k, that means you get 14% of your salary *pre-taxed invested. You invest 7%, and your employer matches it.
Now.. after taxes. Grown up job = grown up taxes, the avg income tax in the US is 14.6%. The above calculator deducts that much from your monthly income before calculating the percentage for your investment. you're welcome.

Block 3

Shoot for the stars, get that raise, hit that goal, try it out!

I also included a retirement section below so you can see how much your investment account will grow after retirement, even without putting more money in. You started that snowball, now just watch it roll.

Step 3: Discover the Importance of Your 'investment Mindset'

When investing it is important to have the a healthy mindset. It's easy to say "don't panic, ride out the market dip, leave your investments alone" it is a lot harder to watch as 20% of your retirement goes out the window.

The book "The Psychology of Money" does a great job of explaining how to keep a healthy mindset. I recommend you read it! However, I will summarize some key points briefly.

Independence is the best financial goal. Financial freedom provides us with unhindered control of our own time.
Do whatever you have to do to sleep at night. Some investors prefer to keep only 10% liquid assets on hand while investing the rest of their savings to earn interest. Others prefer to have more cash than investments. It comes down to whatever you need to do to feel stable.
Save your money. It should be no surprise that to save money, you can't spend all of it. Remember that rich and wealthy are different things. We see rich celebrities every day who spent all their money on stuff and suddenly can't pay for it anymore. Being wealthy is having financial freedom. Warren Buffett said "buying stuff you don't need now, just means you'll be selling stuff you don't need later"
Respect the role of luck. Luck and misfortune are a part of investing. Don't get carried away by one and be prepared for the other. Just think of misfortune as an investors fee for being allowed in the stock market.
You will find out what kind of investor you are, whether play it safe or risky; you play the game one way. before taking jumping on every piece of investment advice you get, consider how they play the game, does their game look like yours?
Don't get greedy. Often investors lose sight of the goal. It's no longer about financial freedom and independence, but money, all the money. Just like gambling, the payout from successful investments can be addictive, which makes some investors willing to "risk it all" even taking out loans to invest in what they are sure will be "the next big thing"

"Though tempting, trying to time the market is a loser's game. $10,000 continuously invested in the market over the last 20 years grew to more than $48,000. If you missed just the best 30 days, your investment was reduced to $9,900." - Chistopher Davis

It has been proven repeatedly that when the market drops, it will come back up. The best course of action is to do nothing. As a student, you have plenty of time for the market to go up. Remember: don't panic and don't pull your investments. And don't try too hard, if you try to outsmart the market you'll probably end up losing money. It helps to think of big financial moves as a limited commodity to spend wisely.

"An investor should act as though he had a 'lifetime decisions' card with just 20 punches on it." -Warren Buffett

Step 4: Choosing What to Invest In

Investing in an index fund, is a good plan if you have an extended amount of time to ride out market ups and downs. We are talking specifically about index funds because as young adults you have plenty of time to sit on these stocks.

So, what is an index fund? An index fund tracks the performance of companies in a specific market. One example is the S&P 500; made up of large companies from the US, this fund is created based on performance, capitalization, industry sector representation, etc.

Buying stock in an index fund provides broad market exposure at a low cost. Even if you were to purchase only one stock of the S&P 500, you would have investments in 500 different companies. Before you get too excited, we are building realistic investment goals here, and since one stock of the S&P 500 costs between 3-4 thousand dollars, that is not the plan. So, here is advice you can find pretty much anywhere: buy low-cost index funds.

So, why did I tell you how great the S&P 500 is? Well, other (cheaper) index funds are made based of the S&P 500.

The S&P 500 is considered to be one of the best indicators of the health of the US stock market because it includes such a wide range of industries and sectors. You will find it on reports as a bench mark to see how a stock or fund is performing in comparison.

Step 5: Choosing Investment Funds

Using my Charles Schwab investment account I will show you one way to find and compare index funds.

There are many options for investment platforms. Some options are: Acorn, Robinhood, Charles Schwab etc.

Whatever you choose, make sure to do your research, some platforms charge yearly fee's, others don't.

Personally, I like my Schwab account because there is no charge, I can mobile deposit checks, and any cash balance that sit's in my account for too long without being invested get's automatically moved into a high yield savings account so I am still earning returns. However, I don't have experience on the others, but I have heard great things!

When researching index funds based on well-known indexes such as the S&P 500 the most important thing to watch for is cost. They will all perform similarly, but it is important to be aware that mutual funds are actively monitored, which costs more than a passively monitored ETF fund. Fee's paid is just money not kept. Do your research.

Above you can see what it looks like to compare index funds on the Charles Schwab website.

Step 6: Go and Do

You're done! You know enough about investing that you can get going. Get a portfolio, do some research. One more Buffet quote before you go because the guy is weird but he's got a point.

"Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time. You can't produce a baby in one month by getting nine women pregnant". - Warren Buffet

Introduction: Invest in the Stock Market As a Young Adult -- ASAP! Your 401k Won't Be Enough.