If I Were Getting Started With Investing Today, Here’s What I’d Do

If I were getting started with investing today, I'd start with the building a foundation for success, then add four primary investment types to grow wealth.Sometimes I assume my blog audience is a bunch of 42-year-old Dads like me balancing work and kids while building income streams. But the emails I get tell a different story. Many readers are beginner investors only recently finding my website and getting started with investing.

Some are young. Some are not so young.

With all the investment options out there, it can be difficult to know where to start.

This article is meant to serve those of you in the early stages of building wealth that need help with some basics.

To do this, I put myself in the shoes of an 18-year-old high school graduate. Knowing what I know now, 25 years later, this is how I would go about getting started with investing.

You don’t have to be a young beginner to follow these ideas. There’s something for everyone in this post.

Foundations for Building Wealth

Before setting off to start investing, I’d look at three foundations of wealth building and put those in place first. Depending on your upbringing and influences, you might not have had the same opportunities as me. But everyone can take initiative to learn on their own and develop the correct mindset to become wealthy.

Education

College graduates earn about $1 million more over a lifetime than high school only graduates. People with advanced degrees earn more than those with only a bachelor’s.

That’s why we’re saving for college for our three kids to give them the same gift my parents gave me to. The gift of advantage.

Skilled trades, technical degrees, and other education backgrounds are good too. The key is learning a skill that’s in demand and doing it well.

Another foundation is basic financial education. This often isn’t taught in high school or college. Once you enter the workforce, you may be on your own. Arm yourself.

The best place to find guidance is in books because they give you a complete picture. Some of my favorite money books are listed hereBlogs can also be a good place to learn, but the information isn’t always well organized.

Online courses are a great option too. The Black Friday sale is live right now on Udemy. 55,000 course on sale for just $10. Check it out. Sale ends November 27th.

Money Mindset

The wealthy earn money and use it to build more wealth. The typical middle-class worker earns money and spends it on too much stuff.

Treat your money like gold. It’s precious. Use it to buy income producing assets such as stocks and real estate, or use it to start businesses. Don’t let it vanish in the form of beer, clutter at home, car payments, or fancy dinners.

Distaste for Debt

A healthy distaste for debt will keep you on track in the early years of earning money and growing your wealth. Never carry a balance on a credit card. Don’t borrow from friends or family. Keep college borrowing to a minimum.

But this doesn’t mean you should avoid borrowing money entirely. The wealthy often borrow money to make money, particularly in business and real estate. And a reasonable mortgage can help you grow wealth too. Be smart about debt, don’t abuse it.

Four Primary Investments

Most individuals and families can utilize four primary investment vehicles to grow wealth and never need to expand beyond those.

After this section, I’ll cover some other popular investment options for those wanting to diversify income streams further.

The First Investment – High-Yield Savings Account

My first income stream was from interest on a passbook savings account. Going to the bank with my Mom and getting the interest I earned from cash deposits printed in my book was so cool. I was ten years old.

I still think interest on cash should be everyone’s very first investment, though it’s not always considered an investment. Once you have a basic checking account, open a savings account. Brick and mortars don’t pay much on savings in this low rate environment so forget those.

But online banks do.

For example, CIT Bank has a Premier High Yield savings account that pays 1.35%. The minimum to start is only $100. Since savings accounts are FDIC insured, they provide risk-free returns up to $250,000.

At the end of each month, I transfer any balance over $2,000 from checking to savings, then fund my other investments out of the savings account. That way, I get paid for keeping cash on hand.

Rates have been so low since the last recession that young people don’t think about savings accounts. I do because earning interest on cash was so exciting to me as a kid. As interest rates increase, these kinds of accounts will start to pay 2%, 3%, and 4% like they did back in the day. Savvy investors compare new investment yields against their risk-free return instead of zero.

Get into the habit of putting excess cash into an online savings account. It’s the bare minimum investment you should make and anybody can start one. In the early stages of compounding wealth, every penny counts.

The Second Investment – Index ETFs or Index Mutual Funds

I’ve told this story many times. My uncle gifted me a share of Chevron stock via the dividend reinvestment plan (DRIP) back in 1995 and I’ve been a dividend growth investor ever since. Back then, it was difficult to acquire shares of stock any other way. ETFs were in their infancy.

I used the Chevron and Coca-Cola DRIP programs to begin investing in my 20’s. In hindsight, buying individual stocks wasn’t the best way to start. But it was the only option I had. Account minimums elsewhere were too high, trading fees were unreasonable, and online investing didn’t exist yet. The DRIPs were not in tax-advantaged accounts.

Today, online investing is the norm and you have dozens of options when selecting a place to invest your money. Minimums are very low, and trading fees are minuscule compared to traditional stock brokers of yesteryear.

If I were getting started with investing today, my next investment after building some cash in my savings account would be a broad U.S. stock market index ETF. I’d choose an index ETF over an index mutual fund because I prefer to buy them in the open market during the trading day. Others might prefer index mutual funds and that’s fine.

More importantly, you want to make this investment in an IRA for tax advantages.

My favorite ETF is the Vanguard Total U.S. Market Index (symbol “VTI”) or the mutual fund equivalent VTSMX. Fidelity has a mutual fund called FSTMX that is very similar. Choosing mutual funds will make it easy to reinvest all earnings from the funds. Whatever fund family you choose, open an account with that company.

Warren Buffett and other experts recommend the less diverse but very low-few “SPY” which tracks the S&P 500 index of largest U.S companies. This is one of the largest ETF in existence and that’s good too.

To buy the VTI or SPY on the open market, you need a low-cost online broker. I still use TD Ameritrade, but I don’t recommend it for beginners because the trading fees are higher at $6.95, although some ETFs are free to buy.

Ally Invest is cheaper for individual trades at $4.95.

A new online broker called M1 Finance is built more intuitively with beginners to intermediate investors in mind. It enables unlimited buy/sell transactions and “pie” rebalancing based on an investment strategy that fits your objectives. The first $1,000 invested at M1 Finance is free and it’s a 0.25% after that.

IRAs are available at both. Open a taxable individual account if you have money left over after maxing out your IRA.

I’d aim to have $5,000 to $10,000 in a broad stock market index ETF before investing in individual stocks. As you age, there are plenty of fixed-income ETFs that can help you diversify away from stocks too. A popular one is the Vanguard Total Bond Market ETF (symbol “BND”).

The Third Investment – 401(k)

I put the 401(k) third because you can’t invest in one until you have a full-time job with an employer that has a plan. You can invest in index ETFs in high school (with a parental custodian under age 18) or college if you have some leftover beer money.

The very first day you have a 401(k) available, max it out never ever stop maxing it out during your working years, no matter how much money you make. If you never see it in your paycheck, you won’t miss it. Doing this has the dual benefit of lowering your taxable income and growing your assets tax-deferred.

This single act of maxing out your 401(k) can make you a 401(k) millionaire like my friend Fritz.

When you’re young, invest it all in U.S. and international stock index funds if they are available with your plan. Don’t ever touch it, just keep investing. When you reach your mid-40’s or if you plan to retire early, start to ease up on the stock allocation and lower your risk by adding fixed-income investments.

Depending on the quality of your plan, you may not have access to index funds. Try to find growth stock mutual funds with low fees.

If you’re clueless about how to allocate your 401(k), there’s a new tool called Blooom that will do a free analysis on your 401(k) investment options. There’s no obligation to get the free checkup on your 401(k). For a $10 monthly fee, they’ll manage your 401(k) fund selections for you. I tried it (see my results). Slick.

The Fourth Investment – Real Estate

I looked into real estate investments in my early twenties and passed. That was a big error on my part. Prices were going crazy at the time so it felt too risky.

My friend and I offered $262,500 on a run down place listed at $255,000 in 1999. It sold for $290,000 which I thought was nuts. What’s more nuts is this place was in the Glover Park neighborhood of Georgetown in Washington D.C. and is easily worth $1 million today.

Aiming to acquire a long-term buy-and-hold real estate property would be my next investment. If I were getting started with investing today, I’d buy that run-down townhouse or multi-family unit, rent out the rooms, fixed it up, and keep it for years. I’d take advantage of this strategy before starting a family.

The term for doing this is a “live-in flip” or “house hacking” and I’d be all over it if I was young again. If you’ve never heard of housing hacking, my friend Coach Carson wrote a 100% free guide on how it works (check out what the spray paint says!).

Some people consider a primary residence an investment. But I prefer to call that a home. Nonetheless, a primary residence usually grows in value over many years and can be a foundation for building wealth if you don’t overpay.

Our former primary residence became a rental property by accident after I overpaid with unfortunate timing in 2006. Now it provides solid cash flow, but it took a number of refinances to make it a palatable investment. If you don’t want to purchase a property on your own as an investment, you have other options.

Traditional real estate investing involves remodeling, landlording, creative financing and a lot of hassles many people aren’t cut out for. If this is you, there are other ways to invest in real estate more passively utilizing new laws and technology platforms.

REIT ETFs are one way. Vanguard has one that trades under the symbol VNQ that I own in my retirement accounts.

For higher yields in the range of 8%-11%, my favorite new real estate investing platform for beginners is Fundrise. At Fundrise, you can start investing with only $500 and you gain access to high-quality deals that most couldn’t otherwise afford to get access too. A Fundrise investment gives you instant diversification across many properties and geographic locations.

Read my Fundrise review here.

Stop Here or Keep Going?

Many investors never diversify beyond those first four investments; cash, index funds, a 401(k) plan, and real estate. And that’s fine.

For those that want to diversify income streams even further after mastering the basics, you have many investment options for growing your wealth.

Individual Stocks

Since I’ve had success investing in individual stocks, I don’t discourage the activity, even though many professionals and bloggers say to avoid them and just go with low-cost indexing. Individual stock investing has some advantages.

  • Earn higher yields than index funds
  • Invest in companies whose values you share
  • Potential for above market gains
  • Take advantage of any personal expertise or insight that could give you an advantage

It’s unlikely you’ll beat the market over long periods of time. But you may be more interested in building sustainable passive income through dividend stocks. Or, you can attempt to earn speculative gains from owning growth stocks. Only set aside a small percent of your portfolio for speculation. Don’t gamble with stocks. Educate yourself and invest after extensive research.

A Side Business

I didn’t put side business in the top of the list because many professionals and full-time worker don’t have the desire or energy to become entrepreneurs. Now that I have my own online business, I see the benefit of earning income outside of a nine-to-five. In fact, my side income is supporting our family now that I’m between jobs.

Creating a side business that earns you income is empowering because it gives you options. The internet provides so many opportunities to make money. Identify your best skills and find the business model that works. Many online platforms already exist to help you earn.

I recommend a book called Buy Buttons by blogger and pod-caster Nick Loper for a list of business ideas utilizing these modern platform.

Young people that don’t have a clear career path should consider starting a side business, or lots of them. The startup costs for many online businesses is very low so there’s little risk but the potential for good returns.

Real Estate Debt

First lien real estate debt is one of the safest ways to invest in real estate. This involves providing money to a borrower who uses the cash to buy real estate properties as an investment. The investor is paid a fixed interest rate on the loan. In the event of a default, the investor has the first right to acquire the property.

This is a more advanced form of investing. However, with the onset of real estate crowdfunding sites such as PeerStreet and RealtyShares, you can invest in real estate debt for as little as $1,000.

Both of these platforms have access to debt investments. But PeerStreet focuses exclusively on debt. These investment platforms are for accredited investors only, so you need to be experienced and have a net worth of more than $1 million or high annual income.

Another option to invest in real estate debt is through local syndication. These are locals deals put together by experienced developers and investors. Find access to these kinds of deals through networking in your local market.

Real Estate Equity

Real estate equity deals were once reserved for wealthy investors in local syndication deals. RealtyShares has made access to these investments easier through its platform. Equity deals are riskier in that the potential return will fluctuate based on market conditions as opposed to debt deals. The potential for losses also increases.

Once caveat about investing in real estate equity deals is that there may be some tax implications based on the state in which the deal is structured. That could mean that you may need to file additional state tax returns if you invest outside of your state.

Peer Lending

My income streams have been supplemented by peer to peer lending income via Lending Club since I started investing on the platform in May of 2013. Peer lending involves providing small unsecured micro-loans to many different borrowers and earning a return on those loans.

Returns for individual investors were strong for the first three years, but have started to lag for me and other investors during the last 12 months due to Lending Club mispricing some loans in late 2016.

Read my latest Lending Club investing review to see my earnings and to learn about how to automate your investments through a tool called LendingRobot.

Due to the recent downturn in peer lending returns, I’ve put more new capital into real estate crowdfunding sites. These are similar but are backed by real assets in the event of default.

Bonds

Bonds are about as sexy as a high-yield savings account on the spectrum of investment excitement. But as you age, you’ll need to lower your portfolio’s risk profile to retain capital when equity markets are volatile. A bond fund or ETF in your IRA or 401(k) is the easiest way to invest in a diversified portfolio of government and corporate bonds. That’s how I access them in my retirement accounts.

But you can also look at buying government bonds directly or buy municipal or bonds through a broker which are low-risk and have tax advantages for income investors.

Options Trading

Some income investors and day traders gravitate toward options trading for both income and capital gains. Options trading can be a reliable way to generate income through conservative strategies. However, you must thoroughly educate yourself before trying your hand at options.

I’ve dabbled in various options strategies and learned it takes a tremendous amount of time to stay on top of things. Therefore, I don’t recommend it for investors looking for passive income.

Most full-service brokers enable margin accounts for options trading. Ally Invest and TD Ameritrade are the two that I’m most familiar with and recommend. But don’t just jump in. Take a basic course on options strategies at the very least before investing your first dollar.

IPO Investing

By investing in stocks on certain brokerage platforms over the years, I’ve personally learned to profit from IPO investing. IPO investing is not for the faint of heart, and it requires both the ability to evaluate individual stocks and to read the supply and demand of each deal.

For advanced investors interested in learning more about IPO investing, check out my other website Access IPOs where you can learn about gaining access to IPO deals. And keep an eye on a new smartphone app called ClickIPO which aims to bring IPO investing to the masses.

Conclusion – Getting Started With Investing

Most investors will never progress past the first four types of investments. These are the best for keeping it simple but still give you the opportunity to grow wealth. Others who want to further diversify income streams have other options to do so. Pick assets and platforms which cater to your strengths as an investor, and don’t chase investments just because others are making money on them.

When you’re getting started with investing, read as much as you can to learn what you’re doing. The more you empower yourself with knowledge, the greater your chances are of becoming wealthy.

Disclosure: Long VTI, SPY, FSTMX, VNQ

Tips on how to start investing for beginners. Start with building a foundation for investing success, then add four primary investment types to grow wealth. ETF and mutual fund investing. Interest on cash, real estate investing, 401(k) investing.

Photo credit: Remaztered Studio via Pixabay
Photo credit: Guombik via Pixabay

11 Responses to If I Were Getting Started With Investing Today, Here’s What I’d Do

  1. Chad Carson November 16, 2017 at 12:38 pm #

    Nice list! And thanks for including my house hacking article. I’m going to bookmark this to share with people new to investing or just new to the adult word. Thanks for putting it together.

    • Retire Before Dad November 16, 2017 at 2:20 pm #

      Hey Coach,
      Thanks for the great post on House Hacking. Wish I would have pursued it back in 1999 when we were bidding on that place. It was perfect!
      -RBD

  2. Matt @ Optimize Your Life November 16, 2017 at 2:15 pm #

    This is a good list. I wish that I had started down this road much younger than I actually did. I sort of lucked out in not having access to a 401(k) for the first year and a half that I was working. I opened an IRA, was overwhelmed with the number of options, and stumbled onto Mr. Money Mustache and index funds while researching. If I went straight to a 401(k) with limited options, I would have just chosen one of those and went on with my day.

    • Retire Before Dad November 16, 2017 at 2:22 pm #

      Hi Matt,
      I started my investing with stocks. ETFs weren’t around yet, or at least they weren’t easily accessible and widely accepted. Online brokers really started gaining steam in late 1999. My 1st 401(k) was all managed mutual funds at the time. But I did invest, though I didn’t max it out. That money is still growing in my accounts.
      -RBD

  3. Tom @ dividendsdiversify November 19, 2017 at 8:37 pm #

    That is a nice summary going from basic to advanced. Not much to argue with here, especially the basics. Some of the options might not be for everyone. As of 50 something, I have done fine without touching real estate, options or an IPO. That doesn’t make them bad, just not for everyone. Build off the basics and stick to what you know and what you are comfortable with. Tom

  4. Mike November 20, 2017 at 7:59 pm #

    If your goal is to retire by the age of 45, wouldn’t it make sense to put most of your money in a standard brokerage account to invest in index ETFs rather than max out an IRA, since with an IRA you can’t touch the money until you are 59 and a half?

    • Retire Before Dad November 20, 2017 at 8:31 pm #

      As an 18-year-old, I didn’t have a specific retirement goal. Not until I was about 27. So I wrote this not assuming everyone wants to retire early. Tax-advantaged accounts allow you to save on taxes to maximize growth over long periods of time. It’s true you may have trouble accessing the funds prior to age 59 1/2 without penalty. But if you think ahead, there are ways to get money out of an IRA tax-free before age 59 1/2. I’ll refer you to this article by the Mad Fientist who explains the Roth Conversion Ladder:
      https://www.madfientist.com/traditional-ira-vs-roth-ira/

      If you earn more and live below your means, you can max out your 401(k) and Roth, and still save in taxable accounts. This is what I am doing now and I expect to not tap my retirement accounts under I’m of official age. I’ll rely on passive income from taxable accounts and draw down cash savings and sell investments before I go into the IRAs.

  5. elie al kareh November 23, 2017 at 7:28 am #

    Hey,
    great Page loved it so far.

    what about bonds? I wasn’t able to find enough info on that

    • Retire Before Dad November 23, 2017 at 8:16 am #

      There’s a few mentions but it wasn’t a focus of this article. Definitely part of the equation to reduce exposure to stocks when the time is right.

  6. Dividend Gremlin November 30, 2017 at 4:12 pm #

    RBD,

    Great post. I would tell the younger version of myself something similar. One thing I would add under the education items are professional certifications. Thanks to companies I have worked for I have been able to pick up numerous state level licenses and a handful of professional certifications. The first one which started my after-name alphabet soup (my CHMM) helped land me my current spot, which was a 50% increase over my old job.

    Still, all of this would require a time machine and a powerpoint show for my younger self. Too bad Doc Brown from Back to the Future has not put the former together yet.

    – Gremlin

  7. Jimmy @ CC Bank December 3, 2017 at 12:17 pm #

    I’m not going to argue against saving for college, but… well, just make sure that when they do go to college, that they major in something actually useful. Way too many people are coming out of colleges with liberal arts degrees and six figures of debt, and then they’re all confused when they can’t find a good job.

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