If you saw my last post, you’ll know how minimalism can increase your productivity, but did you know it can also increase your wealth?
Many people believe that investing in the stock market is a complicated task only the professionals can do, but it can actually be extremely simple.
The book, The Simple Path to Wealth, by JL Collins explains an easy to follow, simple path for anyone to build wealth. Collins minimalist approach to investing consists of buying one ETF or index fund that diversifies your assets for you. That’s it.
Let’s break this down even farther. An ETF is an exchange-traded fund. Simply put, it is a group of stocks and bonds that you can buy all in one place. An index fund is very similar to an ETF with a few slight differences. The biggest being that an index fund typically require a minimum purchase (typically $1,000), where you can invest in an ETF for as little as $1 (purchasing a partial share).
Both are good, relatively safe ways to invest into the stock market. ETFs and index funds have diversity included for you, so you can buy one and not have to worry. Buying multiple funds does little for diversification as many have holdings in the same companies.
Setting up an investment account is easy. I use Vanguard, but others like Fidelity or Charles Schwab work as well. Go online and pick one that sounds good to you, make an account, link your bank account, and invest. That simple.
Why Should I Invest?
Investing can increase your savings and help protect your money from inflation. Think of your money as miners, when your money sits in a bank account, the miners aren’t working, but when they are in the stock market, they are digging to find you some gems.
A normal savings account has an average annual return of 0.60% meaning your miners are barely scraping the surface. In comparison, the S&P 500 has had an average annual return of 10.26% since inception in 1957. Those miners are striking gold.
Over the last 50 years, the average rate of inflation in the US was 3.8%. This means if you left your money in a savings account, it actually lost value, as the cost of products has gone up.
What Should You Invest In?
I have my IRA (individual retirement account) invested in a target date index fund like VLXVX on Vanguard. My brokerage account is invest in VTI, Vanguards Total Stock Market Index Fund ETF (The index fund equivalent is VSMPX). If you are using another brokerage, find a fund that follows the market like an S&P 500 fund or equivalent.
A minimalist approach to finance helps keep things simple and allows you to understand what is going on.
Considerations
See what your employer has for retirement benefits before opening an IRA or brokerage account. Many companies will offer an employer match up to a certain percent, meaning they will match the money you put into the retirement plan (basically free money). Whether it is a 401k or similar plan, a minimalist approach to managing the account will still work. Find a similar fund, typically a target date retirement fund, and stick with that.
Create an emergency fund before investing. An emergency fund is typically 3-6 months worth of expenses and is used incase of an emergency (loss of a job, medical bills, etc.) When you have this big chunk of cash saved up, put it in a high yield savings account. I have mine through Public, currently at 5.1% interest, meaning for every $1000 I put in, I’ll make $51 at the end of the year.
Stick it out through ups and downs. Investing is about the long-haul, don’t try to time the market. If the market starts to fall and the value of your stocks go down, wait, they will likely come back up. The good thing about investing in an ETF or index fund is that the diversification helps hedge your bets and keeps your money safe. Over the last 20 years VTI (Vanguard Total Stock Market Index Fund ETF) has had an annual return of 8.69%. So if you invested $1,000 into VTI in 2004, it would be worth $5,581 today. That includes the financial crisis in 2008. If you sold at that time thinking the stock market would never recover, you probably lost a lot of money.
Do Not Touch Your Retirement Account Until 59 and a half. Taking money out of your retirement accounts before the age of 59 and a half means you have to pay a penalty of 10% on the withdrawn amount (There are ways to kind of get around this, where you can take a loan from your 401(k) if your plan allows. Do some research if you are considering this.)
What’s the difference between a retirement account and brokerage account? Retirement accounts are taxed advantaged, meaning you can defer the taxes until later, or pay them now and withdraw it tax free later (Traditional vs Roth). A brokerage account uses after tax dollars, meaning you pay the taxes on it now, and any stocks you sell that make capital gains (that went up in value) counts as taxable income as well. You can withdraw the money from a brokerage account at any point, but any gains made are now taxable income. As mentioned above, retirement account cannot be accessed until age 59 and a half. I prefer a Roth retirement account, paying the income taxes now but allowing the money to grow tax free. Personally, I have a mix of all three, a traditional retirement account through work, a Roth IRA, and a brokerage account.
I am just a kid on the internet, and while very handsome and smart, I don’t know anything about your personal finance situation. Please make your own decisions and talk to a financial advisor. While I follow this simple path to investing and believe it will work for most people, it may not work for you.
