Conventional financial wisdom states that a person should pay down high interest debt before they begin investing. The wisdom behind this is that high-interest rates on credit cards will negate the returns on investments. According to LendingTree.com, the average credit card APR in the United States is 24.6%, while the average annual return of the stock market is 10%. Take, for example, a person with a $2000 credit card balance who is incurring interest of $480 annually while $2000 in the stock market is providing $200 annually. In this scenario, a person is getting nowhere fast, losing $280 annually. The sooner they pay off the credit they can reap the benefit of receiving $200 annually. 

Conventional financial wisdom only sees the benefits in the financial return and never mentions the benefits of starting to invest as soon as possible. With a small amount of money, you can get the experience of investing while continuing to pay down high-interest debt. Unfortunately, investing is viewed as something you will do later after you complete your degree, get a good job, and pay off your debt. By then you are behind the curve in knowledge and experience compared to someone who has been investing $5 a month since they were five years old. This is an exaggeration, but sometimes they are necessary to prove a point.

You have made it this far in the post and decided, despite where you are in your life, you want to start investing now. You do an internet search about how to start investing, and you are bombarded by the sheer volume of information. You made it through a few articles, and you are completely confused about what or where to invest your money. We suggest you start where you are already spending your money. But before we dive into your spending habits and how you can evaluate them to find possible investments, when it comes to investment or anything that can be complex, it is important to keep it simple.

KEEP IT SIMPLE

Humans tend to make things more complicated than they need to be, especially if they are looking for deeper meaning or trying to get a competitive advantage; with investing, there isn’t any difference. If you’re a new investor where learning and getting practice is the main goal, it is best to keep it simple. As it pertains to investing, think of it as you are buying partial ownership in a business or asset or commodity that produces cash flows. This is not to be confused with other types of investment, such as investing in yourself or investing in other people.

DECIDE HOW MUCH YOU WANT TO START WITH IN REGULAR INTERVALS

Conventional wisdom suggests that 20% of your after-tax income should go to savings and investing. If you can save and invest more comfortably, we suggest you do. In the case that you’re not able to save or invest 20% of your after-tax income, we suggest you assess your financial state to see what is available. For those that believe they don’t have enough money to start investing, that is not true.

The point of this post is to get you in the habit of investing. If you only have $5 per week, that is $20 per month. As your financial situation improves, you will have more money available. The goal is to make it a priority. When you make investing a priority, you’ll be surprised by the amount of money that is available to you. Also, if you have a specific investment in mind and you do not have enough money for that investment, you can save until you have the amount you need. The goal is to start investing what you have or save until you get to the amount you can invest.

START WITH WHERE YOU SPEND

If you’re overwhelmed by all the different investment vehicles, start with where you’re spending your money. What products and services are you currently utilizing?

401k

On a side note, many people have access to investing opportunities through their 401k. The great thing about 401(k)s is the employer match. The average employer 401k match is between 3% and 6%. The maximum contribution an employee can make for 2024 is $23,000. If a person decides to contribute $2,000 to their 401k, their employer could match 6%, which would be $120, which brings the total to $2,120.

You should consider all the ways you spend your money and consider the possibility of investing in those ventures. Think about the food you eat, the clothes you wear, the car you drive, and where you live. 

Many people never consider the possibility of buying Starbucks stocks, even though they buy a cup of coffee from Starbucks on their way to work each morning. Many people never consider exploring the possibility of buying Toyota stock, even though they own and drive a Toyota daily. We own iPhones, MacBooks, and iPads, but we do not own any Apple stocks. We invest in clothes that are a necessity but don’t consider looking into the companies that own the brands that we frequently wear.

This is not to say that you are compelled to invest in the stocks of all of the products you consume, but it is a starting point if you don’t know where to start. This will give you the opportunity to dig deeper into the products you consume and explore if the products are good enough to invest in. Remember, this is just a starting point. This is just the beginning of a much more elaborate process of due diligence that must be taken when investing your money. Also, this will provide you the opportunity to learn more about stock investing, which will lead to your improvement over time.

When you are a new investor and you are starting off small, keep these tips in mind:

DO NOT FOLLOW THE CROWD

Warren Buffett once said, “to be fearful when others are greedy and to be greedy only when others are fearful.” The more you invest you will develop your own investment strategy and philosophy. It is important to stick with your plan and not follow the crowd or chase fads. There are too many examples in history where following the crowd leads to an investor’s downfall. Don’t be like them. Do not chase the next hot new stocks. Do your due diligence and stick to your investment plan.

LEARN ABOUT YOURSELF

When you start investing in where you spend, you will have the opportunity to learn about yourself. You will learn about yourself as an investor. You will be surprised about how much you already know and how fast you are learning. You will discover different types of investment strategies and which ones you are drawn to. 

You may adjust your spending habits due to what you discover about where you are spending your money. You may not agree with the visions or missions of the company’s products that you are consuming. You may even decide to switch to companies whose mission or vision aligns with yours.

SELF-EDUCATION

Much of the learning you will be doing when you are a beginning investor will be from self-education. The great news is that there are many resources online that will get you going. You have the opportunity to go at your own pace. It is important to maintain consistency. Thirty minutes per day will bring you a long way. So many people find themselves getting excited about investing, spend hours per day researching and following investor news, and eventually end up having a burnout. To avoid burnout, go at a steady, consistent, manageable pace.

BE PATIENT

Patience is the key to life, and it is also true for investing. Investing is a lifelong journey; the sooner you begin, the better. Depending on the type of investment strategy, patience is paramount. If you adopt a value investment style similar to Warren Buffett, where you buy undervalued companies and hold them for the long term, you will need to be patient. Patience is just like any other skill; you must work on it. The more you work on it, the stronger it will become.

FINAL THOUGHT

Investing can be intimidating, but it doesn’t have to be. Taking a closer look at your spending habits with the purpose of finding investing opportunities can make the process less intimidating for a beginner. Many feel that they have to get their financial life in order or make a certain amount of money before they start investing, but that is not true. You can open a brokerage account with little or no money and save until you have enough to invest. Every bit counts; $5 per week over several months will add up to a substantial amount. The key is to start investing now, be consistent, and be patient.