What You Need to Know Before You Invest

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I’m approaching thirty and many of my friends have yet to get started investing. When I talk to them about it, they confess that they don’t understand how investing works.

It is not surprising that they don’t. Many parents are secretive about their finances, perhaps because they are embarrassed by their mistakes or perhaps just because children often don’t know the difference between private family matters and things that are okay to share with the librarian. Furthermore, most schools don’t (or at least didn’t) cover investing or economics. Some children may have taken it upon themselves to learn and research the topic, but many are led to believe that investing is only for the “ultra-rich” and not worth the time of a “middle class” individual due to biased caricatures in the news and movies.

In reality, investing is for everyone, especially the middle class, and everyone would do well to learn its basics.

When I was a teen, my grandfather George Marotta passed down to me his copy of “What You Need to Know Before You Invest” by Rod Davis. It is a little book which tries to tackle the most basic questions of investing little by little. My copy has my grandfather’s notes in the margin, my father’s underlines, and my highlighting, which makes it a cherished family keepsake. I recommend this book as way to gain a baseline understanding.

Here is Davis’s the basic explanation of stock and bonds (page 30 of my paperback):

Corporations have two basic methods of raising capital. They can borrow money, or they can sell some of their equity. If they borrow, they can get a loan from a bank or other financial institution, or they can borrow money from other investors by issuing bonds. If the company borrows money, it will have to pay a fixed rate of interest on the amount borrowed, and it will have to pay back the principal when the loan come due or the bond matures. If, however, the company decides to sell some of its equity, it won’t have to pay interest or pay back principal. The company will, however, lose some of the control over its business. If it needs to raise a large amount of capital and must sell a large number of shares to investors not currently associated with it, the company would then go public. By “going public,” the company makes available shares of stock, representing ownership in that business, to anyone who wants to invest.

In addition to a basic education on how the stock market works, I find that many of my friends would benefit from a reframing of what it means to be an investor. As I said before, many have the assumption that investing is only for the “ultra-rich” and not for themselves. However, in reality, investing is for everyone. Those with the least investments now are the ones who can benefit the most from getting started with investing.

Savings is the deferral of the reward of labor. It is sometimes called “deferred compensation” for this reason. Saving fuels the financial engine that makes the rest of wealth management possible. Whatever your life goals, saving is most likely required to achieve them.

Alas, our fiat currency makes it very difficult to save. Inflation can be defined two ways, either as the increase in prices or as the decline in purchasing power of money. Both speak to the fact that after inflation, one dollar won’t be able to buy as much as it used to be able to. This is effectively a negative return on your cash holdings. Inflation causes the value of any cash or cash-based investment instruments to go down. Cash, bonds, and fixed annuities are all, on average, hurt by inflation. In this way, government-fueled inflation has made it impossible for average Americans to build wealth using ordinary savings accounts.

Only stock investments are able to appreciate faster than the devaluation of our currency, which is why it is so important for everyone to understand and get started with investing. The fact that so many low or middle-income families don’t invest makes inflation a regressive tax.

The easiest way to get started is to open an investment account at a qualified custodian. If you are intimidated by learning how to invest by yourself, open a Schwab Institutional Intelligent Portfolio account through our “Do-It-Yourself” service level. If you are reading this and you have any earned income this year, open a Roth IRA. If you don’t have any earned income, open a brokerage account.

Ideally, you should be saving 15% of your take home pay, maybe more if you are older.  That being said, even saving and investing as little as a few dollars will make a difference, especially if you are young.

Photo by Ana Tavares on Unsplash

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Megan Russell has worked with Marotta Wealth Management since 2005. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine