How to Get Started With Investing

Learn the essential steps for saving for retirement and building wealth, even starting from nothing.

Are you like many people and have yet to accumulate much savings (half of Americans have an average net worth of less than $22,000)? Are you in your 20s and unsure how and when you should start saving for retirement? Investing can seem daunting given the mystique often associated with it, the amount of jargon involved, and the number of choices available. But it doesn’t need to be complicated or time-consuming, nor do you need to hire an expensive advisor. You can manage your own money very effectively with some basic investment knowledge.

The first crucial lesson is that waiting costs you more than you’d expect—it is better to start now with a simple (possibly incomplete) plan than to do nothing while trying to figure out an ideal one. Here are the essential steps for getting started today:

1. Spend Less Than You Earn, Ideally Less Than 80%

This requirement should be self-evident, yet it’s where most people struggle. You need to set aside a meaningful portion of your earnings to invest for your later needs—either for retirement, large purchases (e.g. house, car), or emergencies (e.g. job loss, health problems, leaking roof, car repairs). You need to take responsibility for your financial security because no one else will do it for you—relying upon the government to provide for you later is unlikely to end well.

Target Savings Rate

A simple rule of thumb is the 50/30/20 rule, which suggests breaking down your spending roughly as follows:

• Spend no more than 50% of your take-home (after-tax) pay on your basic needs (e.g. mortgage/rent, property taxes, insurance, heat, electricity, water, groceries, transportation, childcare)
• No more than 30% on your discretionary wants (e.g. restaurants, expensive computers/phones, gifts, entertainment, vacations)
• And 20% on your savings (i.e. your future needs).

If you’re unsure where your money goes each month, that should be your first task. Don’t trust your intuition about where you spend your money—if you’ve never tracked it before, I think you’ll be surprised how much money you spend on small daily impulse purchases. Without a clear picture of your spending habits, it’s very easy to delude yourself.

If you save less than 20% of your earnings, it shouldn’t be a surprise that you’re not alone. Savings rates have been dropping since the 1980s, and now the average working adult typically only saves 3%–6% of their income per year (US data, Canadian data). But just because most people don’t save enough doesn’t mean you can’t or shouldn’t.

Note that this 20% savings target is intended to apply throughout your working life (including your 20s), not just at some nebulous point in the future once you “get your life together”. But this deliberate saving doesn’t need to be exclusively for retirement. For example, in your 20s, you may prioritize saving for a house downpayment or investing in your skills (e.g. university). What matters is you’re building your net worth (i.e. accumulating tangible or intangible assets that will hold or increase in value). No, cars are not assets—they’re depreciating money pits, as are many other things we like to buy that quickly become obsolete. Paying down your debts or building up your own business are also ways to increase your net worth.

Realize that this 20% savings target may be the minimum you want to consider. For example, if you have lots of debt, have delayed contributing to your retirement savings until middle age, or want to retire early, a higher savings rate will be necessary (you can check your progress in step 5).

Underearning

If you spend more than 80% of your salary on your basic needs, you’ll never be able to save much. You likely have no choice other than to earn more money.

Fortunately, upgrading your employment opportunities by learning new skills (for free—thanks YouTube!), starting your own business or side gig, or working remotely for any company around the globe has never been easier. We live in incredible times—there have never been fewer barriers or more opportunities for those who seek them out. The only thing stopping you is you—life rewards those who do the work. AI and automation are making some jobs obsolete, but this is no different than what technology has been doing for the past century. Jobs are not disappearing—they’re changing. Develop the ability to learn and adapt, and you’ll always have useful and valuable skills. You’re not stuck in a dead-end job—you’ve chosen a dead-end job. Exercise your agency and figure it out!

“The first step towards getting somewhere is to decide that you are not going to stay where you are.” —J.P. Morgan

My primary advice for those who want to start a side gig is to avoid all the too-good-to-true “advice” on social media.

“There are no get-rich-quick-schemes. Those are just someone else getting rich off you.” —Naval Ravikant

If something were easy, everyone else would do it too—look at the explosion in the number of “influencers” on social media. Boredom and impatience derail most ventures—choose something you enjoy so you can persist through the hard and tedious parts and outlast those who can’t. Accept that the probable outcome of your business experiments is not likely to be short-term financial reward but rather the business/technical skills and experience you’ll gain to leverage over the long term into something bigger. Skills compound over time just as investments do, but it always takes longer than we hoped. If you provide enough value to others, you will be suitably rewarded. Any unsuccessful ventures are only failures if you fail to learn from them—think of them as the tuition cost to the school of life. The best time to take big risks is before you have significant financial commitments, like a family or a mortgage.

Overspending

While there will always be underearners, I suspect most people are overspenders. How many meaningful pay raises or promotions have you gotten over the past ten years? What happened to that extra money? Lifestyle inflation is a fact of life for most people—if there’s money in their account (or room on their credit cards), they’ll spend it.

The ugly truth is you likely have money to invest for the future, but you’re choosing to spend it on your current wants instead. We live in an instant gratification/one-click purchase/next-day delivery world. Spending money has never been easier. Consider some of the luxuries you might currently enjoy:

• Do you buy takeout coffee every morning?
• Do you smoke/vape or drink?
• Do you go out for lunch or dinner multiple times a week?
• Do you upgrade your smartphone every other year to the flagship model?
• Do you trade in your car for a new one every five years?
• Do you buy the latest “smart” tech gadget?
• Do you have a bunch of subscriptions to services you barely use?
• Do you take expensive vacations every year?
• Could you downsize your house or move to a less expensive city?

If you dared to look, there are likely many things you could reduce or do without (if you chose to).

The easiest ways to break your habit of overconsumption are:

1. Pay yourself first — set up an automatic contribution plan for your investment account, which withdraws money every payday (or is automatically deducted directly from your paycheque). If the cash is not in your account, you can’t spend it on frivolous things.
2. Stop buying luxury items on credit — if you want something, save up the money in your bank account to pay for it. This delay will give you more time to consider how badly you really want it and force you to prioritize your wants. If necessary, cut up some of your credit cards (or dramatically lower your credit limit) and only pay in cash or debit.

You need a mindset shift away from mindless consumerism towards a healthy balance between your future needs and current wants. Marketers and advertisers have gotten very good at hacking our base instincts. But you don’t really need that latest and greatest thing today. Your kids don’t need dozens of presents at Christmas (somehow, every holiday has turned into a gift-giving occasion). Stuff doesn’t buy happiness. Disposable gifts are not a good way to demonstrate love. Delaying gratification is a skill you can learn (and one your kids would benefit from, too).

If you ensure your savings and debts are well taken care of first, you won’t need to feel guilty when you spend money on the things you want.

2. Pay Off Your High-Interest Debt

Once you organize your lifestyle to have money available each month, the first thing to do is pay off your high-interest debt (i.e. anything above 5%–6%) as quickly as possible. It’s pointless to buy investments if you’re paying more in interest on your debts than you’d earn on those investments. The goal is to increase your net worth, so digging yourself out of a debt hole is a necessary first step.

Ideally, you’d never carry credit card debt and accelerate paying off other types of debt (student loans, car loans, mortgage) while contributing to your retirement savings. The sooner you’re debt-free, the sooner you can allocate all your extra cash to growing your savings.

3. Open a Tax-Sheltered Investment Account

Governments have created several options for tax-sheltered investment accounts to make saving easier. If you don’t have a reason to choose otherwise, use a Roth IRA (individual retirement account) (in the US) or a TFSA (tax-free savings account (in Canada). They allow you to invest tax-free (i.e. you don’t pay taxes on your gains) while allowing you to access your money in an emergency.

If you earn more than $60,000 per year, you should also consider a Traditional IRA or 401K (in the US) or an RRSP (registered retirement savings plan) (in Canada).

But before you run out and open an account at your local bank, it’s important to consider the types of investments you plan to own—not all investment accounts are created equal. For example, your bank’s default account offering might be a high-interest savings account or an investment account that only offers a limited choice of high-fee mutual funds (thus negating my suggestions in step 4). Doing some comparison shopping first will ensure you have better investment choices available.

4. Buy Low-Cost, Passively Managed Index Funds on a Regular Schedule

Invest for Growth

If you’re investing for long-term goals (e.g. more than 10–15 years), you need to invest for growth (sometimes inappropriately called being “aggressive”). You want to avoid choosing balanced or conservative strategies for long-term investing because they don’t lower your risk but rather simply reduce your returns. Put another way, banks don’t offer risky mutual funds (except for maybe some very specialized funds)—they offer a variety of low-risk choices ranging from less volatile to more volatile. Volatility is normal and healthy and correlates strongly with returns—it’s even a net benefit over the long term. Avoid risky speculative assets, not volatility. Avoiding short-term volatility, as banks are suggesting by recommending more conservative strategies, means guaranteeing lower returns in the long term.

Another reason to prefer growth assets is they are the most likely to outpace inflation, which is a critical risk to your long-term financial wealth.

Buy Index Funds

The simplest way to invest for growth is to own stocks and avoid bonds. The safest way to invest in stocks is to own a diversified basket rather than individual stocks. “The index” (e.g. S&P 500 in the US or TSX Composite in Canada) is a curated list of hundreds of the largest, financially strongest companies in your country. For example, if you looked at the names, you’d probably recognize many of the businesses as ones you hear about or do business with daily.

Indexes are the default way of quantifying the stock market’s overall performance since they hold a decently representative sample of all the listed stocks. They’re also used as the benchmark to compare the performance of individual investments. The dirty little secret of the financial industry is that more than 90% of active mutual funds underperform the index over the long term. In short, for most investors, there is no good reason to pay higher fees for more complicated investments (e.g. actively managed funds or fund of funds) that will likely underperform when you can just own a simple, passively managed index fund.

If your investment account allows it, buying an ETF (Exchange-traded fund) that tracks the main index in your country is the best default choice. For example, in the US, the ETF with the symbol SPY tracks the S&P 500. In Canada, the ETF with the symbol XIC tracks the TSX Composite.

The second best way to own the index is to buy a passive mutual fund that tracks it—the clue is that they’ll have Index Fund in their name. ETFs are better than passive mutual funds because their annual management fees are usually a tenth of the cost while owning the same underlying assets. The main caveat is if you pay transaction fees when buying ETFs (e.g. if your account is with a bank), make sure your ETF transaction fees are less than 1% of your contribution.

Non-Index Fund Options

Unfortunately, banks often make it difficult to own the index. For example, my kids found out that they can’t buy ETFs or passive mutual funds in an investment account at their bank unless they open a self-directed account, which I find ridiculous.

So, if you can’t own the index, the next best option is a mutual fund that is 100% equities (stocks), ideally with the lowest management fee possible. The problem is that actively managed mutual funds often have fees of 4–10× those of passive index mutual funds and ETFs. Management fees of more than 2% are very high and will significantly affect your long-term growth—ideally, you’d want to pay less than 1% in management fees per year.

You often get better choices if you open your account with a robo-advisor (e.g. Betterment, Wealthfront, Wealthsimple) rather than your bank. For example, they usually allow you to invest directly in ETFs (often with no transaction fees), thus making owning the index trivial. If you choose to use their managed portfolios instead of an individual ETF, crank up the so-called “risk dial” to the maximum (i.e. 100% stocks). As I described earlier, when they say risk, they actually mean short-term volatility, which is a net benefit rather than a liability.

In case you’re wondering, owning a single index fund is enough for most people, certainly when getting started. The index is well-diversified across economic sectors and, thus, resists problems in specific companies or areas in the economy. Also, over time, weaker companies will get dropped and replaced by stronger ones, making the index the closest thing we have to a sure bet over the long term.

In summary, settling for mediocre returns or unnecessary fees to achieve the illusion of “safer” returns when clear, superior choices are available is financially unwise. Unfortunately, many investment choices banks offer are optimized for them rather than you.

Use Dollar-Cost Averaging

Once you’ve selected an asset, invest money regularly (at least quarterly), and don’t try to time the market. Don’t worry about whether your contributions are precisely spaced or exactly sized. The crucial points are:

1. Make it a habit
2. Investing earlier is better rather than later
3. Contributing more often is better than less often

You likely won’t make much progress if you wait until tax season and only contribute once a year (hoping there’s money left after the holidays). Contributing to your savings on an ongoing basis and adjusting your lifestyle to match is much more effective. There are also performance benefits to contributing more frequently.

Shorter Timeframes

If you have less than ten years until you’ll need the money (e.g. buying a house, or you’re approaching retirement or are already retired), the best strategy for you is less clear-cut. You still need growth (to defend against inflation), but short-term volatility becomes a relevant consideration. One option during retirement is to maintain a cash cushion you can draw upon in case of market downturns, so you don’t need to sell your growth investments at their lows.

If you’ll need the money in less than five years, a guaranteed investment (e.g. GIC) is probably the safest way to go, certainly now that interest rates have risen into the 5% range after the decade of ultra-low rates during the 2010s.

In the details of my more advanced strategies, I share some thoughts on how you can adapt different strategies to shorter-term situations.

5. Track Your Progress and Adjust Your Savings Rate as Necessary

A simple way to gauge whether you’re on track is to use the following table to compare your current retirement savings (including your pension, if applicable) versus your current income.

Note that this estimate assumes you’re comfortable with your current lifestyle and income level and want to continue at a similar level post-retirement. It also assumes you’ll retire at 65–67 and be debt/mortgage-free by then.

Target Retirement Savings by Age

Another way to judge your progress is to examine the contribution room available across all your tax-sheltered account types. If you’ve consistently maxed out your available contribution room and invested in safe growth assets, you’ll likely be in good shape for retirement, assuming you’ll be debt-free.

Beyond The Basics

Once you’re ready, the next steps on your investment journey will be to learn the core investing concepts and understand some simple investment strategies. The benefit of taking your knowledge to the next level is that you can earn higher returns on your investments with fewer big swings up and down, leading to more confidence and a more dependable stream of income while retired.

Summary

These five steps are sufficient for most people to build their wealth effectively. You now have a choice: continue to ignore your financial challenges and hope things turn out “fine”, or take action and make some hard choices. Saving and investing for retirement is simple (but not necessarily easy).

Key Points

• Aim to save at least 20% of what you earn—more if you’ve fallen behind in your savings goals or have accumulated debt.
• Pay off your high-interest debts as quickly as possible—they will dramatically limit your ability to build wealth until you do.
• Pay off your other debt while balancing growing your retirement savings and an emergency fund.
• Be debt-free before retirement—ideally well before.
• Invest in 100% stocks using low-cost, passive index funds if you’re more than 15 years from retirement.

Recommended Reading

• Abundance: The Future Is Better Than You Think (Peter Diamandis & Steven Kotler, 2014)
• The 4-Hour Work Week: Escape the 9–5, Live Anywhere and Join the New Rich (Timothy Ferriss, 2007)
• So Good They Can’t Ignore You: Why Skills Trump Passion in the Quest Work You Love (Cal Newport, 2016)
• Mindset: The New Psychology of Success (Carol Dweck, 2007)
• Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones (James Clear, 2018)
• The Practice: Shipping Creative Work (Seth Godin, 2020)

If you have comments, questions, or constructive feedback, you can contact us by email at questions@essentialsofinvesting.com.