On the Money is a monthly advice column. If you want advice on spending, saving, or investing — or any of the complicated emotions that may come up as you prepare to make big financial decisions — you can submit your question on this form. Here, we answer two questions asked by Vox readers, which have been edited and condensed.
Where do I begin with investing? How does the stock market work and how do I get into investing in stocks? How do I budget without it being too strict? How do I go about smartly saving?
Dear Future Investor,
These questions are best answered in reverse order, so let’s begin.
Smartly saving money — which is something you’ll need to do before you can start investing — comes down to the difference between your income and your expenses. Many people are unable to save because their expenses exceed their income, and spend much of their financial energy digging out of credit card debt. Other people are able to save small amounts of money, but not enough to get them out of the paycheck-to-paycheck lifestyle. (One or two missed paychecks, or the equivalent in unexpected expenses, would empty them out of everything they’ve saved.)
Budgeting is one of the more effective ways to lower your expenses and save more money, particularly if you really are overspending in certain areas of your life. (Overspending, in this case, would involve making purchases that bring neither utility nor pleasure. Clothing you don’t wear, games you don’t play, food you throw out, and so on.) However, many people aren’t actually overspending, which is why their budgets feel overly strict.
That said, there are plenty of good reasons to take a look at how much you’re earning and how much you’re spending. You might as well draft up a budget just to see how you’re doing. Any of the popular budgeting apps will help you get the job done. I use YNAB, which lets you forecast how many of your future expenses you can pay with your current income. If you’re interested in tracking both your budget and your investment portfolio, you might want to try Monarch Money. Cleo is a budgeting app that uses AI to help you decide what you can afford to buy, although I haven’t used it myself so I can’t specifically recommend it. If you want to go the DIY route, you can open a spreadsheet and start tracking earnings in one column and expenses in another — I’ve budgeted that way for years, and it works.
Once you’ve done a top-level assessment of your finances, one of two things may happen. Either you’ll say, “Wow! I could save hundreds of dollars every month if I simply stopped buying all of this stuff I never use!” or you’ll say — and this is the more likely scenario — “Um, it kind of looks like I need everything I buy.”
This brings me to the most effective way to save more money, which is by earning more money.
Some people earn more money by increasing their skills. Others turn an existing skillset into a side hustle. You may even be able to leverage your current skills into a raise, a promotion, or a better-paying job.
You may also be able to earn more money by investing. A lot of people turn to the stock market because they believe it’s the best way to earn enough money to achieve their biggest financial goals, whether they’re using a Roth IRA to save for retirement or a 529 Plan to save for college. Other people successfully use the market as a way to achieve smaller financial goals, such as saving up enough money for a down payment on a home. (A few people try to use the market as a get-rich-quick tool, and most of them fail.)
When you purchase stock in a company, you are predicting that the company issuing that stock will be more valuable in the future than it is right now. When you purchase a share in a total-market index fund — which essentially allows you to purchase a representative portion of everything the market has to offer — you are predicting that the entire market will be more valuable in the future than it is right now.
You are also, in a sense, helping to fund the growth of the companies and entities in which you are investing — which is one of the reasons why many people choose to invest in companies that are meeting social or environmental benchmarks.
Once you invest your money, it’s gone. Literally. You’ve exchanged your money for the stock or ETF or index fund, and you cannot count any of the numbers in your investment app as part of your net worth — no matter how high they get — until you exchange your stock for money, which is called “realizing” your investment.
In other words, and I cannot emphasize this enough — you have to sell your stock for its value to become reality.
There are two reasons to sell an investment:
The value of your investment is enough for you to meet a specific financial goal, such as homeownership or retirement. You believe the investment will be worth less in the future than it is worth right now. Read more from On the MoneyShould you combine finances with your partner?
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In either case, you are at an advantage if you sell early. The first person to realize the value of their investments makes more money than the second person (who makes more money than the third person and so on). Every sale reduces the total value of the investment, and the value won’t start to go back up again until there are more buyers than sellers.
This can get complicated really fast, which is why a lot of people navigate the bulls and bears of the stock market by following a strategy called “buy and hold.” Simply put, they believe that the long-term future of the market will be better than the present even if there are ups and downs in between.
The trouble is that every once in a while the market crashes — and although it has historically always rebounded, it takes a while to get those numbers back to where they were. During the Great Recession, for example, it took about four years for the market to recover. If you needed to sell your investments during those four years, perhaps to cover an income gap due to unemployment, you might have found yourself at a loss.
This is one of the reasons why financial advisers recommend saving a three-to-six-month emergency fund before getting started with investing. Since we all know how difficult it can be to save up six months of expenses, some people choose to invest small amounts of cash specifically to build up their emergency fund, then sell the investments and transfer the money into a high-yield savings account or CD ladder. At that point, they can begin an investing strategy that could help them achieve longer-term financial goals.
After all of that, investing is the simple part, all things considered. It’s a matter of picking a brokerage and installing an app. From there, you can open an account, follow a series of prompts that are designed to help you build an investment portfolio, and decide how much money you can afford to invest. Some people choose to get a financial adviser involved, but you don’t have to — there have been plenty of studies on whether the average investor benefits from an actively managed portfolio, and it turns out that passive management may be just as effective. (In other words, picking an index fund and sticking with it could be just as good as buying and selling a bunch of different stocks and/or hiring someone to buy and sell your stocks for you.)
You might want to do some research before you choose your brokerage and your portfolio, but you could also pick one of the more popular options and set yourself up with whatever they recommend. The amount of work you put into your investment decisions is entirely up to you. Some people read everything Warren Buffett ever wrote. Other people spend part of every day having conversations on investment forums. Most people simply let their investing app guide them toward a balanced portfolio, which is perfectly fine! You don’t have to master the art of investing to earn a modest return on your investment.
On the other hand, if you find the market fascinating and want to invest both time and money into understanding it, go ahead. Buy low and sell high, don’t invest anything you can’t afford to lose, and remember that past performance does not guarantee future results.
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