The stock market has fallen like a rock over the past several weeks, and it's making even the most experienced investors a bit gun-shy about their investments. If you've never invested before, you're probably counting your lucky stars that you missed all the fireworks -- and the idea of starting to invest right now might be the last thing on your mind. In troubled times, though, the value of having a financial cushion really becomes clear.
Here at The Motley Fool, we've seen these kinds of markets before.
Market downturns are a huge opportunity for those who are just getting started in their quest to become wealthy and financially independent. It's tough to build up the courage to take those first few steps, but once you start, they're easier than you think.
Below, we'll share our simple-to-follow three-step roadmap to $25,000 that many of our members have followed to find financial success.
Step 1: Save money
It's common to want to skip straight to investing in stocks, because it's historically been the best way for regular people to earn life-changing wealth. But before you invest, it's important to have your financial house in order. That means doing these things first:
- Pay down high-interest debt. If you have outstanding credit card balances or other loans that charge large finance charges, then you'll do better using spare cash to get them paid off rather than investing right away.
- Have some emergency money squirreled away. It's never been more important to have some cash set aside for unexpected financial emergencies like getting laid off or needing a major repair. You'll want to invest for the long term, so keeping some emergency money will prevent you from having to sell your investments.
Once you've gotten those priorities taken care of, then it's up to you to find ways to boost your savings. We have some savings tips here, but they all boil down to looking at expenses you can reduce or eliminate and doing what you can to boost your income.
Step 2: Invest in index funds
Here at The Motley Fool, we're all about finding companies that we think will outperform the stock market over the long run. But when you're first getting started, having a core portfolio of index funds that will inexpensively match the market's returns is the simplest way to invest. Moreover, when popular stock indexes like the S&P 500 (SNPINDEX:^GSPC) have already dropped substantially, it makes the likely future returns from investing in those indexes more attractive.
We suggest starting with three types of index funds:
- An S&P 500 fund like SPDR S&P 500 ETF (NYSEMKT:SPY) will let you invest in 500 of the biggest and best-known stocks in the U.S. market. You should invest most of your savings in this fund.
- An index fund specializing in small and mid-sized companies like Vanguard Extended Market ETF (NYSEMKT:VXF) offers chances to profit from higher-growth businesses that have more room to run in the future. Invest a smaller portion of your assets in this fund, as it tends to be somewhat riskier than the S&P 500 fund.
- An international index fund like Schwab International Equity ETF (NYSEMKT:SCHF) that invests in companies outside the U.S., letting you participate in growth opportunities across the globe. U.S. investors typically invest a fairly small fraction of their savings in international stocks, since U.S. names are more familiar.
When you're just beginning, the exact percentages you invest in each of these types of funds aren't critical. The goal is simply to get familiar with the basics of investing, feel comfortable with these investments and, most importantly, to take action.
Step 3: Keep making money
The easiest way to save more money is to bring in more income. That's not always easy when times are tough, but there are things you can always explore. Here are a few:
- Ask for a raise. If it's been a while since you've had a pay increase, see if you can negotiate something with your employer. Now might not be the ideal time for this strategy given the unprecedented pressure on the economy, but when things recover, it's worth pursuing.
- Work a side gig. There are more opportunities than ever to make extra money in your spare time. Whether it's driving an Uber, taking on freelance work, or starting an e-commerce business, enterprising people are boosting their earnings and saving more.
- Invest in your career. Looking for educational opportunities can enhance your earning power by making you eligible for higher-paying jobs. Sometimes, you'll even be able to stay at your current employer.
As you make more money, save more as well. You'll see your portfolio balance rise even faster.
Now is the time
It's scary to think about investing right now, but it's also the best possible time. With stock markets falling, it's cheaper than ever to make the investments that will bring you wealth and prosperity in the years to come.
Get started with these three steps today and put yourself on the road to $25,000 and to financial success.