Money

I just invested my first $7,000 at age 26—here's where I decided to put it

The author (left) and a friend.
Emmie Martin | CNBC
The author (left) and a friend.

As my best friend and I strolled the streets of Philadelphia recently, she told me about how she had saved up a small sum of money and was planning to invest it. Because I write about money day in and day out, I often jump into financial conversations — and this was no exception. I knew the key phrases to throw her way. The terms to tell her to Google. The books to recommend.

But when it came to offering specific advice, I was stuck. Outside of retirement accounts, like many twenty-somethings, I didn't actually have any experience investing.

It's not that I didn't have good intentions. I knew that investing is the best way to truly grow your money. Legendary investor Warren Buffett calls investing in index funds "the thing that makes the most sense practically all of the time." And self-made millionaire David Bach says that consistently investing, a strategy he calls paying yourself first, is the key to building wealth.

Yet investing sat unchecked on my list of goals for 2017 and earned a fresh spot on my list of goals for 2018.

I couldn't use lack of funds as an excuse, either. After saving up an adequate emergency fund, I made setting aside money to invest my next big goal. Over a few years, I had diligently saved up thousands of dollars earmarked to be invested outside of a retirement account, but I hadn't put that cash to work yet.

It wasn't much, but it was a start. So I decided to stop procrastinating. I was finally going to invest the $7,000 I had saved and I was going to make it count.

Getting started

I understand the basics of index funds, which are like baskets with hundreds or thousands of different stocks inside. The S&P 500, for example, holds the 500 largest companies in the U.S. But I had no idea how to actually get started investing in one.

Each new Google search yielded dozens of different financial services companies, with hundreds more options available from each. Some I had heard of: Vanguard, Fidelity. Others didn't ring a bell.

Was I supposed to pick an index fund at random and put money into it? Does diversifying mean opening accounts with more than one institution? How would I know if I was being aggressive enough — or too risky?

I decided to bring in some help. I reached out to financial experts across different platforms to help me paint a picture of my investing options. For this project, I spoke with the following experts:

The first thing they did was quiz me about whether I had reached other financial goals. Was I contributing enough to my 401(k) to take full advantage of my employer's match? (Yes.) Did I have an emergency fund that could cover six months worth of living expenses? (Yup.) Did I have any high interest debt to prioritize, such as paying off credit card bills? (Nope.)

With the basics out of the way, they agreed I was ready to move on to the next level.

Looking to the future

As I called up experts, I expected questions about the amount of money I had and if I knew the difference between a mutual fund and an ETF. But both Holeman and Capalad had questions about my goals and my future instead.

For first-time investors, it's difficult to create a viable plan when you're investing mostly for the sake of beating inflation. It's much easier to know how to allocate your funds and how aggressive to be when you have a specific idea of what the money will be used for and when.

"Get a really concrete vision of what you're saving for," Holeman advised. Instead of saying you want to buy a house, put together a timeline, such as deciding that you want to buy a house in 10 years with a 20 percent down payment.

Capalad had similar advice: "Your first step should be figuring out what you want your $5,000 to do for you down the line. Before you start researching or figuring out what company to put it in, it's figuring out, 'What is your goal with that $5,000?'"

Robo-advisor Betterment shows how much more a $7,000 initial investment can grow over 15 years when invested in a brokerage account versus a traditional savings account. (Click to enlarge.)

I took a mental picture of how I wanted my next 10 years to go. I knew that, eventually, I'd want to buy a house. And because I also knew I wasn't planning on leaving city life behind anytime soon, I'd need a lot of cash for the sizable down payment.

Capalad pointed out that opting for a longer timeline was smart. "It's not a hard and fast rule, but what from I've seen in terms of the volatility, you want to be able to comfortably not need to touch the money for at least five years, if not longer," she says.

I felt emboldened to realize that there were steps I could take to turn a dream into a reality. I was no longer writing off the idea of ever owning property, but saying, "How can I feasibly make this happen?"

Taking a step forward

The next step was surveying my options, which is where things got complicated. You can't just call up Vanguard and say, "One index fund, please!" In fact, for someone looking to put the majority of their cash in one place, choosing a single fund isn't even a good choice, according to Roberge.

"Instead of just investing in the S&P 500, make sure that you have multiple indexes included in your portfolio, ranging from U.S. stocks to international stocks," he says. "That kind of diversification is really important."

"Your first step should be figuring out what you want your $5,000 to do for you down the line." -Pamela Capalad, CFP and founder of Brunch & Budget

While gaining access to 500 companies seems diversified in comparison to investing in one business, a single fund is still one of thousands that are out there across the globe.

"Sometimes, Europe might be doing well and the U.S. is not," Roberge explains. "We can't just rely on our home country bias."

Surveying my options

With this in mind, I looked at my choices and realized there were four general routes I could choose.

• Hire a traditional advisor. I didn't have enough money for that. While a few thousand felt like a lot to me, it wasn't enough that I could justify the high fees, usually 1 or 2 percent of the total amount, that comes along with having an individual handle your money.

• Use a robo-advisor. Robo-advisors such as Betterment, Wealthsimple and Wealthfront curate a mix of stocks and bonds according to the level of risk you choose. "We're taking a lot of the same investing principles that traditional advisors have used with their clients for decades and automating them to make them more accessible to more customers," Holeman says.

One of the key distinctions between robo-advisors and traditional advisors is the price. Traditional advisors tend to charge a 1 percent fee, while it's typical for robo-advisors to take around 0.25 percent. Robo-advisors are able to offer essentially the same services for less money because they have computers that do the heavy lifting, Holeman tells me.

For simple situations like mine, "an online advisor like Betterment might more than meet your goals, so you don't need to pay more for other strategies or goals that don't apply to you or don't apply to you yet," he says.

A sample Betterment account. (Click to enlarge.)

• Curate a mix of funds myself. To create a truly diverse mix of funds, I'd need to put in a lot more research into different stock and bond indexes while gauging the riskiness of each. As a newbie, this also seemed too labor-intensive to me. Although I could also choose a target-date fund, which are pre-structured funds created to hit certain goals over a specified period of time, that would take care of everything, I still felt as though I didn't know enough about the market to rely on my own research.

• Turn to budgeting and micro-investing apps. There's a wide range of apps available that are able to consolidate your financial accounts, including checking, savings and credit cards, into one place. Many of these also feature built-in investing tools.

Bach recommends Clarity Money, which has a partnership with micro-investing application Acorns. Through Acorns, Clarity can round up purchases to the nearest dollar and invest the change, although Acorns can also be downloaded on its own as well. Other similar other budgeting resources include Mint and LearnVest.

As with a robo-advisor, I liked that this approach was hands-off, and I especially liked that I'd be able to see the full picture of my finances in one place. As Bach points out, "the beauty of Acorns is you get a low-cost robo-advisory portfolio made up of ETFs that is totally diversified and automatically rebalanced."

"The whole key to succeeding is making everything AUTOMATIC." -David Bach, self-made millionaire and co-founder of AE Wealth Management

A fifth option would be to choose individual stocks by company, but experts advise against this strategy, because statistically, it's almost impossible for regular people to beat the market long-term. Unless I was willing to invest time into researching companies and following the market closely, it wasn't a good choice for my lifestyle. While that strategy works for some, I knew I wouldn't put in the effort necessary to make it work.

Like many of my millennial counterparts, I feel pressed for time all the time. What I wanted was a one-stop shop where I could invest my principle, set up automatic monthly payments and forget about it.

As Bach told me, "the whole key to succeeding is making everything AUTOMATIC." I agree.

Disproving myths and weighing other considerations

As I learned more about the different ways to invest, I realized that some of the ideas I had about it before were wrong. Here are a few things that stood out:

  • Diversification doesn't mean using several different financial platforms. "Having accounts scattered all over the place doesn't necessarily mean you're diversified," Holeman says. Rather, "it's making sure you own multiple ETFs or multiple mutual funds, so you'll own hundreds and thousands of stocks." Plus, having everything in one place can make it easier to compare your accounts and minimize fees, Holeman says.
  • Investing is emotional. It might look like it's just a numbers game but you're parting with your money and risking that you might lose it all. Once you invest, downturns in the market are no longer abstract — they're real and they're affecting your money and your future. I realized that a large part of the reason I had resisted investing for so long was because it was scary to hand over $7,000 knowing I could lose it all, even if that was an unlikely outcome. I'm not alone: Over 60 percent of adults say they find investing in the stock market "scary or intimidating," a survey by Ally Invest found.
  • Investing in a range of funds means putting your money into companies that may not align with your values. For example, when you invest in the S&P 500, you're betting on 500 major U.S. companies, from Google to Disney to Walmart. It can be a smart way to take advantage of the success of major corporations without the risks associated with buying individual stocks. But it also means you might be indirectly supporting business practices you don't agree with.
"I realized that a large part of the reason I had resisted investing for so long was because it was scary to hand over $7,000 while knowing I could lose it all."

The weight of investing

As I sifted through the multitude of companies associated with the S&P 500 and others, I started to question if I would feel okay supporting all of these corporations when I certainly didn't have time to vet them. I remembered an option Capalad had shared with me: socially responsible investing. "Every asset class has a socially responsible investing component," she says. "There's clean-tech, there's gender diversity, there's local municipal bonds."

Going this route would mean investing in indexes comprised of only companies that met certain requirements, such as a focus on addressing environmental sustainability, for example. I considered it seriously but found that it wasn't the perfect solution for me. Although the concept has been gaining popularity in recent years, Capalad told me, my options would still be relatively limited. The definition of socially responsible investing is still somewhat ambiguous, too, which means the requirements for a company to be included in a certain fund may not be as strict as some consumers might like.

Another major drawback was the price. Not only is the cost typically twice that of traditional investments but the returns aren't always as high because you're leaving out certain companies, Capalad said.

I took a step back and decided to re-focus on the qualifications I knew I wanted out of my investment: It needed to be relatively hands-off and easy to understand. I also wanted to be able to set a certain amount to be automatically invested each month, so I could easily budget around it.

Socially responsible investing is a growing market, and I figured I could return to it later. For now, though, I decided to wait until it was further developed and in the meantime take a more traditional route.

Final decision

Ultimately, I chose to invest with Betterment. As both a beginner and someone without an abundance of time, I knew it would be one of the quickest, easiest ways to get into the market. Although I had turned to one of Betterment's CFPs for advice, I didn't chose it solely because he recommended it; I did my own research on the various options out there and read several articles and lists comparing top robo-advisors, including NerdWallet's list of its top picks for 2018.

Betterment requires no minimum deposit and charges a low 0.25 percent management fee. It's similar to other well-known names in the industry, such as Wealthfront and Ellevest, and it just felt right. I picked it because it was easy to use and checked all the boxes on my list of wants.

I headed to Betterment's website and found the process almost seamless. The app guided me through creating an account and answering a few question about my goals.

A sample Betterment account showing the contact information users must enter when creating an account. (Click to enlarge.)

I chose to focus on saving for a "major purchase," aiming for $100,000 to buy a house in 15 years, a significant goal with a flexible timeline to account for any major life events that may occur. What if I got engaged and wanted to save for a big wedding? What if I decided to have kids before even beginning the house shopping process? I knew aiming for a specific goal would help motivate me to save but, should my priorities change, leave me able to pivot.

A sample Betterment account showing various account options. (Click to enlarge.)

After entering my information to start an account, I transferred my $7,000 from my checking account and set up automatic monthly payments for a few hundred dollars per month. To reach my goal, I need to put in a minimum of $302 per month, but I chose to bump it slightly higher than that.

Now all I have to do is sit back and (hopefully) watch my money grow.

I felt good about my decision, and I immediately texted my friends about it. I still can't tell my best friend exactly where to invest, but I can show her where to start.

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