The Simple Way To Start Investing

Over 80% of Americans Have No Way to Invest Their Money — Don’t Let That Be You.    

This is a post on how to invest. Some posts on this site will be interesting case studies or engaging stories. Others will be more mechanical as they delve into the workings of investing. This is the latter. I apologize for the dry content, but I hope that by laying the groundwork with you for successful investing and accumulating wealth, the future and often more interesting posts will be that much more useful.

According to the U.S. Department of Labor, fewer than 20% of American households have a brokerage account, meaning that they have no way to invest in mutual funds, exchange traded funds (ETFs) or other stocks (I realize that many of these people still may benefit from a work-sponsored retirement plan with some exposure to the markets). If you fall into this vast majority of Americans without an ability to invest, then it will be extremely difficult for you to achieve financial independence. Take 10 minutes tonight and follow the steps below – it’s completely free to set up, it requires no minimum initial investment, and will cost you nothing to keep the account open. Most importantly, opening a brokerage account gives you the platform to reap the rewards from your other smart financial decisions.

On this site, I will keep coming back to a similar theme: take some form of available money (and I’ll cover lots of angles for where that money can come from and exactly how it can become “available”) and then invest it immediately. I’m sure for a lot of readers, you already have a brokerage account and your preferred way of investing. But in case you don’t, here is how you can quickly and painlessly set up a smart way to invest.

I’ll use my favorite investment brokerage company: Vanguard.

Step 1: Open a brokerage account.

Go to and select “open a new account” – again, it’s totally free.

Depending on your needs and preference, this can be an IRA, Roth IRA, or taxable account. I cover in a separate post the order of savings [LINK] in terms of which type of account you should prioritize, but for purposes of this exercise, let’s assume you open a standard individual taxable account (or a joint account if doing this along with your spouse).

The process of opening the account will take 10 minutes, and I admit, Vanguard asks a lot of questions, but most of these are required by federal regulators. Don’t let a handful of questions be what stops you from taking action.

You’ll want to have handy the routing number and account number of an existing savings or checking account so you can use ACH to fund your Vanguard account and make transfers going forward. You also have the option of just mailing Vanguard a check with whatever opening amount you want.

Vanguard will ask you if you want to reinvest dividends. The answer is yes. This will help your money compound and grow faster.

Vanguard will also ask you to consent to e-delivery of statements. The answer here is also yes. In the past brokerage firms like Vanguard charged you a $10 annual fee for accounts with less than $10,000 invested. This fee was to cover the costs of sending you statements and other fund-related correspondence. By accepting delivery via e-mail and Vanguard’s messages portal, you save Vanguard that administrative money, and Vanguard in turn makes your account absolutely fee-free, no matter how little you invest at first.

Finally, the last step for setting up your account is creating a log-in ID and password.

Once the above steps are complete and your funding has been sent to Vanguard, the hard part is behind you and you’re ready to start investing. Your initial investment will be put into what Vanguard calls a settlement fund. Using that money, you can now invest in any stocks, bonds, ETFs, and mutual funds. Don’t get overwhelmed by those possibilities. As you’ll see below, I recommend that you stick with just one investment for now.

Step 2: Select and Purchase a Vanguard ETF

To keep this simple, I recommend buying Vanguard’s VTI ETF. As for when to buy it: each time the balance in your settlement fund Is greater than the price of one share of VTI go ahead and purchase another share. To do this, simply log in and click on your account. First select “Buy and Sell” and then select “Trade Vanguard ETFs (and non-Vanguard ETFs).” Under transaction type, select “Buy.” The symbol you want is “VTI”. For shares, you can start with just 1, but depending on how much you have in your settlement account will dictate how many shares you can buy. And for order type, select “Market” – I’ll cover in later posts the advantages and risks of trading with limit orders. When you’re done hit “continue” to review your order, and then hit “submit.”

Congratulations, you’re now an investor holding a small fraction of over 3,000 American publicly traded companies all in one share, and Vanguard does all of this for you by charging you just .04% per year. Meaning that if you have $10,000 invested in VTI, Vanguard is giving you this wonderfully broad market exposure for just $4/year. And the fee is built into the market price of the ETF, so you’ll never have to pay any separate fees or assessments.

In case you’re wondering, your settlement account pays interest. Let’s say you’re moving $30 at a time over to your Vanguard brokerage account. Until you accumulate enough in your settlement account to buy another whole share of the ETF you choose, your money is still working for you. Vanguard’s default settlement fund is the Federal Money Market., which typically keeps pace with the best online banks in the country. As I write this post, it’s paying a yield of .97% per year, which is more than CapitalOne360 Savings is paying (.75% per year) and less than Ally Bank (1.15%).

Step 3: Repeat

Now that you have your brokerage account and you have started making investments in either your mutual fund or ETF fund, all you have to do is keep transferring money to Vanguard when you can afford to, and then immediately purchase more ETF shares from the settlement account as soon as you have enough to buy another share. That’s it – welcome to the club!

Note: I go through the steps above using Vanguard purely because that is who I use. I firmly believe that you are just as well off using Fidelity or Schwab, and I’m sure readers can give examples of other brokerages that offer equally attractive investments. Just be sure that you choose from the list of ETFs with which each brokerage is affiliated – that way all your trades will be commission-free. The VTI (Vanguard) equivalent on Schwab is SCHB and on Fidelity is ITOT. Be careful not to purchase any of these ETFs in your non-affiliated brokerage account like Scottrade or E*TRADE because you’ll pay a $5-$7 brokerage fee each time, which is extremely costly when only buying one or two shares at a time. The same is true if you try to buy a Schwab ETF on Vanguard or Fidelity, or vice versa.

Additional note: Some readers may argue that mutual funds are an even smarter way to invest relatively small amounts at a time because, unlike ETFs, you don’t have to wait to make a purchase until you have enough for a whole share (as I write this post, the cost of a share of VTI is right around $125/share).

I agree and disagree with this argument.

Let me start with why I disagree. The advantage of buying ETFs is that they give rock bottom expense ratios and there is no minimum account balance to start investing. Vanguard offers a mutual fund with the exact same investment portfolio as VTI. It’s called Vanguard Total Stock Market Index Fund Investor Shares (VTSMX). It requires a $3,000 minimum initial investment, which likely is a big amount for someone just starting out in investing. It also carries an expense ratio almost four times that of VTI: .15% versus .04% per year.

Like I said, I also agree with this argument, but only when you have more than $10,000 invested in this one specific fund. At this point, you qualify for what Vanguard calls the Admiral class of the Vanguard Total Stock Market Index Fund (VTSAX), which brings the expense ratio down to exactly what it is for VTI. And because this is a mutual fund, not an ETF, after you own some of the fund, you can invest as little as you want, whenever you want, with absolutely no fee. You literally can buy $2 at a time, and you can by-pass your settlement fund and pull the money directly from your linked savings or checking account.


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Mr. Financial Independence

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