I know I should invest my money but it scares me – The cut | Vette Leader

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I’ve been saving bucks since my 20s, and now I have about $40,000 in cash (I’m 32). I keep reading about how to invest for retirement, but I’m scared of it. I know nothing about investing and it mostly sounds like gambling to me. (Also, when I was growing up, my parents lost a lot of money through bad investments. They let my uncle invest their money, which was probably the main problem, but it was bad. They still couldn’t retire.)

I know my savings have already lost value due to inflation and I could have avoided that by putting my money on the market. Or maybe not? I keep hearing that the market is particularly turbulent right now, so maybe I should wait a little longer. I also have no idea how or where to start. What is the safest way for me to do this? Any other tips for nervous beginners?

I’m impressed by your confidence. Many people are nervous about investing their money but can’t pinpoint exactly why — usually it’s because they don’t understand how the process works. And who can blame them? I’m not here to make you or anyone feel bad. The stock market is complex and full of unknowns. It makes people anxious for a good reason: it’s out of their control. It may seem less risky to keep your money in your bank account where you can see it.

But in reality the opposite is the case. The only thing for sure is if you keep your savings for the long term out of the market is that its value will diminish over time. In 30 years, yours will be worth $40,000 less than the half its current purchasing power, even if inflation remains at a modest 3 percent (it currently stands at 9 percent). That’s a big risk to take with your money! But if you invest it right, its growth will outpace inflation by even the most pessimistic estimates — a much less risky decision, objectively speaking.

To determine your next steps, I spoke to two certified financial planners who have experience working with clients in your position. We’ll get to her advice in a moment. First, I also want to address your parents’ history with investing, which understandably freaked them out.

Everyone’s relationship with money is shaped by their childhood experiences, be they good or bad. (I vividly remember my dad buying a new TV when I was 8 and worrying we wouldn’t be able to afford it – those moments are deeply moving.) Watching your parents lose their savings to bad investments, was a major event that significantly influenced your attitude towards money in adulthood. If I were you, I’d be afraid to invest too. But this fear actively harms your future financial security.

Three things can help you process this: education, exposure, and professional help. By learning more about investing (and trying it yourself), you’ll become more confident in avoiding your parents’ mistakes. You might also consider meeting with a certified financial planner who specializes in clients with difficult financial histories and/or money scares. (Planners trained in dealing with the psychological aspects of personal finance are often referred to as “integrated financial planners,” and you’ll find them on the XY Planning Network.)

Now for more specific advice on your $40,000. Your first step is to determine what to save for your emergency fund, says Manisha Thakor, a certified financial planner and founder of MoneyZen. Ideally, you should have your living expenses hidden away in a high-yield savings account for about four to six months. It’s there for a worst-case scenario, like losing your job, a freak accident, etc. Put it aside and know it’s there to protect you.

Next, you should figure out how much to invest. “I always ask my clients how much money do you have that you don’t have to spend in the next five years?” says Thakor. “That’s the money you’re going to put on the market.” It’s okay if this number is small to start with. The longer your schedule, the more your investments will grow. It also gives you wiggle room when the market falls. You always want to be able to weather turbulent times without being forced to withdraw funds and incur losses. (Your emergency fund also ensures you have enough cash when you need it.)

Now you have to decide how you will invest it. Assuming your annual income is less than $144,000, then you are eligible to open a Roth IRA, which is a specific type of retirement account for money that you have already paid taxes on (i.e., the money that you saved from your paychecks). This is a great starting point for you. The maximum amount you can put into a Roth IRA this year is $6,000, according to the IRS. Get the most out of it – you can afford it! That money grows tax-free until you’re ready to take it out, ideally in retirement (you have to keep it in the account for at least five years per IRS rules, but you’re already planning to, for reasons we’ve covered).

There are many ways to open a Roth IRA. But for the sake of simplicity, Stephanie Genkin, a certified financial advisor and owner of My Financial Planner, recommends doing so at Vanguard, an investment management company with low fees and a very user-friendly website. (Thakor is also a Vanguard fan; full disclosure, I keep my IRA there too.)

From there, Thakor advises investing in a target date fund, which is a broad mix of thousands of different stocks and bonds designed to “mature” as you near retirement age. Simply put, its content is curated to prioritize growth when you’re younger and then evolve to prioritize stability when you’re older. This ensures that when you are ready to withdraw and take distributions from the account, a market downturn will not have a major impact on your funds. A good choice for you would probably be a target date of 2050 or 2055. Once you have that in place, all you have to do is contribute each year, ideally the annual maximum. Congratulations.

Another important consideration: Does your employer offer a 401(k) or similar retirement plan? If so, you should contribute directly from your paycheck, at least 10 percent of your salary, especially if there’s an employer match (free cash!). This keeps your taxes lower and prevents you from second guessing yourself if you occasionally panic when investing (it happens automatically so you don’t have to think about it). You can also select a reference date fund for this.

Finally, you mentioned that you are nervous about the current market turmoil. I agree that there is a lot of panicked noise being made about this. The thing is, nobody times the market perfectly. As Thakor puts it, “There is a classic saying that ‘time in the market counts more than timed coordination the market,'” she says. “You don’t have to sit and worry about what the market is doing. What is most important is that your money is in the market on its best days. And the way to do that is to put it in and leave it there.”

Eventually, some people will tell you that you’re behind on your retirement savings because you haven’t started investing yet and you need to “catch up.” You can ignore them. The most important thing is that you start and stay consistent. Once you feel more comfortable, you can invest more and more of your savings and watch them grow.

Charlotte Cowles, The Cut’s financial advice columnist, answers personal questions from readers about personal finance. Email your money puzzles to mytwocents@nymag.com

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