What is Index Fund/ ETF?

Index fund is a fund with portfolio that tracks an index in the market. For example, the Standard & Poor’s 500 (or more commonly known as S&P 500) tracks the 500 largest companies that trade in the New York Stock Exchange and Nasdaq.

Essentially by investing in this index, you are investing in a small amount of each company that are listed in the index. Let’s say that there is an apartment building that has 100 units and each unit is being sold for $100,000. Instead of buying each unit for $100,000, you then pay $100 to own a share worth $1 of each apartment. This means that you are not an owner of any single whole 1 unit but an owner of a portion of all the unit in the building.

An ETF works like an index fund, except it behaves like stocks, which means you can buy and sell it as much as you want throughout the trading day, as opposed to index fund that allows you to invest once a day. In term of performance however, there is virtually no difference between ETF and Index Fund.

Why Invest in Index Fund?

3 reasons why you should invest in anything really is you want a good return on your investment with the minimal amount of work and acceptable risk.

It provides a better return than individual stocks in the long run

The idea is that the stock market always goes up in the long run. By investing in the market as a whole you are going where the market is going. Compared to picking individual stocks that could go bankrupt and cause you to lose all your money.

You may not beat the market, since you are exactly where the market is but in my book, if I am beating the inflation, I am earning money.

It is easier to invest in index funds than to look for individual stocks

Since you are investing in the whole market, there is no need for you to pour over all the financial statements that you will have to do if you were to invest in individual stocks.

It’s safer than picking individual stocks due to broad diversification

Since you are investing in the whole market, you are much safer than if you were to invest in an individual stock. Let’s say that you invest in an energy company and the CEO of the company embezzled funds from the company which causes shareholder to lose trust in the company. In turn, the stock price will goes down.

Index fund however self cleans itself. Let’s say that you own the whole market, and the same energy company went bankrupt. The value of the company is no longer counted in the stock market. This is why index fund is safer. Sure, the price may goes down a little bit, but it will not goes down as much as if you were to own the company’s stock individually since the company is just a small percentage of the total stock market.

Investing in the stock market has never been easier due to many brokerages allowing you to trade without comission or opening account without fees like Robinhood and WeBull.

And, if you click the invite links on this page for Robinhood and WeBull, we will both get 2 free stocks from WeBull and 1 free stock from Robinhood valued up to $1,000.

Remember, for WeBull you have to complete your deposit within 24 hours

Anyway, by no means do I consider myself a financial expert, but here are 4 financial goals to have in 2020. Why 4? Because 3 is too little and 5 is too many.

1. Curb your impulse purchases
2. Track your expenses
3. Pay yourself first
   • Build an emergency fund
   • Start an Retirement Account
   • Start an investment account
4. Pay off at least 1 debt

Curb your impulse purchases

I know a lot of people who seems to buy things impulsively, whether it’s that second cup of Starbucks coffee, or a clothing article because it’s on sale. The rationales involved are usually somewhere along the line “I have had a long day today, I deserve this” or “I have not purchase anything for a while”.

I am not saying that you should not get a second cup of coffee if you do need it (we all had those days), but rather to differentiate your want and need appropriately. Any small purchases if you are not disciplined will add up over time, when the money spent could have been invested and generate income.

Having a long day or not having bought anything for a while do not justify impulse purchases. Spend your money wisely.

Track your Expenses

For my December 2019 challenge, I decided to start tracking my expenses and spendings again to have a clearer picture on my financial situation. I recommend you to do the same thing for the year 2020.

When you have a clear picture of what your monthly expenses is like, you can see where you can save money or allocate the spending to a better alternative.

There are many apps on iOS and Android that you can use to do this in the app store. Personally, I use the Spendee app because it is simple and easy to use. The user interface also reduces a lot of passive barrier for me to maintain the habit of tracking.

Pay Yourself First

When you pay yourself first, it is not the same as using the money to buy or spend it on yourself first. It simply means when you get your pay checks or earnings for the month, you set aside a portion of it to be invested first before you pay off other things.

There are many ways for you to set aside a portion of your paychecks automatically every month (contact your HR Dept. or your bank). Aim to set aside 30% of your paychecks every month in a separate account with the remaining 70% to be used for everything else. Once you automate the process and forget about the 30%, you will be surprised how you can adjust to just using the 70% for your daily expenses.

This is where tracking your expenses come into play. Depending on how much you get paid monthly, you have to know your fixed expenses (phone bills, mortgage, electricity, etc; party fund does not count) so you have a clear picture how much you can set aside. Do not worry if you can’t set aside 30% as long as you are setting aside money to be invested and commit to increasing the percentage set aside in the following months. The plan is to make this sustainable and long term.

Once you have set aside your pay every month, start making a conscious decision in allocating the money into the following accounts:

• 3 – 6 months of emergency fund
• Retirement Account
• Investment Account

Emergency Fund

In order to make this habit sustainable, you need an emergency fund. Emergency fund will act as a buffer when unexpected emergencies come up that require money. The keyword being emergency, going out for the night with friends that came from out of town is not considered an emergency.

Commit 1/3 of the pay you set aside every month into the emergency fund. The point is by having an emergency fund, you continuously set aside money every month because when these emergencies come, you can continue setting aside 30% of your pay.

Try to aim for 3 – 6 months of fixed expenses for the emergency fund and once you have filled up the fund with at least 3 months of fixed expenses, the leftover can be put into the retirement and investment accounts.

Retirement Account

Put another 1/3 of your set-aside-money into your retirement account. If you live in America, then Roth IRA, traditional IRA or anything your company offers will work. Even better if your company do a saving matching.

Investment Account

Finally, with your last 1/3, invest it. Start a low cost safe investment. Invest in bonds, invest in low cost index funds, invest in CDs as long as you invest it. The point is to get time on your side and compounding is the way to go.

Pay Off At Least 1 Debt

Aim and commit to pay off at least 1 debt. If you have more than 1 debt, start with the one with the highest interest rate or the one with least principal if the interest rates are equal.

Anyway, if you have your own personal financial goals that are not similar to this post, I will be very interested in hearing about them. Drop me a message or an email and let me know.