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Financial Freedom: Investing 101 with Latina Finance Expert Katia Chesnok

Katia Chesnok is a Latina money expert and coach and the founder and content creator of Economikat, a personal finance educational platform. She educates Latinx on all things money and empowers them to earn more, save more, side hustle and start investing to build wealth.

When it comes to investing some of the typical comments are “only rich people can invest” or “investing is hard” and these tend to come from people who have never been exposed to investing. Most of us grow up thinking that we only invest when we buy a new car, a house, or even a fancy watch but ultimately it’s thought of as something rich people do. But, investing is more than that amiga! It’s an act of consistency and patience where we plant today, we let our money grow and we’ll be able to harvest in the future.

Think about what your life will look like in 10, 20, 30 or more years. Do you want to quit your job and retire earlier than expected? Do you want to build generational wealth and take care of your parents and extended family? Do you want to have passive income? What are your short, medium and long term personal and financial goals?

We can invest our money in the stock market, in businesses, in real estate and most importantly in ourselves. In this article, I’ll be focusing on how we can start investing in the stock market, especially how to start investing for the long term.

Some financial goals to keep in mind before investing are to define our financial and personal goals, know our net-worth (our assets minus our liabilities), have a budget, research investing terms, pay off high interest debt and most importantly build your emergency savings fund.

investing 101
Photo courtesy of Katia Chesnok

What is Investing?

How to Start Investing
Photo courtesy of Katia Chesnok

Investing is one of the keys to build wealth by making your money work for you. In order to invest successfully, we have to have a clear strategy, know the type of investor we want to be and set our specific financial goals. Why will our money grow when we invest? Because of the magic of compound interest. Compound interest is basically the interest we earn on interest.  The purpose of investing is to grow your money over the long term. Saving your money is not the same as investing your money. Saving is recommended for short term goals and to have liquidity, meaning that our funds will be easily accessible in case we need them for any emergency or if we’re saving for a specific goal such as buying a house.

One of the disadvantages of keeping all of our money in a savings account only is that the value of our money decreases over time due to inflation and this makes our money saved and our interest less valuable.

To start investing in the stock market, these are the types of accounts we can open:
– 401k, (403 & 457 for government employees & non-profit)
– Traditional individual retirement account (IRA)
– Roth Individual retirement account (Roth IRA)
– Standard or Taxable brokerage account
– 529
educational savings plans (tax advantaged investments)

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs for your children.

HSA (health savings accounts) tax advantaged investment savings accounts. I

It’s like a savings account but only to be used for be used for qualified healthcare expenses.

Something very important to know is that if we open a Roth IRA, for example, it doesn’t mean that we’re automatically investing; in order for us to be invested and grow our money we have to invest in investment vehicles such as stocks, bonds or index funds for example.

Inside these accounts, these are the types of investments (investment vehicles) we can buy to actually start investing:
– Stocks
– Bonds
– Mutual funds
– Index funds
– Exchange Traded Funds (ETF’s)
– Options

Types of Investment Accounts

investing accounts
Photo courtesy of Katia Chesnok

Investing for retirement:

There are two ways we can start investing long term for our retirement:

Invest using your employer sponsored retirement savings plan such as 401k, 403b, 457(b) in most cases, your employer matches our contribution. That’s free money, so if you’re employed definitely take advantage of this. A 401k is basically a company-sponsored retirement account that you as an employee can contribute to. Go to your Human Resources department to sign up and start investing. As of 2020 and in 2021, the basic limits on employee contributions are $19,500 per year for workers under age 50 and $26,000 for those 50 and up. The contributions you make to your 401k, 403b or 457b are tax-deferred meaning that you won’t pay taxes now amiga! But, you will pay taxes when you’re able to withdraw without penalties at 59 years old.

Invest using self-created retirement accounts such as Traditional IRA and Roth IRA. These investment accounts are not company sponsored and we can set them up by ourselves. We can also open these investment accounts even if we’re employed and have a 401k.

IRA retirement plans
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A traditional IRA allows you to make pre-tax contributions, it is tax deductible and your contributions grow tax-deferred. There are no income limits to open this account and the contribution limit is $6000 in 2021 and $7000 if you’re 50 years or older. On the other hand, a Roth IRA allows you to make after-tax contributions, it’s non-tax deductible and if you earn over $139,000 per year you can’t contribute to a Roth IRA. The contribution limit is also $6000 in 2021 and $7000 if you’re 50 years or older. The main difference between a traditional IRA and a Roth IRA is whether it makes more financial sense to you to enjoy tax free withdrawals in the future or take advantage of tax benefits today.

You can open a traditional IRA or Roth IRA using many brokerages including WeBull, Fidelity, Charles Schwab, Vanguard.

Non-retirement investing:

You can also invest outside of retirement, especially after you research more about investing and understand basic investing terms. There are many ways you can start investing for non-retirement:

1. Start working with a financial advisor (check out Latina financial coach Kara Perez of Bravely Go)
2, You can open a taxable brokerage account with a major brokerage firm such as Fidelity, Charles Schwab or E-Trade or Vanguard.
3. You can open an account with a robo-advisory firm, which is a brokerage that offers automatic advisory services (algorithm based, no financial advisor needed) some examples are Acorns and Betterment.

Investment Vehicles

index funds pros and cons
Photo courtesy of Katia Chesnok

What is a stock?

Stocks are securities that represent an ownership share in a company. When you own a stock, you own part of the company. For investors, stocks are a way to grow their money and win against inflation over time. Public companies sell their stock through a stock market exchange, like the Nasdaq or the New York Stock Exchange.

What are bonds?

Bonds are units of corporate debt issued by companies and securitized as tradeable assets.Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.

What are Mutual funds, index funds and ETF’S?

A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities. They give small or individual investors access to diversified, professionally managed portfolios at a low price.
Index funds and ETF’s are types of mutual funds. An index fund is a portfolio of stocks, securities or bonds designed to mimic the composition and performance of a financial market index. An index mutual fund provides broad market exposure, diversification, low operating expenses and low portfolio turnover.

Some of the pros about investing in index funds is that they track the S&P 500 index (stock market index that measures the stock performance of 500 large companies in the U.S.), they have a low portfolio turnover that leads to low operating expenses, and it’s usually a low-cost way to invest. One of the cons is that it’s usually fixed to a specific investing style so there’s less flexibility if you’re an experienced investor.

ETF’s are very similar to index funds, the difference is that ETFs can be bought and sold at any point throughout the trading day. ETFs can also be sold short or purchased on margin. ETFs also typically carry lower fees than the equivalent mutual fund.

What are options? Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.

These are just some of the ways you can start investing in the stock market. You can also invest in real estate, REIT’s (real estate investment trust) and commodities. Before you start investing it’s recommended that you have from 3 to 6 months of emergency savings fund, that you are debt-free (or at least that you’ve paid off your high interest debt) and that you know which type of investor you want to be (if you’re risk averse, conservative, moderate or want more growth).

We all can be investors as investing doesn’t have to be difficult. It can definitely be confusing, but once we learn some investing basics and most importantly have clear financial goals we can start investing for our retirement and for our long term.