There's quite a bit to get through here, we'll try to keep it really high level.
What is an index fund?
Historically, stocks are the best long term investment (if you have enough time to weather the ups and downs). But buying stocks in only a few companies is risky (what if one of your companies goes bankrupt?) and buying stocks in many companies is a lot of work. An index fund is an efficient way to own many companies at once.
Which index fund should I buy?
There are many types of index funds, but we recommend buying a low-cost S&P 500 index fund. This is roughly the same thing as splitting your money evenly between the 500 largest U.S. companies according to their size. It's much less risky than buying only a handful of stocks, and much easier than figuring out how to divide your money between 500 individual stocks.
What is a low-cost fund?
When you buy any kind of fund, the company managing the fund charges you a fee every year. The fee is paid as a percentage of your total investment, and is called the expense ratio (or cost ratio). For index funds, the expense ratio is very, very small (currently 0.03% for a good S&P 500 index fund), but for other types of funds it can be a full 1% or even higher.
Why does low-cost matter?
How much difference does a 1% fee make? Let's find out by comparing a low-cost fund (0.03% expense ratio) and a high-cost fund (1% expense ratio). We will assume both return 6.7% before fees (the long term average for stocks). For fun, see if you can guess how much money the 1% fee will cost you in total.
Current Age Annual Investment Contribution