The Hustler's Digest StaffAre you free of high-interest debt, have some savings in your account, want to invest, but don’t know how to start? Here is a complete guide for you on how and where to invest to secure your future.
Rent, utility bills, groceries, and debt payment might seem to you the only things that you can afford but once you master your budget and have the capacity to save some amount, you can plan to start investing. The money you set aside today and put in some really lucrative investment option will pay you off in abundance at the time when you’ll need it the most.
As a newbie, you’ll have a lot of questions about how to start investing and how much. It is a great trait to have questions unless you don’t acquire comprehensive knowledge about them. As experts say, don’t invest your money in a thing which you don’t understand. Remember that it is your money and you have to make the best use of it.
Being a beginner in the world of investment, you might make some mistakes. It is okay to make mistakes as long as you learn from them and don’t repeat them. Try to establish risk potential in you because if you lose your nerves, you’ll fail very badly.
Understand investing
Investing is a way to set aside some amount of money apart from your monthly expenses so that you can reap the benefits of that money in the future or when you need it the most. Investing is no doubt a means to a happy end as a legendary investor Warren Buffet puts it as “the process of laying out money now in the expectation of receiving more money in the future”.
The aim of the investment is to put your money to work in one or more types of investment vehicles while you are busy in your life in the hopes of growing it over time. Before starting investing there is a must rule of making a comprehensive study of the process.
Investing is a discipline that not only plays astute analysis and outstanding luck but also on people’s behavior. But how do you approach investing if you don’t possess adequate knowledge and background in it? As without prior experience, it is very tough to think clearly and make well-informed decisions.
While there is an ocean of knowledge on the subject and making full sense of it through an extensive search requires deliberate, thoughtful reflection when piercing through what you’ve read. When it comes to growing your wealth and pave a way for your financial independence, investing is an important tool.
Through investing, you can buy assets that will grow in value over time, whether it is real estate like your home, a tax-advantaged investment like a health savings account, and retirement account, bonds, stocks, or alternative investment options. All of these when balanced properly and included in an investment portfolio represent the best investment for young adults.
It’s a fact that having more money to invest would be an ideal case, but this is not always the case. You can make a good start with a lower amount of money as long as you identify the right strategy that can work for you. It is similar to making an online offer, identifying the right conversation rate through optimization, then scaling that out. If you are convinced that by investing one dollar, you’ll make two dollars, you’ll continue to invest one dollar.
Start with a small amount, try different methods, and track and analyze your results. Don’t rush into becoming a millionaire overnight because it won’t happen. Look around and search out options that can work for you and decide upon one and start working.
Investing in the financial markets might sound scary, but it is also potentially the most rewarding option for managing your finances. While major declinings in the market are frightening, investing seems to be one of the ways to outpace inflation and grow your purchasing power over time. Remember that a savings account won’t make you wealthy.
Why is investing important?
Investing is one of the most effective ways to grow your wealth over time while you are busy studying and doing your job. It certainly works for building wealth and saving money for long-term goals like retirement, paying college fees, buying a house, and the list goes on. At times if you sideline a portion of your money, it will pay you off at the very crucial time of your life.
The sooner you make a decision of investing, the sooner you can take advantage of compounding gains, allowing the money that you put into your account to rapidly grow over time. Your money earns money, without you doing anything.
You’re looking for your investment to grow enough to not only keep with the inflation but in fact outpace it, in order to ensure your future financial security. If your gains exceed inflation, you’ll grow your purchasing power over time if you start investing on time.
Things you should keep in mind before investing
1. Look into retirement accounts
For many people, the best place to start is the employer-based retirement plan, more likely 401 (k) which is offered through your employer’s benefits packages. The 401 (k) plan requires you to contribute a portion of your paycheck that will grow tax-free until you start withdrawing near the age of retirement. Many employers also offer matching contributions up to a certain percentage for employees who participate in their sponsored plans.
There are different kinds of 401 (k) plans, and each has different benefits, such as:
A traditional 401 (k) plan
This plan allows you to deduct a certain amount of money from your paycheck so that you don’t pay extra taxes on it today, and only pay it when you withdraw the money later. With the plan, you make contributions with pre-tax dollars, so you get a tax break upfront, helping to lower your current income tax bill. The money; both earnings and contributions, grow tax-deferred until you withdraw it.
A Roth 401 (k) plan
In this plan, you pay tax on contributions earlier and withdraw money tax-free after years of gains. It is a type of employer-sponsored retirement savings plan in which contributions are made to Roth 401 (k) that are taxed but earnings and withdrawals made after retirement are tax-free. In the plan, you must take at least the required minimum distributions after you turn 72.
The logistics of the plan can be confusing especially for the beginners who have never contributed. In that case, you can look to your employer for guidance or your plan’s administrator. The plan’s administrator may sometimes be a big broker such as Charles Schwab, Fidelity, or Vanguard who may offer tools and plannings to help you educate yourself on good investment practices and options available with the 401 (k) plan.
In case your employer does not offer you a 401 (k) plan, you are a non-traditional worker and you can consider opening a traditional Roth IRA or traditional IRA. The traditional IRA is the same while Roth IRA invests taxable income and then is not taxed upon withdrawal. There are also specialized retirement accounts for self-employed workers.
2. Use investment funds to reduce risk
Risk tolerance is a popular norm in investing. When markets decline, many investors flee, but long-term investors see it as a chance to buy stocks at a discounted price. Investors who have the tendency to tolerate the risks may enjoy the market’s average annual return, about 10% annually. But you have to stay strong in the market when it gets rough.
Some people want a quick score in the market without facing any downturn, but as a matter of fact, the market does not work like that and you must endure the downturns in order to enjoy upcoming gains. To reduce the level of your risk, you must be used to diversification.
You can be more active and aggressive in your allocation of the stocks when you are young and your withdrawal date is distant. But when you get closer to the retirement age or date you are looking to withdraw, start scaling back your risk. Your diversification should grow more with time so you don’t risk major losses in a market downturn.
Investors can get diversified portfolios more quickly and easily with an index fund which works as instead of trying to actively pick the stocks, it passively owns all the stocks in the index. By owning a wide array of companies, investors avoid the risk of investing in one or more individual stocks, though they won’t eliminate all the risk that comes from stock investing. Index funds are given choice in 401 (k) plans, you won’t need to find one in yours.
Another common tool that can reduce risk aversion and make your investment journey simpler and easier is a target-date fund. This automated “set it and fund it” funds adjust your assets to a more conservative mix as you approach retirement. Traditionally, they move from a higher concentration in stocks to a more bond-focused portfolio as you reach your date.
3. Balance long-term and short-term investments
If you are focusing on short-term investments that can pay you within the next five years, high yield savings accounts, money market accounts, and certificates of deposit will be of the most benefit. FDIC insures these accounts, so your money is going to be there when you need it.
Your return will be as high as long-term investments, but it is safer in the shorter term. Note that investing in the short term is generally not a good idea because if there is a downturn, it is not plausible that the market will get stability in a five years term.
The stock market is an ideal vehicle for long-term investments and it can bring you a lucrative return over time. Whether you are looking to buy a house in 10 years, saving for retirement, preparing to pay your child’s college tuition, you have a variety of options- index funds, mutual funds, and exchange-traded funds all offer stocks, bonds, or both.
Getting started is easier now than ever with the rise of online brokerage accounts designed to fit your personal demands. In fact, it’s never been cheaper to invest in stocks or funds, with brokers slashing commission to zero and fund companies continuing to cut their management fees. You can even hire a Robo-advisor by paying a very reasonable fee to pick the investments for you.
4. Don’t fall for easy mistakes
One of the common mistakes new investors make is being too involved. The experts say that actively traded funds usually underperform passive funds. You should continuously keep yourself from checking (or changing) your accounts for more than a year in order to let your money grow and you have peace of mind.
Another riskier trap is failing your accounts as they are intended. Retirement accounts such as IRA and 401 (k) accounts offer tax and investing advantages but specifically for retirement. Use them for almost anything else, and you’ll likely get stuck with additional penalties and taxes.
Maybe you are given an option on your 401 (k) plan to take out a loan, in that case, you don’t only lose the money that can be earned, but you also have to pay back your loan within five years of time, unless you have used it to purchase a house. Otherwise, you’ll have to pay a 10% penalty on the outstanding balance. Also, keep in mind that your retirement plan is meant to be used when you are retired, so, before spending money from your account, make sure if it is worth spending.
5. Keep learning and saving
It is crucial for kicking out your investment to educate yourself about the ways and strategies that can help you throughout the process. Try to learn as much as you can about investing; read books, online articles, listen to experts on social media, and even YouTube videos. There are great sources out there from where you can equip yourself with knowledge about the subject and help you figure out the right strategy.
If you want to give it a serious try, you can also seek out a financial planner who would work with you to set financial goals for you. As you try to find a good advisor, make sure that he will be working in your best interest. Ask him questions about their recommendations and through that confirm that he is acting in your best interest and negotiate his payment plan so that you won’t be hit by any hidden fee during his services.
How to start investing?
Get started investing as early as possible
Investing at an early age is one of the best ways to receive a solid return at an early age. That is because of compound earnings which means that the money you have invested starts earning its own returns. Compounding allows your investment to snowball over time. The sooner you invest the sooner you get the returns.
In practice, it works this way: let’s say you invest $200 every month and earn a 7% average annual return. At the end of the 10-year period, you’ll be having $33,300. Of that amount, $24,200 is the amount that you have contributed and $9,100 is the interest you’ve earned on your investment.
Know that earning from the stock market won’t go in a steady direction and there will be ups and downs in the market, but investing earlier means you have enough time to ride them out and decades for your money to grow.
Determine how much to invest
How much you should plan to invest largely depends on your investment goal and when you want to reach it. A common investment goal is retirement and buying a house. If you have received a retirement account at work such as 401 (k), and it offers you matching dollars, you can take that money and contribute enough to that earned account to earn a full match. That’s free money that you won’t want to miss out on.
If your investment goal is retirement, you would want to invest 10-15% of your income. For other investing goals, consider your time horizon and the amount you need, then work backward to break that amount down into weekly or monthly investments. Before opening an account, you need to know how much you can invest monthly. Determine your expenses and budget and set out a portion of your amount, but don’t rush to open a Roth IRA account yet.
● Save an emergency fund
Even before investing, set a reasonable amount of money into your savings account. For instance, if you start investing and lose your job in the middle, you don’t have to sell off your investments to cover it.
● Pay off high-interest debts
If you have high-interest debts, pay them first because there is no sense in investing for 8-10% for potential return if you have to pay 15% interest on a credit card. Focus on taking care of paying high-interest debts before maxing out your investment account.
● Don’t miss the match
The only exception to the above-mentioned rules is your employer-sponsored retirement accounts. If a company match is available, invest enough to get enough matches while paying off your debt. This is typically a 50-100% prompt return on investment, so don’t miss out on it. Once your finances are in order and high debts are taken care of, you can take the additional funds you have and start investing.
Open an investment account
If you haven’t got a retirement account from your employer, you can invest in an individual retirement account such as a traditional or Roth IRA for your retirement. If you are investing for another goal, you don’t need to have a retirement account and choose a taxable brokerage account. You can take out money from your brokerage account at any time.
A common misconception about opening an account is that you need a lot of money to open an investment account. In fact, many online brokers, which offer both Roth and regular brokerage investment accounts, require no minimum investment amount or very little amount which can be sought.
Understand investment basics
Whether you start investing through your regular 401 (k) or similar employer-sponsored retirement plan, traditional Roth or IRA, or another standard investment account, you choose what to invest in. Before making an investment, it’s better not to just follow the norm rather have a look into each instrument and understand how much risk it carries. The most popular investment for those who are just starting investing include:
● Stocks
Stock is a share of ownership in a single company that you buy for a share price. The price can range from single-digit to a couple of thousand dollars, depending on the company. Stocks can also be bought through mutual funds. As the company grows, your stocks gain value while some stocks will also share profit in the form of dividends. Stocks typically grow more in value than other assets over time but they contain an equal risk of losing at the same time.
● Bonds
A bond is essentially a type of loan to a company or government entity that agrees to pay you back in a certain amount of time. Meanwhile, the interest is collected on that money. Bonds are less riskier than stocks because you know exactly when you’ll be paid back and how much you’ll earn. But bonds are not a good investment for long-term returns, so they should make up only a smart part of your long-term portfolio.
● Real estate
Investing in real estate means you buy a property to improve upon or rent it out for income. Investing in real estate can be a risky option but if done with the right party, you can make wealth really quickly. If you want to invest in real estate without buying a property, a REIT allows you to put money into an investment company that purchases, rents, improves real estate for you, and gives you a piece of the profit.
● Mutual funds
A mutual fund is an investment in groups that is done by a number of individuals together. Mutual funds allow the investors to skip the work of picking and collecting individual stocks and bonds, instead of getting a diverse collection of stocks in one transaction. Because of the inherent diversification of mutual funds, they are generally less risky than individual stocks.
Some mutual funds are managed by a professional, but index funds follow the performance of a specific stock market index such as the S&P 500. Index funds charge lower fees than actively managed mutual funds because they eliminate professional management in their service. Most of the 401 (k) plans offer a bunch of mutual or index funds with no minimum investment, but outside of these plans, you have to pay a minimum of $1,000 for these funds.
● Exchange-traded funds
ETFs work in a similar way as mutual funds which means that it bundles together many individuals’ investment. The difference with ETFs is that they trade throughout the day like a stock, and are purchased for a share price. The share price of an ETF is generally lower than the minimum investment requirement of a mutual fund. It makes a good opening option for new investors.
● Asset allocation
Asset allocation is described as the division of your investments across asset classes. It is typically gauged in an investing world by how much you have invested in bonds, stocks, and other assets. Setting your proper asset allocation depends on your age, your investment goals, and risk tolerance. Once you have an asset allocation that fits your investing style, you can use it as a compass for your investment strategies.
Pick an investment strategy
Your investment strategy depends on your savings goals, how much money you need to save them, and at what time you need them. If your savings goal stretches more than 20 years such as retirement, you can safely invest in stocks. But selecting specific stocks can be challenging, and time-consuming, so for most people, the best way to invest in stocks is through low-cost stock mutual funds, ETFs, and index funds.
If you’re saving for a short-term goal such as for your college fee, the risk associated with stocks means you’re better off keeping your money safe, in a cash management account, online savings account, or low-risk investment portfolio.
In case you don’t want to decide, you can open an investment account through a Robo-advisor which is an investment management service that will help you build and look after your investment portfolio. Robo-advisor largely builds their portfolios with low-cost ETFs and index funds. With Robos, you can start really quickly because they offer low costs and low or no minimums. They charge a small fee for portfolio management, typically around 0.20% of your account balance.
Avoid risky investing at a young age
When you decide to invest in stocks, remember that stocks can be exciting but in a downturn, you can lose a lot of money that you can otherwise grow in mutual funds. If you pick the wrong company, you can lose all of your money in some cases. It’s better to pick a low-cost index fund and enjoy the growth of a diversified portfolio.
Initially, pick a small portion of your investment, let’s say 10% when you choose to pick stocks yourself. Do your homework and see how the company operates, how it makes money, and how they’re continuously going to grow.
When should you start investing?
Learn that there is never too early or too late for investing. If you invest now, you’ll receive the returns very soon. The social security administration mentions that social security benefits only cover 33% of the cost of an average American’s retirement plan, the rest is to be paid by the individual which will be filled by personal savings and return on investments. So, it’s better to decide upon a better investment option as early as you can.
It’s not only retirement that requires your savings or investments, but there is more to invest for than that. Investment can help you buy a house, start a dream project, travel, and even pay your bills in the future. If you decide to invest in the stock market, you’ll have a better chance to watch your investment grow over time. In the case of investing in bonds, however, it will give you a steady stream of income.
Investing for short-term profits is elusive, and oftentimes elusive. That is why focus on a longer investment horizon which will give you a chance to realize extended annualized returns on your investments. Your different life stages demand different investment goals, focus on diversified options to maximize your returns.
When you are young, you have many years ahead to grow your money to safeguard your future. Later in life when you marry, your investment goals will be different and you may prioritize your family and plan to invest in your children’s college education. As you get older, your focus can be on financing your retirement. So, when you are mapping out your investment plan, keep in mind the current age and investment goals.
Best age to start investing
No matter what your current age when you decide upon investing, you should be financially ready to invest as soon as you can. Because the sooner you begin investing, the more your money gets the time to grow. Keeping in view your current financial condition, you can look around for the available options to invest.
For example, if you don’t owe any debt and have a full emergency fund in place, you should invest 15% of your income. If you start investing $500 a month, at the age of 25, you can have between $3.1 million and $5.8 million by the age of 65 based on a 10-12% rate of return. Now, if you wait until you reach 35, you’ll be having between $1.1 million to $1.7 million when you turn 65. Waiting for 10 years can cost you millions of dollars.
As you start investing, keep this in mind; never invest in anything which you don’t understand. It’s your money and you should spend it in the best possible manner. Ask as many questions as you can, read a lot about stocks, and find some professionals who will guide you through the whole process.
FAQs about investing
● How much money do I need to start investing?
There are multiple options where you can invest. With ETFs, you can invest less than $100, while mutual funds often require you to invest at least $1,000. A share of stock can range from a few dollars to thousands of dollars so you need to invest accordingly. EFTs and mutual funds can be wise long-term investments since they both invest in multiple companies, the risk is spread out and you’re vulnerable to a wider range of asset allocation.
● How to find a financial professional?
If you currently don’t have a financial expert as you get to start investing, search for a financial professional in your area using FINRA’s BrokerCheck. Depending on where you live, you can find a local or national firm better suited to assist you in your investment decision.
● What should I discuss with my financial professional?
As you find your financial professional you should discuss your financial goals, explore the full spectrum of your investment solutions best suited to your portfolio, and ask him full charges so that you don’t get to discover some hidden fee later on. Make sure to read each fund’s prospectus prior to investing so that there are no sudden surprises later.
● Do I need an exit strategy when investing at a young age?
If you are investing in index funds and mutual funds for the long term, you should not worry about selling your investments very often. They’ll keep on fluctuating, but sticking to your target asset allocation over the long term is the best course of action. As you are investing in stocks, you need to keep an eye on each company you’re investing in which will guide you when to make a sale. In this case, you need an exit strategy.
Conclusion
For an adult, there are a great number of responsibilities from paying for college education, buying a home, to saving for retirement are some of them. This requires not only financial stability that you can earn from your regular job but more than that. Here, investments play their part which can ensure a safe future for the investor. Investments let the money grow over time so it becomes a passive source for the investor to make money while spending little time.
The general rule for investment is to invest that you can afford to lose. Investors should strategize a plan before actively diving into the process. There are a lot of resources available to guide a person through the process and teach different techniques that can guide a person to make a well-informed decision. As experts say, don’t invest in a thing which you don’t understand.
So, as a matter of fact, one should thoroughly study stocks, bonds, or mutual funds and based on his current financial situation, should make a decision to invest. If you can’t decide on how and where to invest, you can consult a financial professional who can take you through the process and help you make a good decision.
