Saving is the first step to building wealth. But you’ll likely never get rich just from saving. You also need to put your savings to work, which is to say you need to invest.
When people talk about investing, stocks are usually what come to mind, but, of course, you can also invest in real estate and much more. In this guide we will breakdown some smart ways to help you get started on investing your money. It is never too late to start investing your money!
Table of Contents
When Is the Right Time to Start Investing?
With stock prices falling, now is a good time to get a great deal. If you buy at the market dip, you can make a lot of money when stocks go up again. And as history shows us, stock prices eventually go up after they crash.
How you invest and what you should be investing in may vary with age. For instance, if you’re 30 years old, you’ve got a few decades before you retire. You can play with long-term investments such as stocks that would be too risky for someone on the cusp of retirement. After all, stocks can lose their value quickly, but if you have 30 more years before you need that cash, you can afford to take that gamble.
If you’re closer to retirement age, you want to focus on maintaining what you’ve already got. Safer, steadier investments — especially where there are dividends involved — are a better choice for you.
Where Can You Invest Your Money?
Before you start investing your money, understand that there are different types of asset classes available. An “asset class” is a group of similar types of investments. You can invest in one asset class or many. A mix of asset classes, or diversification, gives you a well-rounded portfolio that can weather ups and downs.
Here are the basic asset classes for investors:
- Equities: This is also known as stocks, or when you own shares in a company.
- Fixed Income: Also known as debt. You lend money to a government or institution and will be paid interest in return. Examples include bonds and certificates of deposit.
- Real Estate: Here, you own physical property.
- Cash: Also including cash equivalents. You invest your money in an interest-paying savings account, for example.
Because you need to have a diversified portfolio, alternative investments are a good addition, although they have their own set of risks to consider.
Setting A Goal
Figuring out how to invest money starts with determining your investing goals and when you want to achieve them.
- Long-term goals: The universal goal is often retirement, but you may have others as well: Do you want a down payment on a house or college tuition? To purchase your dream vacation home or go on an anniversary trip in 10 years?
- Short-term goals: This is next year’s vacation, a house you want to buy next year, an emergency fund or your Christmas piggy bank.
In this post, we’re largely focusing on long-term goals. We’ll also touch on how to invest with no specific goal in mind. After all, the aim to grow your money is a fine goal by itself.
Picking An Investment Account
To buy most types of stocks and bonds, you’ll need an investment account. Just as there are a number of bank accounts for different purposes — checking, savings, money market, certificates of deposit — there are a handful of investment accounts to know about.
Some accounts offer tax advantages if you’re investing for a specific purpose, like retirement. Keep in mind that you may be taxed or penalized if you pull your money out early, or for a reason not considered qualified by the plan rules. Other accounts are general purpose and should be used for goals not related to retirement — that dream vacation home, the boat to go with it or a home renovation down the line.
Here’s a list of some of the most popular investing accounts:
If you’re investing for retirement:
- 401(k): You might already have a 401(k), which is offered by many employers and takes contributions right from your paycheck. Many companies will match your contributions, up to a limit — if yours does, you should contribute at least enough to earn that match before investing elsewhere.
- Traditional or Roth IRA: If you’re already contributing to a 401(k) or don’t have one, you can open an individual retirement account. In a traditional IRA, your contributions are tax-deductible but distributions in retirement are taxed as ordinary income. A Roth IRA is a cousin of the traditional version, with the opposite tax treatment: Contributions are made after-tax, but money grows tax-free and distributions in retirement are not taxed. There are also retirement accounts specifically designed for self-employed people.
If you’re investing for another goal:
- Taxable account. Sometimes called nonretirement accounts, these are flexible investment accounts not earmarked for any specific purpose. Unlike retirement accounts, there are no rules on contribution amounts, and you can take money out at any time. These accounts don’t have specific tax advantages. If you’re saving for retirement and you’ve maxed out the above options, you can continue saving in a taxable account.
- College savings accounts. Like retirement accounts, these offer tax perks for saving for college. A 529 account and a Coverdell education savings account are commonly used for college savings.
With the exception of a 401(k) — which is offered through your employer — you can open these accounts at an online broker.
Opening an Account
Now that you know what kind of account you want, you need to choose an account provider. There are two major options:
- An online broker will allow you to self-manage your account, buying and selling a variety of investments, including stocks, bonds, funds and more complex instruments. An account at an online broker is a good choice for investors who want a large selection of investment options or who prefer to be hands-on with account management.
- A robo-advisor in a portfolio management company that uses computers to do much of the work for you, building and managing a portfolio based on your risk tolerance and goal. You’ll pay an annual management fee for the service, generally around 0.25% to 0.50%. Robo-advisors often use funds, so they’re generally not a good choice if you’re interested in individual stocks or bonds. But they can be ideal for investors who prefer to be hands off.
Don’t worry if you’re just getting started. Often you can open an account with no initial deposit.. Of course, you’re not investing until you actually add money to the account, something you’ll want to do regularly for the best results. You can set up automatic transfers from your checking account to your investment account, or even directly from your paycheck if your employer allows that.
Investments and Tolerance Risks
Figuring out how to invest money involves asking where you should invest money. The answer will depend on your goals and willingness to take on more risk in exchange for higher potential investment rewards. Common investments include:
- Stocks: Individual shares of companies you believe will increase in value.
- Bonds: Bonds allow a company or government to borrow your money to fund a project or refinance other debt. Bonds are considered fixed-income investments and typically make regular interest payments to investors. The principal is then returned on a set maturity date.
- Mutual funds: Investing your money in funds — like mutual funds, index funds or exchange-traded funds — allows you to purchase many stocks, bonds or other investments all at once. Mutual funds build instant diversification by pooling investor money and using it to buy a basket of investments that align with the fund’s stated goal. Funds may be actively managed, with a professional manager selecting the investments used, or they may track an index. A Standard & Poor’s 500 index fund, for example, will hold 500 of the largest companies in the United States.
- Real estate: Real estate is a way to diversify your investment portfolio outside of the traditional mix of stocks and bonds. It doesn’t necessarily mean buying a home or becoming a landlord — you can invest in REITs, which are like mutual funds for real estate, or through online real estate investing platforms which pool investor money.
There are plenty of ways to start investing with little money, with many online and app-based platforms making it easier than ever. All you have to do is start somewhere. Once you do, it will get easier as time goes on, and your future self will love you for it.
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