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Beginners Guide to Investing: Easy ways to start now
Is it time to start investing? The answer is almost always yes. Investing in stocks and other products is often the best way to build wealth over time. But exactly how and where do you start? We’ll start with the basics so you can learn how to start investing, no matter your income level.
Investing1 vs. Saving
The terms investing and saving are often used interchangeably, but investing money and saving money are two different things. Generally when you choose to invest your money, you’re purchasing an asset with the expectation that the asset will make money over time and you’ll generate more income in the future. Most likely when you begin investing you have a specific goal in mind--for your retirement, buying your first (or second) home, or maybe your child’s education.
You probably have a specific goal in mind when saving money as well, but saving is gradually setting money aside, typically for shorter-term goals or perhaps an emergency fund. Investing is focused on growing your money and is usually used for longer-term goals. Typically savings are guaranteed and readily accessible—if you deposit money into a savings account you’ll be able to withdraw the amount of money you put in. With investing, you don’t have instant access to your money because selling the investment takes time. Investing is not guaranteed, so it is riskier but has the potential for a greater return.
How do I start investing?
First, make sure that you have a savings account or emergency fund in place before you begin investing. Even if you don’t have the recommended six months of savings in place, make sure you’ve got something in the bank to fall back on when life happens or emergencies come up.
Once you have savings in place, use these 5 tips to start investing, no matter your income level.
Understand your investing options
There are a variety of types of investments that you can choose from. Make sure you understand all your options before making a decision about where to focus your investments.
- Stocks: Stocks are shares of a company. Also called equities. Stocks typically provide higher returns, but they can also come with more risk.
- Bonds: Bonds are like IOUs for loans that the investor makes to the borrower, usually a company or governmental entity. Bonds have dates when they come due, at which time the original amount invested as well as interest earned will be paid out. Investors use bonds to give them fixed income.
- Mutual Funds: Mutual funds use pooled money from investors to buy an array of stocks, bonds, and other securities. They're managed by an investment company, which charges a fee. Mutual funds aim to beat the market, but there's no guarantee they will over time.
- Index Funds: Index funds are a type of mutual fund. Rather than investing in a selection of securities, index funds invest in all the shares that make up a particular index, like the Standard & Poor's 500 index of blue chip stocks. Index funds have average returns but lower fees.
- ETFs: ETF stands for exchange-traded funds. They're a type of index fund that's traded like stocks as opposed to mutual funds. They're better for investors who want the ability to trade multiple times per day. As with index funds, fees for ETFs are lower than for mutual funds.
- Annuities: Annuities are a type of insurance product. When an investor buys an annuity, the insurance company agrees to pay them a fixed amount either immediately or in the future. Investors often buy annuities to manage their income in retirement.
To keep it simple, you might want to start with an index fund. Because these bundles of investments—primarily stocks—reflect the totality of a particular exchange like the NASDAQ, you can rest easy that your portfolio is well diversified. If one company suffers, all of your money won't go down with it.
Reflect your personality
Are you a long-term planner who clings to stability and tradition? Or are you energized by the world of tech and innovation and want to try for steep gains? The answers to those questions should help you determine your “risk tolerance” (basically how much money you feel comfortable losing). Whether you're on the risk-averse or risk-tolerant side of the spectrum, your investing approach should match your personality. Make sure you fully understand the potential risks associated with your investment choices.
Investing also gives you the opportunity to support businesses you believe in. With ethical investing, you can put your money into organizations that align with your values, be they political, environmental, or centered on workers' rights.
Set clear goals and purpose
What are you trying to achieve as you begin investing? Are you investing for your retirement in 30 years or to help pay for your child’s education? When you’ll need access to the money determines the investment “time horizon” (the length of time you’ll have an investment) and will also help determine your risk tolerance. Make sure you set clear expectations before you start.
Just get going
When it comes to investing money, sometimes the question isn't what to do but when to do it. And the answer is always the sooner, the better. That's because of a mathematical principle known as “compound interest." With compound interest, you earn interest on your original investment, and as that amount grows, the amount of interest grows, too. Over time, your investment increases in value. . The real beauty of compound interest is that if you start early, you can invest less and still reach your financial goals.
These days, there are easy, low-stress ways to start investing right from your smartphone or computer. Search for apps that link to your credit or debit account. With a few clicks, you can be on your way to investing, in some cases with just your spare change.
At a minimum, you should participate in your company's retirement plan, such as a 401(k). Your employer might even contribute additional money to your account as a benefit, adding more fuel to the compound-interest fire.
Stick with it
When you think of investing, you might picture frantic brokers on the Wall Street trading floor yelling, “Sell! Sell!" The reality is that not selling is a far better strategy. Make a financial plan that you can stick to—a $100 automatic withdrawal per month, for example—and then hold steady. Over time, that monthly contribution could generate a nice nest egg (remember compound interest?). But if you get nervous and stop investing every time the market fluctuates, you're less likely to reach your goals.
Investing in today’s world can be convenient, versatile, and totally personalized. And with a little bit of homework up front, you can be confident you’re making smart choices for your future.