Why Should I Learn How to Invest?
Investing your money is the most common way to save for future financial events (including retirement) and the most reliable way to build wealth over time. When you learn how to make your money work for you, you can take an active (or passive) role in securing your own financial future and reaching your personal and financial goals.
What Are the Benefits of Investing Money?
Your money has real earning power. Investing simply means that you spend money with the expectation of earning more money over time.
When you put your money in a savings account, for example, your bank may invest your money to earn more money and pay you interest as an incentive for saving. When you spend your money to make a purchase, like a home, your asset may appreciate over time. This means that the value of your asset may increase due to more demand, less supply or a change in inflation or interest rates. Or if you use your money to invest in part of a business, you can reap the reward for your financial foresight, if that business succeeds.
All these examples of investing involve putting your money to work for you. You pick the investments that feel right to you — or have someone help you invest your money — with the expectation that you’ll earn more money over time. Smart investing can help you accelerate your earnings, build wealth at a rate that outpaces inflation, and achieve your long- and short-term financial goals.
Where to Start?
Learning how to invest your money in some capacity is a wise financial move, but there’s a different investing path for nearly every person and every financial situation. The difficulty comes in knowing where to start. Your personal starting point will depend on your objectives and your ability to invest. The best place to start is to give your money a goal and determine the level of risk you want to take.
Give Your Money a Goal
Ask yourself what you want to do with your money now, and in the future. The answer may tell you whether to take the long or short road to build wealth, or some mixture of both.
- Long-Term Goals: What do you want to do with your money in five years or more? Do you want to retire? Do you want to save up for a down payment on a home or pay for your kids’ college tuition? Make a list of long-term goals and decide how much money you think you’ll need for each. This pre-investment practice can help you decide how much and where to invest your money.
- Short-Term Goals: You can save for short-term goals like a vacation, a car purchase, tax payments, or other similar goals with a savings account, money market account, or certificate of deposit. There are other ways to invest money to make short-term gains, including investing in the stock market, but they may involve more risk.
What Is Your Budget & How Much Money Do You Have To Invest?
The amount you decide to invest is completely up to you. It will depend on your unique financial situation, but many financial experts advise investing between 15% and 25% of your post-tax income. You can always start smaller, especially if you’re just getting into investing.
Take a close look at your budget to see what you can afford. The purpose of investing is to spend money to make money, but this process can take time, especially when investing for long-term goals. It’s also not completely risk-free, so it’s important to make sure you can afford to live without your investment money for the foreseeable future.
What Is Your Risk Tolerance?
Learning how to invest money sometimes involves a little self-reflection. That is, how risk averse or risk tolerant do you want to be with your money? Again, the answer to this question will depend on your unique financial situation. If you can afford to lose your investment money, you may choose to invest in high-risk, high-reward types of investments. If you can’t stand the sight of wasted cash, you may want to consider safer, long-term investment opportunities.
Find Help If You Need It
If you’re just starting out, you might choose to meet with an investment advisor to help you determine the right level of risk and investment type for you. Your investment advisor can help you pick a diverse portfolio and do all the investing work for you.
Of course, you can also choose to invest all on your own. You pick the investment vehicles and accounts yourself, and decide how much money and when to invest. Many people also choose to invest using an automated portfolio manager — a solution that lies somewhere in between working with an advisor and doing it all yourself. No matter how involved you want to be with your investing, there’s an option for you.
Pick an Investment Account
Now the fun part — the actual investing. When it comes to long-term investing, you have several different options, including a 401(k), individual retirement account (IRA), a taxable account, and a college savings account.
- 401(k): A 401(k) is a retirement plan offered through your employer. You make monthly pre-tax contributions to your account, and if you’re lucky, your employer will match. Your account money is then invested in different tax-shielded, tax-deferred funds to help you earn returns over time. If your employer matches your contributions, it’s usually a good idea to contribute the maximum amount that your employer will match.
- Traditional or Roth IRA: A Traditional IRA, or individual retirement account, allows you to make pre-tax contributions to an account. When you retire, you pay taxes on the money you withdraw. With a Roth IRA, on the other hand, you pay taxes on the money you contribute upfront. Your money then grows tax-free and you don’t have to pay taxes on withdrawals when you retire. These accounts may come with their own set of income requirements and restrictions on withdrawals, as well as the amount you can contribute in a single year.
- Taxable Account: A taxable account is an investment account with a brokerage firm that you can use to buy and sell investments, like stocks, bonds, and mutual funds. Unlike a retirement account, you won’t have any restrictions on the amount you can deposit or withdraw. You also won’t be able to take advantage of the tax deductions available with a retirement account.
- College Savings Accounts: A college savings plan allows you to save and pay for college and educational expenses, while receiving tax benefits on your savings. Common college savings accounts include a state-sponsored 529 College Savings Plan and a Coverdell Education Savings Account, created by the U.S. government.
Open Your Account
In general, you have two options when choosing an account provider and opening an account. You can go with an online broker and manage most of your investing yourself, including the day-to-day of buying and selling investments. Or, you can go with a robo-advisor and have a computer program do most of the investing for you. The account you choose will depend on your desired level of involvement and the types of investments you want to make. Robo-advisors, for example, generally invest in funds, whereas online brokers allow you to buy and sell specific stocks and bonds.
Choose Investments That Match Your Tolerance For Risk
As you choose your account provider, you should also consider the types of investments you want to make and whether those investments align with your tolerance and/or aversion for risk. Common investments include stocks, bonds, mutual funds, and real estate.
- Stocks: Stocks are ownership shares in actual businesses. When you manage your own investments, you can pick and choose which businesses you want to buy (and in what amount). You make money in proportion to your ownership share when the business earns a profit or by selling stocks at a higher price than you purchased them.
- Bonds: Bonds are loans that you give to companies or government entities through your investment money. You make money when the company or government pays back your loan with interest. These fixed-income investments are generally considered safer than stocks.
- Mutual Funds: Mutual funds allow you to make many investments all at once. You invest your money, along with other investors, in a fund to purchase stocks, bonds, and other investments. This approach allows you to diversify your investment dollars. You also get the advantage of professional investment fund managers, who choose and manage your investments for you.
- Real Estate: Real estate is a piece of land, including houses, buildings or any other property attached to that land. You can purchase real estate with the expectation that your land will increase in value over time. You can also invest in funds that focus on real estate purchases.
Learning how to invest money can be challenging. With time, you will find the right account provider and mix of investment types to maximize your money and minimize your risk.
- Asset Diversification: The investment market is always moving. When one investment type appears to be poor, another may be ripe for the picking. It’s volatile, but paying attention to market movement is part of the fun of investing. One way to guard against risk is to diversify your assets. That means owning a mixture of stocks, bonds, funds, and other types of investments to ensure that you keep moving toward your investment goals.
- Asset Allocation: When you diversify your investment dollars, you allocate assets into different investment types. The term asset allocation refers to the proportion of your investment money you have in each investment type—stocks, bonds, etc. The way you allocate your assets is up to you, but you should always keep track of market movement and be aware of how much money you have in each investment, so you can make informed decisions about your finances.
- Time Value of Money: The value of your money today is greater than that same value tomorrow, or at some future date. That’s because you can invest your money in the market today in order to earn even more tomorrow. Among other important financial implications, this means that the earlier you invest your money, the more potential you give your money to grow. Delaying your investing decisions only leads to lost opportunity.
Summary: How to Invest Your Money
Investing your money is a great way to save for the future and build your wealth to achieve your personal and financial goals. It can be intimidating to know where to start, but the earlier you invest, the more opportunity you give your money to grow.
Be wise about investing and get help if you need it. Find your personal preference for risk tolerance, and balance your budget to include some opportunities for investing your money. With patience and a little practice, you can make your money work for you to accelerate your earning and secure a stronger financial future.