Congratulations, you’ve taken the first step to securing your financial well-being! By educating yourself about the investing basics, you will be able to gain financial security over time and enjoy the benefits of successfully managing your money. Why should you invest? The answer is simple: to have your money work for you to create wealth. There are a couple of things that you should know before you begin your money-growing journey. First, you don’t need to be a genius to invest.
Anyone can do it, and it is much easier than you think. All you need to do is know the basics, set your goals, develop a plan, and stick to it over time. The four steps in this article will give you an overview of this process. Second, it doesn’t matter how much or little money you have. The objective is to grow your money over time, which can be done with any starting sum. That being said, read on to learn how you can get started. Good luck!
Step 1: Set your financial goals
Start by determining your financial goals. Are you saving for your higher education? A child’s education? Buying a car or house? Retirement? Make a list of the reasons why you want to save and invest, in order of importance. Figuring out your most immediate goal is essential because you want to choose an investment strategy that will effectively help you reach your desired outcome.
Step 2: Establish financial security
Know your current financial situation
First and foremost, figure out your budget and try to eliminate unnecessary expenses. You must know where you’re starting from before you can move forward with your financial journey. Understanding where your money is going is essential to a stable financial footing. You can use online tools such as Mint.com or create your own Excel spreadsheet to track your expenses.
Pay off high-interest debt
Before you start making investments, focus on paying off all high-interest debt that you may have. For example, credit card interest rates can be extremely high, so eliminating these charges will save you a lot of money. After paying off your debt, you will be able to save and invest.
Have an emergency fund
Next, make sure that you have an emergency fund to cover 3-6 months of expenses. This fund should be easy to access and relatively liquid so that you could maintain your lifestyle even if the unexpected were to happen.
Pay yourself first
Once you are ready to move forward, create a category of your budget for savings and investing. A great way to start is by deciding what you want to pay yourself. A good way to guarantee that you stick to this type of plan over time is to allow your bank to automatically deposit money from your paycheck into an investment or savings account. You should consider participating in an employer-sponsored retirement plan like a 401(k), 403(b), or 457(b). This will automatically deduct money from your paycheck while reducing the taxes you are paying and your employer may match some or all of your contribution (think of this as “free money”).
Step 3: Determine your ideal investment strategy
Long-term: High risk, high reward
At this point, you know what your goals are and you are financially stable, so let your money make money! By investing, you are putting your money to work for you. The first important considerations in choosing a strategy are your age and time frame. You may want to start by taking this short quiz to determine your risk tolerance level. If you’re younger or a long-term investor (perhaps saving for retirement), you can take greater risks that provide the chance for better returns. If you plan to hold an investment for several years, volatility will not affect you as much because you can afford to withstand the ups and downs of the market. If you decide that a risky or more aggressive portfolio is right for you, focus on stocks, certain mutual funds and ETFs (stock or real estate funds), riskier bonds, and alternative investments (options, forex, real estate, commodities).
Short-term: Less risk, more guarantee
On the other hand, if you need a more immediate return on your investment (such as putting a down payment on a house in a couple of years), you cannot afford to take as much risk. You will want to select a slightly more risk-averse portfolio with guaranteed returns in the near future. Additionally, you may want to choose a more diversified portfolio. This means that you spread your assets over a wider selection of investment types. If you want a more conservative portfolio, focus on cash investments (savings accounts, CDs, money-market funds), certain mutual funds and ETFs (bond funds), and short-term, high-quality bonds. Avoid any investments that would be affected by short-term market declines.
Step 4: Take action
Hopefully, you now have a general idea of which type of investments you’re looking for, so get started! There are a number of options at this point. You may want to visit a broker, speak with other industry experts, set up an online brokerage account (try Scottrade.com) or continue to do research on your own. Remember that you’re never too young or too old to invest, and the sooner the better. Finally, any amount of money can be invested. You don’t need to have thousands or even hundreds of dollars set aside to invest. You can start small, and your money will grow over time.
To continue learning more about investing basics, check out these helpful articles:
What is investing? Interest, Inflation and Compounding
8 Principles of Investing to Help You Save Money Wisely
15 Characteristics of Highly Successful Investors