It can raise a host of harrowing questions: is it too risky? Is now the right time to invest?
But allowing fear to stop you from investing can be a big mistake. In fact, the earlier you start investing, the better your financial future will be. Why? By investing early, you give your money time to grow.
After all, it’s not about timing the market to get rich quickly, but more about taking some time in the market and allowing your investments to accumulate. And while there will always be some risk involved, investing wisely helps reduce those risks significantly.
Here’s how you can start investing.
Table of Contents
Determine your game plan
Before making your first investment: “It’s important to assess what your goals are,” said Trina Patel, manager of the financial advisory at Albert Financial Service.
Ask yourself what you are looking for when investing, how much risk you are willing to take and when you will need the money.
Remember that different goals will justify different strategies and time horizons. For example, if your goal is to save enough for a down payment on a house, it will probably take much less time than if you were saving for retirement.
Learning the basic investment terms can also help you make the best decisions for your goals.
There is no small investment
Many people assume that it takes a lot of money to start investing. But that is not the case.
In fact, you can start investing with as little as $5 or as much as $50,000.
Just make sure you take into account your investment goals and the time in which you want to achieve them.
It is also important to note that the budget is still important. So make sure you have enough money set aside for essentials.
“To start investing well, you have to meet the prerequisites,” said Corbin Blackwell, a certified financial planner at Betterment, a financial advisory firm that offers cash management and retirement counseling.
Stick to a budget that allows you to take care of your expenses and pay off any high-interest debt. You should also set aside cash for an emergency fund. Emergency funds can help in the event of a financial emergency or serve as a cushion in case your investments go down.
How to start investing in stocks?
Saving for retirement is a common investment objective, and certain accounts, such as 401s and IRAs, are set up specifically for that purpose. Oftentimes, the holder will pay some kind of penalty if they withdraw the funds too early or for a reason other than retirement.
Fortunately, if you’re offered a 401 plan at work, it’s pretty easy to get started. Accounts are generally funded by payroll deductions and may include a matching contribution from your employer.
But suppose you don’t have a 401 (k) plan. You can open an individual retirement account, like a Roth or a traditional IRA. Just be sure to compare the two as they vary in tax benefits, contribution limits, and income requirements. Many banks offer IRA or Roth IRA accounts. SoFi, Ally Invest, and Schwab are some examples of places you can open a retirement account.
If you’re saving for something other than retirement or need to access your money more quickly, you can opt for a taxable brokerage account with a company like Fidelity, TD Ameritrade, or Vanguard instead. That means you will have to pay taxes on any investment income within the account. This may include the sale of shares or when your cash balance accrues interest. It is important to note that these earnings or income are taxable in the tax year in which they were earned, not when they are withdrawn.
Unlike retirement accounts that have restrictions on when you can withdraw funds, taxable brokerage accounts allow you to deduct money at any time. Since these accounts do not offer tax advantages, there are no restrictions on when and how you can withdraw your money or how much you can contribute.
Where else can you open accounts?
Online brokers and robotic advisers are other places where you can open accounts.
Online brokers such as Webull and ETrade allow you to manage your own investments and generally do not require a minimum balance. But they charge fees for things like trading stocks and options. So be sure to compare what each broker charges before choosing one.
Robo-advisors, on the other hand, are automated financial advisors who manage and choose your investments for you. These include digital platforms like Betterment and Wealthfront, which offer low minimums and a small administration fee.
Patel says that using automated advisors can benefit newer investors looking to build a portfolio that aligns with their goals, risk tolerance, and time horizon. He also suggests trying automatic investing, which involves scheduling recurring contributions to your investment portfolio.
“You can easily see how that adds up, rather than starting all of your life savings at once,” he said.
Understand your options
Once you’ve opened an account, you’ll want to explore your investment options and the risk they carry. Here are some of the most common investments you will want to consider:
Shares are an ownership interest in a company and can be purchased individually for the price of a share or through mutual funds.
Bonds are loans taken by a company or government and usually pay a certain interest rate.
Mutual funds are a set of investments that include assets such as stocks and bonds. Some of these funds are professionally managed and help take the burden of choosing individual stocks or bonds. Mutual funds are traded once a day after the market close.
Exchange-traded funds, or ETFs, similar to mutual funds, also include a bundle of assets, but are traded on the stock exchange throughout the day and purchased for the price of one share.
It’s important to remember to diversify your portfolio with a mix of asset classes to help balance risk.
Mutual funds and ETFs, for example, are options that can give first-time investors the opportunity to diversify. While investing in safer bets like bonds is a good way to offset riskier investments in things like real estate investment trusts (REITs).
The final result
No matter which path you take, investing is another way to grow your wealth, or as the saying goes “make your money work for you”.
Investing can help you reach your financial goals, like buying a home, saving for retirement, or even starting your own business. The younger you are when you start investing, the better your chances of getting higher returns. It also gives your money time to compound, which means that the returns you made on your investments can start to generate your own profits.
“Think of investing as an overall strategy and a way to preserve and grow your money,” Patel said.
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