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So you’re ready to dive into investing! Great move! Trust us, it’s not nearly as intimidating as the so-called “pros” would have you think.
As a beginning investor, you probably have a lot of questions swirling in your head. When should I start investing? What are the best types of investments to pursue? Should I hire a financial advisor to make sure I don’t screw it up?
It can seem overwhelming, but have no fear. We’re here to answer those questions and provide you with a few simple steps to get your foot in the door. Before you know it, you’ll be investing your way to financial freedom! Let’s get started.
Obviously, investing is a key cog in the machinery of wealth-building. Whether you need to build your nest egg for retirement, save for a home purchase, or earn more for your day-to-day living expenses, investing is the way to go.
Simply stashing money in a bare-bones savings account at your local bank won’t get you the robust returns you should be getting. What you need to do is find ways of ensuring that your money will grow, not just sit there.
Yes, investing does come with some risk. But, by adding a proper amount of low-risk investments to the mix, you may still be able to enjoy some relative peace of mind while posting impressive returns!
If you’re a beginner who is confused by all of the investment lingo, here’s one of the most important terms you need to understand – compound interest. This is the seemingly magical way your money earns more money for you, instead of just what you’ve put away.
Compound interest means that you not only earn interest on your contributions, you also earn interest on the interest those contributions generate. Every time it compounds, your stash grows. So your money keeps multiplying, with no effort on your part other than to shop around for strong interest rates!
Essentially, the sooner you start investing, the more time your investments have to compound. What an awesome motivator, right? So, invest early and watch your money grow!
Types of Investments
Now that you’re excited about where investing can take you, let’s get into some specific types of investments you may want to try. Since this is for beginners, we won’t bombard you with dozens of options – just a few.
Employer-sponsored retirement accounts, like a 401(k), are where most people do the majority of their retirement investing. If your employer provides you with the option of a 401(k), this is a fantastic place to start socking away your hard-earned money.
Typically, contributions to a 401(k) are made with pre-tax money, so it’s taken directly out of your paycheck. You don’t pay any taxes on that money until you eventually withdraw it.
Need another reason to love employer-sponsored accounts? Here’s a great one – matching funds!
Many employers (but not all) will put in a percentage of whatever you set aside in your 401(k), adding to the pot without any more work on your part. Aim to contribute at least enough to get that employer match, and take advantage of their free money!
You’ve probably heard of the IRA (Individual Retirement Account). Two basic types of IRAs exist: the traditional and the Roth.
A traditional IRA is taxed when you withdraw the funds, so they reduce your tax burden now.
The Roth IRA is taxed up-front and keeps your earnings tax-free, which in some cases can be preferential to being taxed upon withdrawal.
Whatever you contribute has to be earned during that tax year. There are also some limitations on how much you can contribute to an IRA. For 2019, the individual max is $6,000. After age 50, you can “catch up” and contribute an additional $1,000 per year.
One of our favorite methods of growing our stash is through real estate investments. Of course, you can grow your net worth and income by purchasing an actual building to rent out. But nowadays, you can also start investing in real estate with companies like Fundrise.
One of the benefits of going with Fundrise is that your initial investment can be as low as $500! Instead of scraping together a 20% down payment on a brick-and-mortar property, you join with others to get some skin in the game. It’s basically crowdfunded real estate.
Educational Savings Plans
Parents, definitely put a 529 college savings plan on your radar. Higher education is pricey, so preparing for your children’s college education is certainly a worthy investment goal. When the money in a 529 plan is used to pay for qualified education expenses, the earnings are not federally taxed, which saves you a lot of money.
Rules for 529 plans are determined by each state. Depending on your state’s rules, a 529 plan may be a smart investment choice!
High-Yield Savings Accounts
High-yield savings accounts are pretty self-explanatory. They’re simply savings accounts that earn a higher rate of interest on deposits than traditional bank checking and savings accounts.
Being insured by the FDIC also gives investors peace of mind. So, if you’re looking for a safe place to hold funds for short-term savings goals or for emergencies, this could be a great option.
The ETF, or exchange traded fund, gives investors exposure to a collection of different stocks for a relatively low price. It can be especially useful for newbie investors because you can diversify your holdings right off the bat. Typically, they also charge significantly lower fees than mutual funds, which is another win.
Important Considerations for Beginning Investors
- Fees: How much are the fees for your various investment accounts? Are they taking too big a chunk out of your returns?
- Time Horizon: How long can you leave the money invested? If you’re saving for a retirement that’s 40 years away, you’ll invest differently than if you’re saving for a down payment or something else that you’ll need access to in a shorter time frame.
- Diversification: Aim to build a strongly diversified portfolio of investments. Diversification helps spread out your risk, so if one investment tanks or has a rough year, all your money isn’t tied up in one place.
These days, investing isn’t just for the wealthy; it’s for everybody. Even better, it doesn’t have to be as complex as many would have you believe.
Remember, if you’re a beginner, you can do this! Retirement is a big enough reason to get started on your investing journey considering you’ll need to fund your lifestyle for several decades!
Whether you’re focused on a far-off retirement or on short-term savings goals right over the horizon, use these smart investment options to get yourself on a good financial path.
Kate Underwood is a freelance writer and staff writer for Club Thrifty, a website dedicated to helping people dream big, spend less, and travel more.