Investing For Beginners: Resources & Advice For Investing In Your Future
Putting money in a savings account is fairly easy to establish, but it also often has a disappointingly low rate of return and the possibility of your savings losing value. People who want their money to work for them and earn their money must do so by investing it and making wise investment decisions. The good news is that anyone with some spare cash and time can get into investing.
Are You Ready to Start Investing?
There is some discussion about whether it’s better to prioritize investing or paying off debt is a better move financially. Paying down debt can improve your credit score, which can save you money and lends to securing better interest rates and financial opportunities in the future.
However, investing is a way for your money to earn you money while doing very little. The decision of whether to invest or pay down debt depends largely on the terms of a particular debt compared to the opportunities of an investment. A debt that comes with a high interest rate that quickly compounds further debt should be paid down aggressively, particularly if the investment options available do not yield more money than the debt itself accumulates.
The Power of Compound Interest
Building wealth through budgeting and investing is all about compound interest, and how people get an interest in investments to pay them back in increasingly larger quantities. If someone invests $1,000 in a company and gets a 7-percent rate of return on an investment for the year, they will earn an additional $70. If they keep the money in the account for another year and get the same return, they will have about $1,140. Over decades, a small investment can generate tens of thousands of dollars in wealth.
Basic Investment Tips
When people start to consider investing, they often hear a great deal about buying, selling and holding. These are recommendations that investors are not obligated to follow, but they may help to make a practical decision. An investment with the recommendation to buy has a lot of growth potential. One suggesting that investors sell is essentially the opposite.
Holding is variable. If someone already owns the stock or security, they might hold it without a great deal of risk. However, an investment listed as “hold” may not be a wise choice to buy. Experts suggest that investors look at the previous two earnings reports to get a sense for the company’s overall growth pattern.
There are many types of investments, and the best way to secure a reliable rate of return is to select a variety of them. Stocks involve an investment in a company, and may also provide regular dividends. People who bought or received a savings bond as a kid-friendly investment probably understand that bonds typically accrue interest and increase in value until they reach a specified date of maturity.
Funds are the most variable of the investment types, in part because the funds themselves may contain a combination of stocks, bonds, securities, and other investments. Common investment funds include:
- Mutual funds
- Exchange-traded funds (ETFs)
- Index funds
A mutual fund is an investment made with money pooled together from multiple investors and spread across a diversified investment portfolio where all of the individual investors share the gains and losses of the overall fund. Mutual funds are a valuable asset for small investors because they provide access to diversified portfolios with a smaller barrier to entry.
Exchange-traded funds allow buyers to grow their investments at the rate of market growth based on an index fund (think NASDAQ, Dow Jones, or other indexes), and they require less active management because they only need to keep up with the market, not outpace its growth. Index funds are a type of mutual fund constructed to match a component of a broader market index, such as the S&P 500 or the Russell 2000.
Real estate can also count as an investment, as land, homes, and other buildings gather equity as the owner pays off loans and takes control of the asset.
The type of fund an investor wants depends on how they plan to exchange and trade the stocks.
Purchasing Dividend-Paying Stocks
There are two types of stock: common and preferred. Preferred stocks often come with a dividend that is paid out first. Choosing a dividend-paying stock requires careful consideration. The trick is to find the stocks that have a consistent rate of dividends paid out to investors. As with any investment, an investment in stock relies on the company to follow wise business practices.
This can be hard to tell without a lot of research. Some companies with a high dividend and who yield year after year are taking a path that is hard to sustain. Sometimes, the smaller dividend yields are easier to guarantee year after year, making those stocks a better choice.
Building a Portfolio
It is rarely wise to put all nest eggs into one basket, so diversification is key. Put money into a few different stocks, bonds, and funds. Get a sense for the risk level of each investment so that it is easier to balance out investments based on individual risk tolerance. Keep an eye on investments, but focus primarily on the yearly returns. Be sure to factor in the cost of fees to manage any investment arranged through a third party. Fees vary between types of investments and organizations.
Taking dividends or pulling out any investments may trigger a tax liability on capital gains. Capital gains refers to the increase in value of a particular holding. Investments made through a retirement plan may be tax-deferred until retirement, but others could generate capital gains tax liability on a yearly basis. The rate of taxation for the investment depends on whether the investment was short-term (usually less than one year) or long-term.
Of course, it can be intimidating to get into the market in the first place, especially if you're trying to invest or save for retirement on a budget. Discussions of risk may make it seem like it is very difficult to succeed as a new investor. Fortunately, there are many organizations, apps and other tools to educate, make recommendations on investments, or help manage a portfolio. Consider companies like:
- Acorns, which also has options for retirement planning
- Personal Capital
- Stock Market Simulator
- Yahoo! Finance
Experts recommend trying out a variety of options and choosing the one that aligns best with specific investment goals for yourself or for your joint finances with a partner.
Starting to invest at a younger age is probably one of the best financial decisions someone can make in their lives, and it can help you develop advanced skill in investing and help with planning for larger purchases. With a thorough grounding in the essentials, it is easier to choose investments and have a more productive investment experience.