How to Begin Investing
Taking control of your finances is a big decision, though it does not have to be an intimidating one. For those just beginning their financial journey, it can be difficult to know where to start. These sound investment tips can help set you on your way.
The first step is to understand your financial situation, and how much you can afford to set aside for investing. One practical way to do this is to create a weekly or monthly budget, which will help you grasp how much of your income you use on day-to-day needs. This includes debts you are paying off and other non-negotiable expenses such as rent and food. Designing a budget has another goal of helping you understand if there are items that you can live without.
Once you have a sense of how much money you have at your disposal, you can make a plan for where to invest it. Here are some tips to help you make sound investments that can help secure your desired financial future.
What Are Your Investment Goals?
It is important to define your goals at the outset, as these will guide your decisions going forward. Are you saving up for a down payment on a house? Perhaps you are looking to purchase a car, or quit your job and travel around the world. Or, maybe you want to begin building-up your retirement savings. The objective you are aiming for should determine the type of investment you ultimately pursue.
Your goals are not just about what you are planning on using your savings for, but also your intended timeframe. For instance, someone saving up for a down payment on a house in the next three years will want to take a conservative approach. In contrast, an individual in her twenties looking to save money for retirement can afford to take a more aggressive stance.
Types of Investments
There are a number of different types of common investments and strategies for you to choose from, ranging from conservative to risky. It is also important to understand your own personal risk profile, and how much uncertainty you will feel comfortable living with.
- Savings accounts: If you have money in a a bank or credit union, you probably already have a savings account. Unlike checking accounts, these pay some interest. However, because your cash remains easily accessible, these are generally the investments which offer the lowest amount of returns.
- Certificates of deposits: Also known as CD’s, these are vehicles that are offered by banks and credit unions. In exchange for agreeing to leave you money untouched for a certain period (12 months is a common timeframe), you will receive a higher return on your investment than monies left in a savings account. (Most savings accounts and CD’s are insured by the Federal government. Make sure that your institution is either FDIC insured (for banks) or the NCUA (for credit unions).)
- Index funds: For those who want to partake in the earnings of the stock market, but have neither the time nor interest to learn about individual companies, index funds are a good option to begin your engagement with Wall Street. Index funds are composed of a number of different stocks and bonds and are designed to offer investors a relatively easy way to invest in the stock market. By choosing a wide variety of holdings, you shield yourself from the risk of one company imploding due to bad management or other external causes. These funds generally mimic the market, and tend to perform well when the entire market rises. The same holds true when the market does poorly, and in these years your investments will suffer.
- Individual stocks and bonds: For those looking to take a more active approach, picking individual stocks and bonds is an option. This has become much easier in recent years, with numerous platforms and technologies enabling the buying and selling of stocks with the click of a button. However, especially for inexperienced investors, this is among the riskiest strategies that you can pursue.
Conclusion: Maximizing Your Investment Gains
Once you have decided on your investment goals, timeframes, and strategies, it is a good idea to revisit these periodically to ensure that your initial assumptions and decisions remain relevant.
It is also important to remember that the longer you can devote to your investments, the more you will gain. This is due to the magic of compound interest, in which the interest you gain from your investments begins to earn money as well. Compound interest is a powerful tool that will allow your investments to blossom and grow over time.
Taking the time to understand your personal financial situation and your objectives will shape your decisions. It allows you to consider your different options and decide which investments are right for you.
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