So, you’ve decided it’s time to start investing, but – where to begin? Among the questions that may be running through your head, it’s important to start with answering the basics. Why? Because the better you understand the unique nature of investing, the more prepared you’ll be to make informed decisions along the way that will yield higher financial gains.
Let Your Money Make Money for You
Investing in the stock market is one of the most effective ways to make money for your future. And the sooner you start, the better off you’ll be in the long-run. Because investing returns an average of 7% even after inflation, investing is by definition, the act of sacrificing a small sum of money in the present to see a large return on it in the future. If you invested $500 a month for 40 years, your return will be $1,320,562 – at the average rate of return.
Savings Accounts Can Only Save
Savings accounts just don’t build wealth the same way retirement funds do. Putting money away in savings is like putting a seed on cement and hoping it will grow into a tree. Whether it stays in that spot for a day or ten years, it will simply stay a seed – and never turn into what it could have if it was placed in the right environment for its highest growth potential.
It All Adds Up
Now, you may feel a significant amount of pressure to invest a large sum of money in the stock market right away. But starting out with small investments is always better than not starting at all. Take time to look over your budget and decide how much you’re willing to invest right now. Consider picking up a side gig to add money to your investments as well. Remember, little sacrifices can go a long way when it comes to investing.
The Long Game Wins
Usually, people invest to meet their long-term financial goals such as saving for retirement or building generational wealth. 401(k)s or IRAs are the best options for this type of investing. You can choose whether you’d like to invest in a traditional 401(k) through your job’s benefits package, or if you are a non-traditional worker, both IRAs and Roth IRAs are great options.
Here’s how they work:
-A traditional 401(k) gives you the opportunity to invest money now tax-free and pay taxes on the money when it is withdrawn for retirement later.
-A Roth 401(k) gives you the opportunity to take out your money tax-free but pay taxes on the money up-front.
*For a detailed breakdown of the money you can make over time, use Bankrate’s 401(k) calculator.
-A traditional IRA parallels a 401(k), letting you invest money tax-free and pay taxes on the money during withdrawal for retirement.
-A Roth IRA, by contrast, taxes money when it is invested but later does not when it is withdrawn for retirement.
Keep in mind that there are limits on how much can be invested into an IRA account each year.
Where Does the Money Go?
The four most common types of investments are stocks, bonds, cash, and other alternatives. And within these types of investments, there are multiple ways to invest into them. You can choose from Mutual Funds, ETFs, and Robo-Advisors.
Short-Term Investing
If you’re considering investing for short-term goals such as saving for a down payment on a home or saving up for a car, 401(k)s and IRAs are not a great option. Consider investing your money into money market accounts, high-yielding savings, or certificates of deposits. These are also insured by the FDIC to ensure your money won’t go anywhere when you need to withdraw it.
Rule of Thumb
When it comes to investing, it’s best to be hands-off and to trust the journey. If the market crashes – don’t retreat and pull your money out. Not only could you be penalized for taking your money out early, but the market usually comes back around and you could lose a significant amount of money because you pulled out too early.
Though there are many layers to investing, it has never been cheaper to start. There have never been more tools to help you manage your money once it’s placed in an investment account. Be encouraged that as you start investing, you can learn more along the way.
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