When you decide that it’s time to start investing your money, you may be filled with various questions as there is a significant amount of information available. When starting to invest, it’s important to remember your short-term and long-term goals as you consider the best strategy for you. When you first start investing, you will want to make sure that you are prepared in other financial areas of your life as well to ensure a strong foundation to build upon. Here are a few ways you can start contributing to your investment portfolio:
1. Secure your assets
Before you start investing, it’s necessary to ensure that you have adequate financial protections and preparations in place. For example, you will want to have an emergency fund built up in case of an unexpected circumstance. It’s important to have liquid funds available (before you start investing) in case of an emergency or large expense because your investments may not always be readily available.
Another consideration prior to investing is determining the amount of debt and type of debt you have. You may question if you should start investing while you have credit card debt, auto loans or student loans. When determining whether or not to pay off debt before investing, consider the interest rate of your monthly obligations. It’s also important to gain some insight on the predicted return on a given investment.
For example a short term stock may be anticipated to increase in value by 7% percent year over year. In this case, it makes sense to pay off looming credit card debt first because most cards carry an interest rate of more than 7%. This is because you would still owe money in interest on your credit card debt that would amount to more than your return from a given stock. However, if you have car loans or student loans with interest rates under what your estimated return on investment would be, it might make more sense to build your portfolio before paying off these debts in full.
Furthermore, it’s necessary to ensure that you have safeguards in place to protect your assets and investments. Making sure you have a life insurance policy to protect those that rely on your income or those that would rely on your investments if you were to pass away is critical when beginning to invest. While securing a life insurance policy is an added cost to your monthly budget, term life insurance coverage could be a good option to consider while you are building your net worth, if you have children, or if you share monthly obligations with someone else.
2. Investments
When you start considering where to invest your money, you may be overwhelmed with the different options and conflicting advice that’s available. Each situation is unique so an investment strategy that works for others may not work best for you. Furthermore, remember that as time goes on and your situation changes, you may need to adjust your strategy accordingly. Some may prefer a high risk, high reward route to investing while others might choose to be more conservative with long term goals in mind. With any financial planning, it’s always best to speak with an advisor but there are two common types of investments to consider when you are first starting out— stocks and mutual funds.
Stocks
When you think of investing, putting money into the stock market is probably one of the first things that comes to mind. Investing in stocks can be a great way to build wealth and further your financial goals. When you purchase a stock, you are investing in a single, publicly traded company. When you invest in a stock, certain factors will affect share prices such as supply and demand, the economy in general and shifting interest rates, so it’s important to understand that there is volatility involved.
There are a few different ways that you can start investing in the stock market, either through an individual brokerage account, through an automated, robo-advisor or through your company’s 401K. It’s also important to remember that you will be required to pay taxes on your gains if you sell your stocks.
If you decide to individually invest through your own brokerage account, it’s important to understand the different available platforms, their requirements, and their associated fees. For example, some accounts will require a minimum investment or implement a fee per trade or per share. When looking for an account, you want to look for reasonable fees, ease of use and access to information and customer service. When taking this route to trading, you individually pick the companies to invest in and how much you want to invest. This can be a bit more complicated as you want to ensure that you have a diversified portfolio.
If you would rather have the process be a bit more automated, you could consider using a robo-advisor, which is an investment management service. Robo-advisors use computers to choose stocks for you and will charge a management fee. Similarly to brokerage accounts, some robo-advisors will require a minimum investment. When opening up an account, you will be asked a series of questions to determine the best strategy for your individual circumstance.
Mutual Funds
Mutual funds differ from trading individual stocks because you are investing in a collection of stocks and bonds. When you purchase a mutual fund, you are buying a “share” of a diversified portfolio rather than a share of an individual company. Some choose to invest in mutual funds over stocks because of the built in diversification component.
Mutual funds are overseen by a fund manager to execute the investment strategy of a given fund. This may be attractive to you as a potential investor because it takes the guesswork out of diversifying your portfolio by leaning on the fund manager to make these choices. You can choose your fund based on volatility and risk level. You can also choose a fund that specializes in various sectors such as technology or finance. Similarly to investing in stocks, there are certain associated fees and there may be a minimum amount of money needed to invest.
3. Retirement
When you start investing, you may have both short term, mid-term, and long term goals you are trying to achieve. While certain long term goals, such as retirement, may seem like they are in the distant future, it’s still important to plan and prepare for them when you’re investing. One of the most straightforward ways to financially prepare for retirement is to contribute to your 401K, if applicable.
If your job offers a 401K with an employer match, contributing to this fund regularly is a great way to save for retirement. When you invest in your company’s 401K, your contributions are not taxed and your company will match this contribution up to a certain percentage. This is essentially free money towards your retirement so it is beneficial to take advantage of this company perk.
Keep in mind that there are penalties associated with withdrawing from your retirement fund early. This is why you want to ensure that your contribution amount is manageable and you aren’t maxing yourself out while trying to save. Incrementally increasing your contribution amount year over year (or after a promotion) is a way to work up towards saving the maximum amount while ensuring that you aren’t overextending your budget.
When you contribute to your 401K, your company will either invest these funds in money markets, mutual funds, securities or a combination of these to further build your equity. Check with your human resources department to see if this is customizable based on the risk level you feel comfortable with and investment strategy you prefer.
4. Real estate opportunities
Another smart way to start investing money is through real estate opportunities. While this strategy isn’t for everyone, some find this a lucrative way to either earn passive income or use it as a means to build wealth. As with any investment, there is risk and volatility involved and with real estate in particular, the status of the market is a significant consideration. A common way to invest in real estate is purchasing a multifamily property to live in and rent out the other portion. You can also achieve similar results through renting out a portion of your existing home, if applicable. You can then use this rental income to either reinvest or pay down your home faster. However, it’s important to understand the pros and cons of this strategy and determine if being a landlord is right for you.
If you aren’t interested in owning physical property, you can still invest in real estate through an REIT or real estate investment trust. An REIT is similar to a mutual fund in the sense that you are investing in a company that owns different types of commercial real estate rather than investing in one property. If you are considering this route, it’s important to research the fees and check if there is a minimum investment requirement.
As a prospective investor, remember that it is normal to take time researching and preparing before diving in headfirst. Keep in mind your short-term, mid-term, and long-term goals to ensure that your strategy aligns with your investment objectives. By taking a strategic approach to investment, you are able to lay a solid financial foundation and can work towards building your wealth for years to come.
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