You may not think you need an investment guide because you don’t think you need to invest.
If you plan on retiring at some point in your lifetime, don’t be part of those statistics. Here’s a beginner’s breakdown of investing to get your money working for you.
What is Investing?
Let’s start with the basics: What is investing?
An investment is an asset or income which you, the investor, purchase in the hopes that it will generate future income or increase in value over time. Investing, then, is a tool for building wealth.
This is often used for retirement funds but could be for almost anything–buying a house, saving for a vacation, or just boosting the health of your savings account.
It isn’t just for the wealthy, either. Anyone can invest. In fact, everyone should be investing, especially if you don’t have great personal wealth to fall back on.
Why Should You Invest?
Any great investment guide can answer this basic question: Why should you invest?
Because you need to build wealth.
Picture this. You have a child you need to send to college. You’ve got big dreams for them, so you want to make sure they can go to a great school.
Except you can’t afford to pay for that great school based on your current finances. Sound familiar?
Let’s say you invested $10,000 in the stock market at a return of 9% over 40 years. Assuming your return rate is consistent, that comes in at around $315,000.
How Much Should You Invest?
The next obvious question, then, is: How much you should invest?
The answer to this question varies because everyone’s financial situation is different. It’s not just based on how much you’re earning, either.
For example, how much passive income do you want from your investment assets? When are you planning to access the funds?
If you need somewhere to start, a good rule of thumb is 10% of your income. If, for example, you’re investing 4% of your income into your 401(k), you should set aside another 6% to invest independently.
For a closer look at figuring out how much to invest, check out this article.
Figuring Out What Types of Assets You Want
The heart of investing is cash or assets. You lay one of those out now in the hopes that it will pay off later.
Usually, this is achieved through productive assets.
Productive assets are assets that give surplus money from some sort of activity. Owning a rental property is a great example–you have the house or apartment, but you also have the income produced from renting that property over several years.
Of course, there are several kinds of productive assets, each with their own legal tics, tax codes, and quirks.
Types of Investments
If you take nothing else away from this investment guide, remember this: It’s vital that you choose the right type of assets for you.
There are many more types of assets out there, but here are a few common ones.
Even if you don’t know much about investing, you’ve probably heard of stocks.
Buying a stock means buying partial ownership of a company. If the company does well, the stock value can increase over time, but if the company does poorly, the stock can drop.
Stocks are often the most rewarding asset class. They’re also the most volatile.
Bonds are another common asset you’ve probably heard of, even if you don’t know what they are.
Also called fixed-income securities, bonds actually involve lending money to the issuer in exchange for interest income. There are a variety of ways to purchase bonds–you can even buy them from the US government.
Mutual Funds and ETFs
Mutual funds and exchange-traded funds (ETFs) are a mix of various types of assets. Rather than an individual investor putting their money on a stock or bond purchase, a group of investors will pool their resources to invest in stocks, bonds, or other assets.
Tips to Get Started
Now that you know a few basic kinds of assets, here are two tips to get you started.
Ease Into Investing
The stock market is exactly as tricky as it sounds.
And while many people tend to invest in a do-or-die mentality, unless you’re retiring tomorrow, you don’t need to approach investing this way. If anything, it could actually hurt you in the long run.
Do your homework about investing before you start buying stocks or investing in real estate, and make sure to assess your financial situation first.
For example: Do you have an emergency savings fund? What about high-interest debt?
If you don’t already have emergency savings, or you have any high-interest debt hanging over your head, hold off on investing. Sort out your finances first.
Start with Your 401(k)
The easiest place to start investing? Your 401(k).
The good news is that if you’re a salaried employee, chances are you already have an employer-provided 401(k). And if your employer offers matching contributions, time to take them up on their offer.
You should try to contribute enough to your 401(k) to get at least the maximum match contribution amount. It’s hard to find a 100% return on investment anywhere else.
Plus, you’re directly contributing to your retirement savings, so that money can only help you in the long haul.
If you can’t yet contribute enough to get the maximum match, don’t worry. Start by contributing what you can and slowly work your way up.
Remember: make sure your financial health is good before you start investing. Otherwise, you’re just digging a hole for yourself.
Your All-Around Investment Guide
Need more help investing? The investment guide doesn’t end here.
SaveYourDollars is your resource to make the most of your money, whether it’s investing, credit, or savings. Check out the blog for more investing tips, like these nine investment solutions no one tells you about.