When first starting out as an investor, most people know nothing about how to invest. People have financial goals they want to reach, and believe that investing can help them get there, but often that’s about it. If a person seeks to invest for any reason, from a major purchase to starting a retirement account, it’s best to start at the beginning. An investing beginner’s guide is a great way to start.
Always Pay Off Your High Interest Debt First
For those who have large amounts of debt, paying off debt first will ensure they have money to invest in the future. This is important because if one owes $5K on a credit card and the annual interest rate is 18%, but they also have an investment that is $5K with an annual return of only 5%, then as long as they owe on the debt, they are losing money.
However, deductible or low-interest debt, such as a mortgage, might cost less than an investment earns. This is especially true when we factor in the mortgage interest deduction on federal taxes. In this case, investing is the smarter choice.
Build Your Emergency Fund
To become a successful investor, one must plan for emergencies. By setting this money aside, this guarantees that money left in investments will help reach goals. The rule of thumb is to have at least six months of living expenses saved for emergencies. Arrive at this number by figuring out how much it costs to pay necessities each month. This will ensure that, when it’s time for an investment, funds don’t go to covering expenses in case of job loss or major medical emergency.
How do you build an emergency fund? Here are a few ideas.
- Get a side hustle. The gig society is officially here. You can use Uber, Uber Eats, Lyft, and many other online portals and apps to find small jobs that can help to build your emergency fund.
- Save your income tax refund. Did you know that there are many couples that get in excess of $8K to $10K back each year in tax refunds? If you are one of those lucky couples and simply saved this money alone for the next 10 years, you’d have $80K to $100K saved. Now that’s an emergency fund.
- Sell it! All of us have items hiding all over our homes that we no longer use. Why not have a yard sales or use one of the numerous apps, like “Let Go,” to get rid of some this extra stuff and add more money to our savings.
- Raise and Save. This is a great trick to save. Every time you get a raise, immediately start depositing that amount into your savings account. It’s easier to save money you’ve never incorporated into your budget.
Don’t Lose Free Money
What would you do if someone came to your door today and offered you $100 for every $250 you put in your bank account? Would you take it? Well, most people are actually saying “no” to this question by not participating in their company’s 401(k), 403(b), or any other program that offers matching.
This is an excellent investment to use for retirement purposes. Here is how it works:
Sign up for the 401(k), 403(b), or another applicable plan and choose the best investment. Decide on the amount or percentage of your pay you want to save each month, the company provides a match of some portion of your saved amount (free money). You win!
An individual can place up to $18,500 into their 401(k) this year. For most Americans, this amount may be out of reach, so start with a percentage of income you feel comfortable giving up. Try to at least make your savings percentage enough to get the matching percentage from your employer.
What Other Investment Vehicles are Available?
Individual Stocks
An individual can purchase individual stocks; for example: Google, Facebook or Auto Nation. For an individual stock investment, it’s wise to for the investor to purchase what they know. That means the investor should already be familiar with the product or services.
Already love a particular product or service? Why not back that up with an investment? Investors can research company stock symbols to find them on an exchange, allowing them to see exactly where they trade and the current price. Then, if they like what they see, they should consider investing.
When purchasing individual stocks, the investor may have to watch the investments closely. For those new to investing, this can be a heart-pounding journey, as stocks can have wild swings and volatility. Don’t let this discourage investing. Simply start small. A new investor can see how they feel about this type of investing without risking everything.
Index Funds
Many investors would like to own investments that follow many of the major indexes. This is where index funds come in. In an interview with CNBC, Warren Buffett stated, “Consistently buy an S&P 500 low-cost index fund.” What does Warren Buffet know that the rest of us don’t? He knows that index funds have consistently (year over year) had great returns. In fact, over the past 90 years, the average return has been about 9.8%.
This type of investment works well for those that want to buy and hold. Use index funds as a retirement account (many of which are offered as a part of a 401(k)). Index funds can also help new investors meet long-term goals.
Bonds
A lot of people overlook bonds when they start investing. But these options are great for a reliable income stream. There are also a lot of options, including high-yield bonds or emerging market debt, allowing investors the opportunity to select options that meet their needs.
Generally, bonds are less volatile than stocks and provide a level of protection when it comes to the principal. This is because when you own bonds, you are essentially lending money and the law protects creditors. For those nearing retirement or who consider themselves risk-adverse, this is ideal.
Plus, bonds are an excellent vehicle for diversifying a portfolio, something that every investor should do.
Exchange-Traded Funds, Mutual Funds and More
While most people picture stocks and index funds when they think of investing, there is actually a long list of options available. Investors can also buy Exchange-Traded Funds (ETFs), mutual funds, and a variety of other investment vehicles. I’ll cover these investments more in a future article.
Just remember, each option has its own positives and negatives, including varying levels of risk, so each investor needs to select those that are right for them. Some points to examine include risk tolerance, fee amounts, penalties for withdrawals, and who is overseeing the account.
Cryptocurrency
By now you’ve probably heard about “Bitcoin.” For the past few months to the new investor, Bitcoin and other cryptocurrency has been all the rage. When potential investors look back at the beginning of 2017 and see that Bitcoin has returned close to 800% profit during that time, they want to know how to get in. Although, this seems like a dream come true for many beginning investors, it can be a roller coaster ride, they aren’t ready for.
At the end of 2017, bitcoin was at over $20K per coin. It is currently sitting at a little over $10K. For most new investors, these wild swings would be enough to have them running for the exit. Because of this volatility, this is not an investment for the faint of heart. Outside of Bitcoin, other promising coins like Ethereum, Litecoin, and Ripple have made promising gains in the past as well. Those same coins are now trading well below their highs.
What you are probably not aware of is that the value isn’t necessarily in the coin, but the block chain technology behind it. Unless, you are ready to do tons of research and have a high risk tolerance, this may not be something for the beginning investor. However, if you are interested in cryptocurrency; research, research, research and then research some more. Start with a small amount of money and track your coins. This will give you a better idea of what to expect.
The Benefits of Compounding
One of the beauties of investing is compounding. This is where any profits, known as returns or dividends, are reinvested, allowing investments to grow faster over time. Ultimately, compounding is one of the true powers behind investments. However, it means having a long-term strategy, as time is what allows compounding to really work for you.
Personal Factors
Deciding which investments are right for you means examining your unique situation and goals. For example, are you hoping to make enough money for a large purchase in five years? Are you looking to bolster your retirement savings? How tolerant are you to risk?
Different investments work better in specific situations, so you need to understand what you want to accomplish before you begin. That way, you can choose options that meet your needs more effectively.
Additionally, everyone has a different perspective on risk, so you must figure out your level of tolerance. Generally, higher risk investments can yield larger rewards. Your time horizon will be a major factor in you choosing this type of investment. The longer time period you have to weather the highs and lows or volatility of this type of investing the better.
For example, the value of every stock fluctuates, but typically to different degrees. A startup can have a lot of potential for growth, leading to significant gains. However, it could also collapse, wiping out your investment entirely. Some people are more comfortable with the idea of extreme shifts in value, especially if it represents the possibility of making a lot in a short time. Others prefer something more conservative, trading slower gains for a smaller chance of the value falling.
Do You Need to Work With a Broker?
Technology gives people more options regarding how you can invest. In the past, you had no choice but to connect with a broker or investment firm to get started in investing. Now, you can download an app, deposit funds, and handle a range of transactions on your own.
Which approach is right for you depends on your comfort level. Some people prefer to have access to expert advice from a broker or firm while others feel confident handling it on their own. Just a word of caution if you choose to work with a broker; your broker is working for you. Ensure you understand how he or she plans to meet your financial goals. Here are a few questions you should ask a potential broker before working with them.
- What fees do you charge for your services?
- Will you invest my money in the best funds available for my goals are only those chosen by your firm?
- Do you provide any tax assistance
- What are your fiduciary responsibilities?
These questions can help you decide if a specific broker is right for you. Fees can add up and end up costing you future gains. The lower the fees, the more money you have invested, the better the profit on strong returns. Your broker should choose funds that will work best for meeting your goals, not the ones that add the most money to their bank account.
Some brokers may only purchase investment vehicles chosen by their firm as these offer higher commissions for them and not necessarily the best returns for you. The broker that is able to choose from any available funds on the market based on your financial goals is the type of broker you should hire.
Taxes must be paid on realized gains. Your broker should be able to help you minimize your tax liability, not just advise you on where to invest your money. Finally, a good fiduciary is looking out for your best interest, by asking your potential broker this question, you can get a good read on whether or not this broker is a good fit for you. Don’t be afraid to hold someone to a standard that ensure you get the best outcome.
Ultimately, investing isn’t as difficult as it initially appears, and nearly anyone can begin fairly quickly. Just consider the points above, and let this investing beginner’s guide serve as an initial advisor on your journey into the world of investments.
Have you recently started investing? I would love to hear about your experiences in the comments below.
Looking for more great articles? Here’s a few to check out:
- Are High Fees for Investment Advice Sapping Your Returns
- Audible.com Free Trial
- Teairra Mari New Worth
- Before Investing in Stocks, Get Prepared
Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.