Mobills Personal Finance is an easy way to track expenses and manage your budget. The app is much more organized and user-friendly than a spreadsheet. This finance management tool helps you create a budget plan that actually works. Mobills lets you track expenses on the go, right in the palm of your hand.
A Beginner’s Guide to Investing
Saving and investing your hard-earned money can be intimidating and very stressful. When it comes to investing, there are literally thousands of options, and everyone seems to have contradicting opinions. It’s not always clear what options will be best for you.
Our goal is to provide you with the information you need to make good decisions with your money and point you in the direction of financial security. Here, we’re giving a complete guide to investing money for beginners.
Building wealth can be summed up in just one sentence. Are you ready? Here it is, the one sentence that will change your financial life:
Our goal is to provide you with the information you need to make good decisions with your money and point you in the direction of financial security. Here, we’re giving a complete guide to investing money for beginners.
Building wealth can be summed up in just one sentence. Are you ready? Here it is, the one sentence that will change your financial life:
Spend less than you make, and invest the difference wisely.
That’s it! It really is that simple. If you can commit to this simple mantra now, you can secure yourself a positive financial future.
There are certainly other paths to financial success. You can win the lottery, gain a huge inheritance, or marry someone wealthy… however, for most of us, these scenarios are unlikely at best. I prefer to focus on what I can control. I can control what I spend, and I can control how I invest.
So, how much should you save and invest? And where should you invest your money? These are the million-dollar questions (sometimes quite literally)!
Decisions regarding how much you save and where you invest are personal decisions that you should not take lightly. Many factors can influence your decision-making process: your age, income, family size, and current financial obligations are a few to name. Our goal at Rainy Day is to give you the information you need to create a financial strategy that is right for you when planning how to invest money!
How Much Should You Save for Investing in the Future?
The short answer: save as much as you can! Your ability to save a larger percentage of your income is going to have a significant impact on your future.
Before you begin to invest any money, I strongly recommend having at least some money set aside for emergencies and unforeseen events. Experts like Dave Ramsey and others typically recommend saving around $1,000 in cash (physical cash or in a bank account that you can access at a moment’s notice). This money is for emergencies ONLY!
Once you have your emergency money set aside, I recommend that you set a goal to save at least 10% of your income for investing in your future. If you are able to save more, by all means, save as much as you can!
There is a popular financial movement called F.I.R.E., which stands for “Financial Independence, Retire Early.” The goal is to save and invest very aggressively, half or more of your income, in order to retire early. This can require significant sacrifice and lifestyle changes, but some feel that it’s worth the sacrifice.
The key is to remember to pay yourself first! I was first introduced to this concept by what is still my favorite financial book of all time, The Richest Man In Babylon. “A part of all I earn is mine to keep. It should not be less than a tenth no matter how little you earn.” This is a significant quote that has stuck with me. When put in this perspective, the money you save is less of a sacrifice. After all, this is the only money, of all that you earn, that is actually yours!
If you pay yourself first (save 10% or more) and then live on the rest, you will be on a path to financial security.
How to Invest Money Wisely and Where
Okay, this is where it can start to get confusing. Yes, there are a lot of options when it comes to investing. Financial institutions have added so much jargon and complexity to the process of investing that many people get discouraged and never take the critical first steps to get started.
Truth be told, a lot of financial professionals are far more interested in making money from you than they are in making money for you!
Here is the good news. Most people would do far better by simplifying their investment strategy, not by making it more complex. Historically, the most successful investments are also simple. Here are some of the investment options we recommend you consider. Keep in mind that everyone’s situation is different. Take control of your own financial future by learning about each of the investment vehicles below and selecting the accounts and investment tools that are right for you.
Retirement Plans
Preparing for eventual retirement is one of the main reasons that people save and invest. No matter what your current age or situation is, investing your money into a retirement account is almost always a great place to start! Virtually, all retirement plans offer a tax advantage that can save you a lot of money over time. The primary difference between most retirement plan types is when you will pay taxes.
Pre-Tax Accounts:
With a retirement plan like a traditional 401 (k), your contributions are made with pre-tax dollars, which reduces your taxable income. Suppose you make $40,000 in a year but contribute $4,000 to your retirement. In this case, you will only pay taxes for $36,000. However, when you take money out of your account for your retirement, you will have to pay taxes on the money you transfer at whatever tax rate you’re at then.
After-Tax Accounts:
Roth 401 (k) and IRAs, in contrast, are funded with after-tax dollars. So, if you make $40,000 but contribute $4,000 to your ROTH retirement account, you will still be taxed for the full $40,000. Withdrawals are tax-free, however. So, when you take money out for retirement, you will not have to pay any taxes.
Most experts agree that Roth accounts are great for younger investors with more time for their money to grow. Again, everyone’s situation is different, and there are pros and cons to each option.
Keep in mind that with a traditional IRA or 401 (k) plan, you will pay a penalty fee if you try to take money out before you are at retirement age. With a Roth account, you can withdraw your initial investment at any time with no penalty (because you have already paid taxes on this money). You just can’t take out any of your investment proceeds, or you will need to pay a fee.
A lot of retirement savings plans provided by employers include matching contributions from your employer. When trying to decide whether to invest in a 401(k) at work or an individual retirement account (IRA), I definitely recommend that you go with the 401(k) if you get a company match. This is basically free money from your employer! If there is no company match, your company plan might still be a good option, or, if you prefer to manage your own account, you can easily set up an IRA or Roth IRA with an online brokerage account. Here are a few to consider!
There are other retirement options and account types to consider as well. Here is a great resource to review from Bankrate.
You do not need to use a retirement account to invest. You can open an investment account at any brokerage and invest as much or as little as you would like. The primary advantages of a retirement account are the tax advantages. If you have already maxed out your retirement contributions (there are limits depending on the type of account you choose) or if you want to spend your investment returns before retirement, you can invest directly without putting your money in a retirement account.
Investment Options
There are hundreds or even thousands of different types of investments including stocks, bonds, real estate and index funds. There are also unique investments like art, coins, rare metals, and other collectibles. Information on more common investments can be seen here.
Back to investing money for beginners. When it comes to the many investment options, here are some you will want to understand:
Stocks
A share of stock basically represents your ownership in a specific company. If a company has 10,000 total shares, and you own 1,000 shares, you own 10% of the company! When you own stock in a company, you are betting that the company will grow so that the value of your shares grows, AND/OR that the company will pay you a share of their profits in the form of a dividend. Historically, stocks are risky, with big swings in value over time. However, they also have a higher potential for large gains.
Bonds
Bonds represent a loan made by an investor. If a company or government agency needs money, they might choose to issue bonds as a way to gain the capital they need. In return, they pay a predetermined amount of interest to the investor. Historically, high-grade bonds are a very safe investment but also provide a lower potential for returns.
Real Estate
Many investors like to own property, homes, business buildings, and other real estate. Real estate can provide investors with attractive gains through appreciation of the property or from tenants making payments. You can also own real estate by purchasing investment products like REITs (Real Estate Investment Trusts). A REIT is basically a company that owns a particular type of property or real estate. By owning shares in the REIT, you proportionally own the property they invest in.
Index Funds
Index funds are basically baskets of investments. For example, the index fund SPY owns shares in all of the companies listed on the Standard and Poor’s list (the 500 biggest companies in the US). Index funds can be actively managed by people, OR like the example above, it can be a passively managed fund. This simply means that there are predefined rules that the fund will always follow, and there is no need for a person to manage anything. Actively managed funds have fees associated with the fund managers, and passively managed funds have much lower fees.
I am a big fan of index funds because they allow you exposure to hundreds of stocks, bonds, and REITs, different industries, and various market segments.
Historically, investors who track the whole market and invest in simple index funds have significantly outperformed investors who invest in actively managed funds.
If you’re concerned with how to invest money wisely, we recommend investing 80% or more of your investment capital in low-cost index funds that track a wide range of investments. You can find some great options here.
We hope this guide has shown you how to invest money and how to invest money wisely. Spend less than you make, and invest the difference wisely. The longer you can live by this simple investment practice, the more likely you are to have financial freedom!
Conclusion
If you’re concerned with how to invest money wisely, we recommend investing 80% or more of your investment capital in low-cost index funds that track a wide range of investments. You can find some great options here.
We hope this guide has shown you how to invest money and how to invest money wisely. Spend less than you make, and invest the difference wisely. The longer you can live by this simple investment practice, the more likely you are to have financial freedom!
Blogs You May Like:
