Investment is needed to achieve almost every conceivable financial goal, including retirement.
Some people are afraid to invest, but in fact, you should be wary of the consequences of not investing. Sitting on the sidelines is a huge opportunity cost.
For example, take a person who is diligent in saving and saving $ 10,000 a year for 25 to 65 years. If this person puts this money into an interest-bearing account, such as a savings account, that gives an average interest rate of 1%, they will have a little over $ 500,000 left over.
Not bad.
But if you invested that money instead, you would have over $ 1.25 million!
That’s right, assuming a modest 5% return on your investment each year, you will more than double your money compared to keeping it in a bank account.
And if the market was returning an average of 7%, which is closer to the historical average, you would have $ 2.10 million north! This is 4 times more than a bank account.
Below we provide a complete guide that will give you the basics you need to know how to invest money to achieve your personal financial goals.
How to Invest Money: A 6-Step Beginner’s Guide
1. Set your financial goals
The first step you need to take before investing money is to set some basic financial goals. This is usually the first step in any financial planning process.
Pension purpose
For almost everyone, this should include a retirement goal. You should make a rough plan of what age you want to retire and how much money you want to retire.
Age is 100% your call. Most people retire at age 60, but there is no reason you can’t work longer. And if you want to retire early, you’ll need to save and invest a little more along the way.
When it comes to how much money you need in retirement, you can use a simple trick to find your number. This is called the 4% rule.
The rule works by simply taking your cost of living and dividing it by 0.04 (or multiplying by 25). So if your cost of living, including rent, groceries, and all other expenses, is $ 20,000 a year right now, you need $ 500,000 to comfortably retire (assuming your cost of living stays the same).
If your living wage is $ 40,000, you need a million dollars.
Other goals
Retirement isn’t the only financial goal you should consider. Other goals to consider before investing:
- Debt repayment
- Creation of an emergency fund
- Save up for vacation
- Saving on cars
- Preparing to buy a home
- Savings for a child’s education
- Wealth creation
While the list is not exhaustive, it is a good start.
It is important to understand these goals because it can affect how you invest. For example, if you currently have a lot of high-interest debt, you might want to pay it off first before investing.
Likewise, if you are saving money for a car or house, you will need to balance the amount you plan to invest with how much money you put in another bank account for those items.
Determine your investment level
Once your goals are set, you can determine how much you want to invest – both initially and permanently – to meet your retirement goal and balance other financial goals.
2. Determine your level of engagement
When your goals are set and you have a clear idea of how much you want to invest, it’s time to decide how much you want to be involved in the investment process.
Generally speaking, you have three options:
Option 1: Active investor
Investing actively requires the most effort and carries the most risk.
When it comes to being an active investor in the stock market, you will need to track and select the exact stocks that you want to invest in. You also need to constantly listen to the ground to know if you want to trade or buy another stock in your portfolio.
Even with bonds and real estate, it usually takes more work to be an active investor to select the individual bonds or real estate that you want to invest in.
This option also carries the greatest risk because you have less opportunity to diversify what you invest in, unlike the options you’ll see below. Even if you are investing in 10 or 20 individual stocks, it may not be enough to truly diversify your portfolio; you will need to do the math to confirm this.
Option 2: passive investor
A passive investor is one who chooses to invest in broad index funds or exchange traded funds (ETFs) that reflect the established index. The passive investor usually has less risk tolerance and less time to actively manage their portfolio.
An index fund or ETF is a group of stocks or bonds tied together. For example, you can buy an S&P 500 index fund and buy shares of the 500 largest companies at the same time. This is an easy way to diversify and “buy the whole market”.
Personally, I like this approach. I can select the lowest value ETFs and ETFs that reflect the broad indices I am interested in.
Note: a passive investor looking to invest in real estate will most likely choose a REIT.
Option 3: Robo Investor Advisor
Robo Expert Advisors take passive investing to the next level and are a good option for newbies looking to take a more hands-off approach.
With the help of a robo-consultant like Betterment, you answer a series of preliminary questions. This is usually a combination of personal questions (like your name, date of birth, etc.) and financial questions (like the goals section that you completed in step 1) to give the robo advisor all the information it needs to invest from your name.
From there, the advisor robot will invest in various ETFs on your behalf and manage your investments, which will continue as you age and your investment goals may change.
Bonus Option: Financial Advisor
Finally, you can always hire a financial advisor to invest on your behalf. This option tends to be the most expensive, and you should be careful when choosing an advisor who cares about your best interests.
Compared to a robot consultant that charges about 0.25% management fees, it is not uncommon for some financial advisors to charge a management fee of 1% or more.
3. Select an asset class and investment instrument.
Once you’ve decided on your investment style, it’s time to choose how you want to invest. If you take the robo advisor or financial advisor route, it can be done on your behalf, but it’s still good to go to inquire about your investments and know your options.
In general, you have several different asset classes to choose from, including:
- Shares or capital
- Bonds
- Real estate
- Goods (e.g. gold)
Stocks and bonds are the most common asset classes to invest, with bonds considered low risk and stocks more volatile. You have the option to invest in them through mutual funds, index funds, ETFs, or buy them separately.
You can also invest in real estate through a REIT or buy individual property or invest in a commodity like gold. Both of these asset classes are for the slightly more seasoned investor, and many experts, including Warren Buffett and John Bogle, believe you can get by with a simple mix of stocks and bonds.
But ultimately, the choice is yours in what you want to invest in.
Just don’t invest all your money in bitcoins … please…
4. Choose where you want to invest
Next, it’s time to choose where you want to invest. In other words, it’s time to choose a broker.
There are several factors to consider here, including the decisions you have made so far.
If you want to be an active stock investor, choosing a free stock trading platform like Robinhood, Webull or even Charles Schwab is a good option.
If you’ve decided to become a passive investor in index funds or ETFs, it might be wise to choose an online broker that offers a wide variety of low-cost fund options. Fidelity, Charles Schwab, and Vanguard would be good options here.
And if you have chosen a robotic advisor, then you need to choose which advisor robot you want to invest with! Betterment and Wealthfront are popular options, but Schwab and Vanguard have similar offerings as well.
Another aspect you need to consider is the type of account you want to invest in.
If you are looking to open a standard brokerage account, you probably don’t need to think too much about it.
However, if you are looking to open an IRA or 529 college savings accounts, you need to make sure the broker you choose offers what you are looking for.
Bonus: Make sure to think about your 401 (k) at this stage if your employer offers one as well. If they offer an employer match, you need to get one – that’s free money!
5. Get started!
At this point, you’ve done most of the important work to start investing your money! Even if you have some money to invest right now, you can start today with just $ 100.
Taking action involves three important steps:
- Open your account
- Fund your account
- Make investment purchases!
And please don’t forget step # 3.
I have heard horror stories of people opening a Roth IRA and depositing money into an account, thinking they have invested their money. But they never actually invested in any asset class!
The money was in the broker’s account, as well as in the bank account.
After you fund your account, you need to make investment purchases, be it stocks, index funds, ETFs or whatever, don’t forget this step in the process!
6. Manage your current investments
It is equally important for the initial investment to manage the current investment.
If you choose to become an active investor, you may need to monitor your investments more closely than if you chose the role of a passive investor or a robot advisor investor. In the case of the last two checks on your investment, once a month or even once every couple of months is probably more than enough.
The important thing, no matter which path you choose, is to deposit money regularly.
It’s not enough to deposit money once and leave – unless you’ve deposited a heck of a lot of money!
Recalling the example at the beginning of this article, the diligent investor set aside $ 10,000 each year. It was this consistent savings, coupled with investing, that allowed them to retire with over $ 2 million.
Therefore, whether you deposit money once a month or once a year, do not forget to regularly add funds to your investments.
Summary – How to start investing
Self-investing doesn’t have to be difficult or difficult.
This is good as investing is usually necessary for retirement and other investment goals. You can get started in six easy steps:
- Set your financial goals
- Determine your level of engagement
- Select an asset class and investment instrument.
- Choose where you want to invest.
- Begin!
- Manage your investments at all times
Start investing money today to tune in for a better financial future!
This article originally appeared on Your Money Geek and has been republished with permission.
