Take it from most Americans: one of the biggest financial regrets is not investing sooner.
According to a 2020 report by CNBC, which found 76% of baby boomers and 77% of millennials said they wished they’d started investing earlier.
What exactly is investing? It’s allocating funds into a company, portfolio or asset like a house, with the intent of growing those funds as the value of the investment appreciates.
Since there’s no guarantee an investment will become more valuable over time, investments do carry risks. However, the rewards from investing can meaningfully impact your financial future.
Investing early is important for a few reasons.
Compound interest you make on investments helps you grow your money more quickly. The earlier you invest, the more interest you can gain and grow.
As inflation rises, you’ll need to grow your savings, as well, to keep up. The value of cash will depreciate over time. Investments help you grow your money along with market performance.
Depending on your investment options, investing can provide other benefits. For example, some employers will offer an employee match on a retirement account like a 401(k). This means you could save even more by investing and having an employer match your contributions.
If you’re new to investing money, use this guide to learn more about how to get started, options available, things to consider along the way and some basic investing principles.
Decide How Much Of Your Budget You’re Willing To Invest
As we covered in our guide, Budgeting 101: How to Use the 50/30/20 Rule, a sound budgeting technique is to allocate 20% of your budget into savings. Savings include:
- Investments
- Emergency fund
- Savings plans
- Retirement
Amid these categories, you’ll need to determine how much you’re able to invest. Ideally, you’ll have at least three to six months of your income saved in an emergency fund in case you lose your job so you can still cover your bills. You might want to make creating an emergency fund and eliminating debt a top priority.
From there, you can divide the rest of your savings among investments, savings plans and retirement.
Understand Your Investment Options
Before you invest, it helps to understand the difference between financial services like high-return savings accounts and investment accounts.
For example, a certificate of deposit (CD) will typically offer higher interest than a regular savings account since you’re expected to keep your money in the account for a certain amount of time before taking it out. But unlike an investment, which carries risk, a CD typically guarantees a return, as long as you meet the requirements.
There are various investment options for beginners to choose from when you decide you want to invest money. In addition to assets like real estate and commodities you could invest in, some of the most popular investment assets include the following.
Stocks
A stock is a share of ownership in a company. You make money when the value of your stock goes up, and you sell your stock for a profit. Some stocks may also pay regular company earning distributions to customers, called dividends.
Depending on the company’s performance and your share, you may be able to earn high returns with this type of investment. It also carries risk since companies can go out of business or lose value.
Corporate and Municipal Bonds
A bond is a debt security. It’s money you’re essentially lending to the issuers, which may be the government, a business or a municipality.
Bonds are considered a fixed-income investment since investors generally receive regular income payments and regular installments of interest once or twice a year. Bonds typically provide a lower return than an investment like stocks, but they’re also considered less risky.
Mutual Funds
You can buy shares in mutual funds, which are companies that collect money from investors and invest it in assets like stocks and bonds. With mutual funds, you may have your own professional investment manager, who chooses which assets to invest in to maximize your returns.
One common type of mutual fund is an index fund. Index funds track an index rather than paying an investment manager to choose the investments. For example, an S&P 500 Index fund will hold stock in the S&P 500, the stock market index comprising 500 large companies in the U.S.
Mutual funds work similarly to stocks, where you might earn dividends or interest. You can sell the mutual fund for a profit when its value increases. Mutual funds typically require the payment of an annual fee called an expense ratio to cover the management of the fund.
Annuities
An annuity is a financial contract between you and an insurance company, where the insurer will be required to make payments to you in the future based on an investment. There are three main types of annuities:
- A fixed annuity: where the insurance company promises to pay a minimum interest rate and a fixed amount of periodic payments
- Variable annuity: where you can direct annuity payments to various investment options, such as mutual funds
- Indexed annuity: insurance products and index crediting strategies
Annuity payments will either be made in a series of payments or as a lump-sum payment. In addition to insurance companies selling annuities, banks and brokerage firms do so, as well.
Exchange-Traded Funds (ETFs)
ETFs work similarly to mutual funds, where investors can pool their money into a fund that invests in bonds, stocks or other assets. ETF is a type of index fund where shares are traded on a national stock exchange.
The main difference between ETFs and mutual funds/index funds is that ETF prices fluctuate throughout the day. Mutual funds and index funds are priced once at the end of each trading day.
Money Market Funds
Money market funds are a type of mutual fund that primarily invests in government securities, corporate and bank debt securities and tax-exempt municipal securities. Money market funds may be structured for different investors, such as retail investors or institutional investors.
While these types of investments can provide a better return on investment than more traditional savings accounts, they generally don’t grow your wealth as quickly as other types of investments, like stocks.
U.S. Treasury Securities
U.S. Treasury securities are types of debt issued by the U.S. Department of the Treasury on behalf of the federal government. They include:
- Treasury bills: short-term securities that may mature within a few days or as long as a year
- Notes: longer-term securities that mature within 10 years
- Bonds: long-term securities that usually mature in 30 years and pay interest every six months
- Treasury Inflation-Protected Securities (TIPS): which are notes and bonds that pay interest every six months and have various maturity terms
Since U.S. Treasuries are issued on behalf of the federal government, they’re typically a safe investment. However, they also don’t generally payout as high a return as other types of investments.
How To Choose An Investment Strategy
All investments carry some degree of risk. Ideally, your strategy will maximize your returns and minimize your risk to achieve your financial goals.
You may want to invest in a variety of assets, including some that are higher-risk, higher-return, and some that are safer bets because they’re considered lower-risk. Diversifying an investment portfolio with a mix of investment assets may minimize the risk of loss and provide you with the opportunity to see a return.
One major factor that should influence your investment strategy is your age. As you get closer to retirement, you’ll want to have more funds available that can help you pay off all your debts and stop working with less worry about covering expenses.
Some financial advisors may recommend a more aggressive investment strategy the younger you are. As you age, you can shift to a more conservative investment strategy.
Ideally, you’ll want to work with a professional financial advisor who can help guide you toward the best investment strategy for your age and financial goals. Here are some basic guidelines to keep in mind when it comes to investing.
Enroll In Your Employer’s 401(k)
This is a retirement investment account. Some employers will offer an employer match, where your company will match your contributions. Talk with your employer’s human resources department if you have questions about their offerings and what they recommend.
Look Into Other Retirement Options
You may be interested in an individual retirement account (IRA), an investment account for retirement that can come in various options. A traditional IRA enables you to contribute pre- or post-tax. Your money grows tax-deferred, then will be taxed as current income after the age of 59½. With a Roth IRA, you contribute after-tax dollars to your account. Your investment grows tax-free, and you can also usually make tax- and penalty-free withdrawals after 59½.
Consider Buy-and-Hold Investing
Buy-and-hold investing is a strategy sometimes recommended for younger investors, where you invest in products with the intent of having them long-term. Even when markets or investments dip, a buy-and-hold strategy is to retain those investments, with the understanding that they may rise with time again despite short-term declines. You can apply this strategy to stocks and index funds.
Active Investing Can Produce Short-Term Gains
Active investing is on a shorter-term schedule than buy-and-hold investing. Active investors trade more frequently to benefit from current market fluctuations. This strategy may also benefit long-term goals. One form of active investing is value investing, which is purchasing undervalued stocks that have potentially strong long-term outcomes.
Consider Dollar-Cost Averaging
Dollar-cost averaging spreads stock or fund purchases out over time, purchasing the same amount at regular intervals. You can buy more shares when a stock price is lower and buy fewer shares when the stock price is higher. That helps you gain a better average entry price.
Choose Investments That Match Your Values
Another type of investing strategy may focus on investing only in socially responsible companies. Some investors will want to only invest in socially responsible companies and exclude investing in companies that don’t align with their values.
DIY or Enlist Finance Professionals
You can invest yourself with DIY options like robo-advisors, or you could work with a financial professional who can guide you based on your goals. Think about your short-term and long-term goals, how much risk you’re willing to take and what your financial goals are. Reach out to an investment advisor for professional assistance.
Things To Consider When You Start Investing
The U.S. Securities and Exchange Commission has some helpful tips for things to consider before you make investing decisions. The commission advises to:
1. Outline Your Financial Goals
If you don’t yet have a financial plan, create one first before you start investing. That way, you’ll understand what your financial goals are and how investing may be able to help.
2. Determine Your Risk Level
Any investment carries some degree of risk. Risk is necessary to achieve greater financial returns, but you may want to invest more conservatively, depending on your comfort level. Also, consider the role of inflation when you’re investing. If you focus only on low-risk investments, the return may not be high enough to keep pace with inflation.
3. Diversify Your Portfolio
Another reason to diversify your portfolio is that generally stocks, bonds and cash don’t grow or decrease in value simultaneously. When bonds become more valuable, for example, stock value may decrease. Having a diversified portfolio can help you protect all your investments.
4. Invest in Multiple Sources
In addition to diversifying the kinds of products you use for investments, it’s also a good idea to invest in multiple companies. If you put all your investment money into a single company and it goes out of business, you’ll lose your investment. Having a mix can protect you.
5. Don’t Forget Other Financial Goals
If you’re carrying debt, if you don’t yet have an emergency fund or if you don’t have personal savings, make sure those are part of your financial plan, too. You’ll want to have enough money to pay off emergencies, including job loss, so you don’t go into debt while you’re investing.
6. Take Advantage of Employer Matching
If your employer offers to match your 401(k) contributions, make sure you contribute enough to get the maximum match. It’s free money that can help you grow your wealth.
7. Adjust Your Portfolio
Your investment needs may change over time. Periodically, look at your investment strategy and rebalance your portfolio as needed.
If you work with a financial advisor, look for one that’s a fiduciary. A fiduciary is a person or organization that puts the clients’ interests ahead of their own. That means they’ll make investment decisions to help you maximize your return, not to help their business or their clients.
Consider Investing For Your Financial Future
Investing can be a great tool to create long-term financial stability. By building a diverse portfolio, you can grow your money over time and earn compound interest on your investments. Investments help your savings keep pace with inflation and help you generate wealth so you can comfortably retire or achieve other life goals.
You can use investment strategies with savings to create financial stability short-term and long-term. If you’d like information on saving, contact Arizona Central Credit Union for personalized recommendations.
