Investing Your Money For Beginners

Investing your money can be a simple process. Many argue that more information is not helpful, which is true to up to a point. It is important to understand the basics of investing and what you can expect from your investment decisions. You also need to know who and why behind an investment and if it’s safe for you to invest with them. Big-name companies may be trustworthy but there are others who aren’t so upfront about the risks and benefits associated with their investment programs.

Investing your money is the easiest way to earn more. You can invest your time, energy or capital, but you need money to start making investments. There are multiple ways to invest, but most of them deal with buying stocks, which means you need to choose between two options: buy individual stocks or buy mutual funds . In this article i have listed out ways to invest wisely.

Avoid investment funds with high fees.

Different funds charge different fees, known as the expense ratio. For instance, an expense ratio of 2% per year means that each year 2% of the fund’s total assets will be used to pay for expenses, such as management, advertising, and administrative costs.

If you can choose a similar fund that charges just 1%, that may seem small, but the savings really add up over time when you consider that they come off your potential annual return.

For instance, if you invest $100,000 over 30 years with an average return of 7%, instead of 6%, you’ll save close to $200,000. So, be sure to choose low-cost funds so you get the benefit of higher returns.

Pay High-Interest Debt

Other financial priorities could include paying down high-interest debt. If you have a debt that has a higher interest rate than your investment return, you’re losing money each day you carry the debt. So it works in your favor to pay down high-interest debt as soon as possible.

Take Your Age as a Factor

Another significant factor is your age.

If you’re 30 years old – You’ve got a few decades before you retire. You can play with long-term investments such as stocks that would be too risky for someone on the cusp of retirement. After all, stocks can lose their value quickly, but if you have 30 more years before you need that cash, you can afford to take that gamble.
If you’re closer to retirement age – you want to focus on maintaining what you’ve already got. Safer, steadier investments — especially where there are dividends involved — are a better choice for you.

Get an Emergency Fund

Having a fully stocked emergency fund in an accessible savings account is a huge financial priority. You want to have three to six months’ worth of living expenses tucked away. Emergencies happen all the time, and having the capital to deal with them is a necessity. You don’t want to have to tap into your investments to deal with a car repair or a hospital bill. Don’t have an Emergency Fund? Start saving for one with LendingClub Bank’s high-yield savings account.

Understand What Compound Interest is

Time is on your side. Thanks to compound interest, you are more likely to earn more money the sooner you start investing. Here’s why: Let’s say you’re 25 years old, and you can pull together $5,000 per year to invest. That’s money you may have accumulated from holiday bonuses from your boss and birthday checks. If you were to save $5,000 every year for 40 years, when you’re 65 and ready to retire, you’d have just $200,000. But if you invest that money into something with a 7% annual return, you’ll have made $1,068,048. More than $1 million! If you were to increase your monthly contributions, you’d see even more money when it’s time to retire. While millennials are perfectly poised to take full advantage of compounding, anyone can benefit.

It’s essential to keep in mind that investing comes with a risk, so make sure only to invest money that you know you won’t need in a few months’ time. The stock market can be volatile day-to-day, but you’re more likely to make higher returns in the long run if you invest than if you don’t invest.

Reduce Fees and Fund Expenses

Investment expenses — i.e., fees — can take a hefty chunk out of your returns. So make sure you’re not getting ripped off.

There are many different kinds of fees — everything from account maintenance costs to mutual fund loads. And there are many ways to cut back on them or even avoid them altogether!

Every type of investment carries its own set of fees. However, here are the most common fees you’ll see:

Account Maintenance Fees: Typically, an annual fee below $100. This fee is often waived once you hit a minimum balance in your investment account.
Commissions: A flat amount per trade or a flat amount plus a percentage per trade. This amount will vary depending on your broker and the funds you invest in.
Mutual Fund Loads: Either front-end, back-end, or a combination of both. These can sometimes be waived if the funds are held in brokerage accounts with the same broker.
12b-1 Fees: Internally charged fees on mutual funds. This will reduce the value of your fund by up to 1% and will be deducted automatically every year.
Management or Advisor Fees: A fee paid to an advisor who manages your accounts. This could add up to thousands of dollars per year, all avoidable if you manage your own account instead.

We’ve reviewed several products that are fee-free. In fact, one of our favorite robo advisors, Wealthfront, is free for accounts under $5,000. That makes it a great place to get started.

And if you’re looking for a fee-free stockbroker, you’re in luck. The competition in this space is heating up, which means some brokerages are slashing their fees to zero. Robinhood has been a trailblazer, but even old favorites like Firstrade are now fee-free. Public.com is another broker to check out, especially if you want to add a social element to your investing.

Choose an Asset Class that Suits Your Risk Tolerance

Once you have an account set up, either with a brokerage or a robo advisor, you can start investing! This can be a daunting part. There are a lot of investing options, depending on your risk tolerance, or how willing you are to lose your money in exchange for a higher return.

Generally, the more risky an investment is, the higher the return is. While it might be tempting to invest in riskier stocks, the best thing is to invest in a variety of different asset classes.

An “asset class” is a group of similar kinds of investments. You can invest in one asset class or many. Here are the basic asset classes for investors based on how risky they are:

Cash

This also includes cash equivalents. Cash is considered the safest investment because its value is usually steady, even when taking into account inflation. For an easy way to expand your cash reserves, You can invest in an interest-paying savings account.

Bonds

Also known as debt or fixed income. This is when you lend money to a government or institution and are paid interest in return. Examples include mutual bonds and certificates of deposit.

Real Estate

This is when you own physical property. You can also invest in a REIT and own a portion of a property. However, keep in mind that real estate can be a big-time commitment. Find out how to invest in real estate here.

Stocks

This is also known as equities or when you own shares in a company. This is probably what most people think of when they think of investing. However, keep in mind that the riskiness of stocks varies significantly by company. Younger companies might be riskier, but a well-established company could also go bankrupt due to unexpected changes or sudden lawsuits. If you want to know more, then read our guide on how to invest in stocks.

Futures and Other Derivatives

This is when you speculate on the future price of an underlying asset. It can be rather complicated, but essentially it’s a contract that obliges the parties involved to buy and sell an asset (such as oil) for a predetermined future price and date.

Commodities and Precious Metals

Just like with real estate, commodities are to own a physical thing — be it gold, oil, or pork bellies. You can trade them, but thankfully, you rarely have to take possession of them. There are a lot of different ways to buy and sell commodities, including futures contracts, or investing in an ETF. Read more about how to invest in commodities.

Other Alternative Investments

Since you need to have a diversified portfolio, you can also consider alternative investments like fine art on platforms like Masterworks, or lending to small companies via a peer-to-peer lending platform. These can be an excellent addition to your portfolio, although they have their own set of risks to consider.

A mix of asset classes, or diversification, gives you a well-rounded portfolio that can weather the ups and downs of the stock market. An example of a diversified portfolio is investing in a mutual fund, owning a variety of individual stocks across a number of sectors (like healthcare, transportation, and retail), and also owning and renting out a few real estate properties.

Set a Deadline and Choose an Investing Goal

Now that you have a better idea of the type of asset classes you can invest in, it’s time to determine your financial goals. What are you saving and investing for? How much will you need? If you’re saving for your kid’s college, you’ll need a different amount than if you’re just saving for retirement.

Short-Term Investing

If you know you’re going to need the money in a few years, then your strategy is going to be a bit different. Usually, this is when you buy stocks whose earnings are expected to outpace the market as a whole in a short amount of time. This is also known as growth investing. Some of the short-term investing strategies include investing in a peer-to-peer lender or putting your money in a savings account.
Pros:

High-liquidity. Your money is not stuck in an account for a set amount of time, making it easy to withdraw the funds when you need them.
It can be low-risk. Depending on the type of investment, short-term investing can be low risk because it has less time to be impacted by a sudden drop in markets or interest rates.

Cons:

Low-return. Because your money has only been invested for a short amount of time, you’re unlikely to make a big return on your money.
Higher tax bill. Depending on the investment, you may have to pay more taxes than if you had left the investment in a longer-term account.

Long-Term Investing

This is also known as buy-and-hold investing and is probably the most common investment for things like retirement. You know you’re in it for the long run. This strategy involves buying stocks now and holding them for years when they will hopefully be worth more. Other long-term investing strategies include real estate, investing in a certificate of deposit and
Pros:

Less Risky. Holding onto a stock for a long time means you have more time to recover from a sudden dip in the stock market.
Less Stressful. Longer investments are often less stressful because you don’t need to follow markets as closely on a day-to-day basis.