Buzz
If you have savings, it’s a good idea to invest them to help your money grow. In fact, if you know how to invest wisely, you could live comfortably off the interest generated by your investments. Start with safer options such as bonds, mutual funds, and retirement accounts while you familiarize yourself with the investment market. Once you’ve accumulated enough funds, you can consider more risky investments like real estate or commodities, as they offer higher potential returns.
Steps to Take
Begin with safer investment options
Open a money market account. A money market account is a type of savings account that requires a higher minimum balance but offers much higher interest rates. These rates generally align with the current market rates.
- The access to funds in a money market account is quite good, although banks may impose limits on how much can be withdrawn and how frequently. It’s not ideal to use a money market account for emergency savings.
- If you’re already a customer of a bank, you can open a money market account with them. However, it’s also wise to shop around to find the best interest rates with low deposit requirements that fit your needs and budget.
- Many credit card companies, such as Capital One and Discovery, allow you to open a money market account online.
Protect your investment with a Certificate of Deposit (CD). A CD locks away a certain amount of money for a set period of time. During this term, you cannot access your funds. Once the term ends, you will receive your initial investment along with the interest earned.
- CDs are among the safest options for saving and investing money. The longer the term of the CD, the higher the interest rate will be.
- FDIC-insured banks offer CDs with various terms and minimum deposit requirements, making it easier to find a CD that suits your needs.
- Some online banks, like Ally, offer CDs with no minimum deposit requirements.
- When opening a CD account, carefully read the disclosure statement. You need to understand whether the interest rate is fixed or variable, and when the bank will pay interest. Check the maturity date and evaluate the penalty fees for early withdrawals.
Buy stocks from companies and industries you know. As a beginner, you don’t need a broker to start investing in the stock market. You can use Dividend Reinvestment Programs (DRIPs) or Direct Stock Purchase Plans (DSPPs) to avoid broker fees and commissions, allowing you to buy stocks directly from companies.
- As a beginner, you should invest small amounts, perhaps only $20 or $30 per month through these direct investment programs. A list of companies that allow fee-free direct investments can be found at https://www.directinvesting.com/search/no_fees_list.cfm.
- If you invest in companies you understand, research becomes easier. You can recognize when a company is performing well and anticipate trends that will benefit the company.
Diversify your portfolio with mutual funds. Mutual funds are collections of stocks, bonds, or commodities managed by a professional investment advisor. Due to their diversified nature, mutual funds carry lower risk and are suitable for long-term investments.
- In some cases, you can purchase shares directly from the fund. However, typically, you’ll need to work with a broker or financial advisor to buy shares in a mutual fund.
- Mutual funds are a relatively inexpensive way to diversify your portfolio when you’re new to investing. You can buy shares in a mutual fund for far less than the cost of buying a portion of the underlying assets in the fund.
Open a retirement account. A retirement account allows you to save for retirement without paying taxes. The most common retirement accounts are 401(k) and IRA. A 401(k) is set up by your employer, while you establish an IRA on your own.
- Many companies contribute a specific amount to employees’ 401(k) accounts. You should contribute at least as much as your company offers to avoid wasting the tax-free contributions.
- With a traditional IRA, you can contribute up to $5,500 or more each year and avoid taxes. You will pay taxes when you withdraw the money during retirement. You may also opt for a Roth IRA, which doesn’t offer tax benefits during contributions. However, withdrawals during retirement will be tax-free.
- All IRA accounts benefit from compound interest, meaning the interest on your investments is reinvested and earns even more interest. For example, if you contribute $5,000 to a Roth IRA when you’re 20, your account could grow to $160,000 by the time you retire at 65 (assuming an 8% interest rate) without any further effort from you.
Invest in bonds for steady income. Bonds are fixed-interest securities. Essentially, a company or government borrows an amount equal to the bond's face value and agrees to repay that amount with interest. Bonds provide income regardless of market conditions.
- For example, imagine Bella Bakery issues a 5-year bond worth $10,000 with an interest rate of 3%. Ivan, an investor, buys this bond and pays Bella Bakery $10,000. Every six months, Bella Bakery pays Ivan 3% of $10,000, or $300, because Ivan has allowed them to use his money. After 5 years, with 10 payments of $300, Ivan receives his $10,000 back.
- The face value of most bonds is at least $1,000, so you may need to save up a bit before you can participate in the bond market.
- Series I bonds earn interest and have the ability to offset risks related to inflation. You can buy them directly from the government online. When interest rates are low, Series I bonds may offer better returns than money market accounts or CDs, and they are completely safe. They protect your investment from inflation.
Use gold or silver as a hedge against inflation. Investing in precious metals adds permanence and stability to your portfolio. Since gold and silver prices tend to move inversely to the market, they serve as a safeguard for other investments.
- Gold and silver prices typically rise during periods of market instability. Geopolitical events and instability affect this, while the stock market may not respond well to such uncertainty, often falling quickly.
- Precious metals are tax-free and relatively easy to store and trade. However, be prepared to invest a small amount in secure storage if you decide to buy gold or silver.
Embrace higher risks
Invest in real estate if you're aiming for long-term growth. Real estate investment can either be active or passive. Active investing, such as property trading or buying, renovating, and selling homes for a profit, carries higher risks due to real estate’s low liquidity. When you need to sell, finding a buyer may not be guaranteed.
- Passive investment is less risky and can be an ideal starting point if you wish to invest in real estate. A common choice is purchasing shares in a real estate investment trust (REIT). Each share represents a diversified group of properties, similar to a mutual fund investing in real estate. Shares can be bought through a broker.
Explore the currency market if you're seeking greater challenges. The global foreign exchange market Forex is the largest financial market in the world. Currencies fluctuate in relation to each other, mostly driven by the strength of each nation’s economy.
- To succeed in currency trading, you need a deep understanding of trends and geopolitical events. Make a habit of reading international news daily to spot opportunities.
- A smart strategy is to focus on one or two currencies, allowing you to research those countries’ economies thoroughly and stay updated on the latest news.
Trade options contracts to manage risk. An options contract allows you to buy or sell an asset at a specified price at a particular time in the future. Since you're not obligated to follow through, your loss is limited to the cost of the contract itself.
- To trade options, open an online brokerage account or go through a broker. The brokerage firm will set limits on your trading capacity based on your investment experience and the funds available in your account.
Implement a risk-hedging strategy for investments. If you’re making high-risk investments, using a hedging strategy can protect your portfolio. The core concept behind this strategy is to offset the potential losses of one asset by simultaneously investing in another asset whose price moves in the opposite direction.
- Most passive investors, such as those investing for retirement or long-term goals like funding college for their children, do not employ a hedging strategy. However, if you’re involved in riskier or more aggressive investments, a hedging strategy can help reduce the impact of losses, especially those caused by short-term market fluctuations.
- If you plan to engage in aggressive short-term investing, you will need support from a financial planner or advisor. They can help you design a hedging strategy and ensure that your portfolio is well-protected.
Diversify your portfolio with commodities. Commodities can serve as a risk hedge since they tend to behave differently than stocks and currencies. However, commodities also come with their own risks, as their prices are influenced by various factors, many of which are beyond human control.
- Commodities can be divided into hard commodities, like precious metals, and soft commodities, such as wheat, sugar, or coffee. You can invest in commodities in three ways: directly buying the commodities, purchasing shares in commodity companies, or trading futures contracts.
- You can also take a more passive approach by investing in commodities through exchange-traded funds (ETFs). These funds may invest in commodity companies or track commodity indices.
Prepare for success
Create an emergency fund. Set aside enough to cover 3-6 months of living expenses to ensure financial security in case of unexpected events. This money should be easily accessible but separate from your investment accounts.
- Keep your emergency fund in a savings account (so you can earn a bit of interest) and separate from your main checking account. You might also want to consider getting a dedicated debit card for your emergency fund so you can access it quickly when necessary.
Pay off high-interest debt. The returns you earn from investing are usually less than 10%. If you have credit card debt or personal loans with higher interest rates, they will quickly erode your investment income.
- For example, if you have $4,000 to invest but also owe $4,000 on a credit card with a 14% interest rate, even if you earn a 12% return on your investments, you'll only make $480. However, the credit card company will charge you $560 in interest during the same period, leaving you with a net loss of $80, regardless of how smart your investment strategy is.
- Not all debt is created equal. You don’t have to pay off your mortgage or student loans before starting to invest. These types of debt usually come with low interest rates and can even help you save money through tax-deductible interest payments.
Write down your investment goals. Your investment objectives will determine your investment strategy. If you're unsure about how much money you want and when you need it, you won’t be able to choose the right investment approach.
- You may have short-term, medium-term, and long-term goals. Determine the amount of money you need for each of these goals and the timeline to achieve them.
- Setting goals also helps you select the right investment vehicles. For example, with accounts like 401k, you may face penalties for early withdrawals. These types of accounts may not be ideal for short-term goals because the funds are not easily accessible.
Seek advice from financial experts. While you don’t necessarily need to hire a financial planner for investment advice, things will likely go smoother with the guidance of someone who understands market trends and investment strategies—especially if you're just starting.
- Even if you don't plan on working with a financial advisor long-term, they can still provide you with tools to stay on track.
- Bring a list of your goals and discuss them with them. A financial planner will offer you options to help you achieve your objectives most effectively.
Advice
- A common piece of investment advice is 'buy low, sell high.' Ideally, you invest when prices are at their lowest, when few people are involved. Then, you'll profit as investment interest grows and prices increase.
- Although you may have short-term goals, avoid investing in the stock market with the aim of making quick money. The general objective should be long-term investment rather than engaging in short-term gambles.
Warning
- There is always a chance you may incur losses. Make decisions only when you have sufficient information, and only invest an amount that you can afford to lose in case the investment doesn’t work out.
