If you’re like a lot of people, you don’t have the first clue about investing, at least not proper investing. To clear up the confusion and help take the sting of intimidation out of the realm of finance, learn a few tips for first time investing to help you grow your wealth, retire with peace of mind, and meet your financial goals.
What is Investing, Really?
The absolute best place to start when it comes to learning about investing is with learning exactly what investing is. Simply put, investing is the act of using your money, rather than your time, to build your money. Sure you can grow your wealth by working more, but there are only so many hours in the day. You can easily burn yourself out working around the clock; hence, learning about investing for beginners.
Compounding Your Returns
There’s no better feeling than watching your investments grow, all without lifting a finger or investing more money. Rather than pat yourself on the back and withdraw some of the money you’ve earned, it’s much better to leave it exactly where it is. Compounding is a financial term that simply means you’re stacking your return on investment, or ROI, the longer your investment is recycled and allowed to grow.
Let’s say you invest $20,000 today when interest rates are six percent. After a year, you’ll have $21,200, compounded annually. Rather than touch a cent of that money, you instead leave it where it is. In a few more years, you’ll have made thousands, all without having to put in a second of extra work. Now, let’s take a look at some options for investing for beginners.
The 3 Big Investing: Exchange-Traded Funds, Mutual Funds, and Certificates of Deposit
Exchange-traded funds, often referred to as ETFs, are one of the most popular investment options. These funds can be either sold or bought on an exchange throughout the trading day. ETFs are linked to the U.S. stock market and make great investments for both beginners and experts.
If you’ve got at least $1,000 to invest, a mutual fund may be ideal for first time investing. Know that you’ll likely have to have at least a $1,000 in your fund in order for it to remain active. Mutual fund investments are an ideal choice for those who are looking to save money for retirement, and they’re even better if you’re currently contributing to either a 401(k) fund or an IRA.
Looking for one of the safest options investments out there? Consider a Certificate of Deposit, also known as a CD, which is insured by the Federal Deposit Insurance Corp, which means you can’t lose money. That being said, this low risk comes with a relatively low return, possibly less than one percent a year. As a beginner, you’ll want to be rather conservative with your first CD.
Finding the Right Amount of Risk
Due to the fact that there’s hardly any risk without reward, you need to know just how much risk you should take when it comes to investing for beginners. The best way to do this is to subtract your current age from 100. Someone who is 20 can invest 80 percent of his or her investment in a risky option, like the stock market. The remaining 20 percent should be funneled into a CD or a U.S. savings bond.
Additionally, you’ll be wise to go over your investing options with an experienced and trusted financial adviser who has worked with beginner investors like you. Know that you’ll have to pay for professional advice, which can be as much as one percent a year. Before deciding on an adviser and agreeing to any fees, check the FINRA BrokerCheck to make sure the individual is well-qualified and currently registered.
No matter your level of risk or your adviser, there are a few standards to adhere to when it comes to investing:
- Keep your costs low
- Diversify your investments
- Make sure you’re investing in a way that matches your level of risk
If You’re Going to Invest, Start Sooner Rather Than Later
Going back to compounding, first time investing should be done ASAP. This isn’t to say that you should rush out and put down money on a mutual fund or CD, just that the earlier you start investing, the more you’ll be able to reap what you sow.
Let’s say you invest $15,000 at the age of 25 when annual interest rates are 5.5 percent. When you turn 50, that investment will have grown to $57,200.89. If you had waited until the age of 35 to invest that same amount of money at the same annual interest rate, you’ll only have $33,487.15 when you’re 50, a difference of $23,713.74. Let that sink in for a moment.
These are just the basics of your many investing options. Do some more digging on your own, and seek out family and friends who invest for more information.