When most people have extra money, they tend to purchase things that they don’t really need. While the items they’re buying may be useful, that extra hundred they just dropped on the latest in tech gadgets could be put to better use by investing.
Many people don’t even consider investing because they think they need thousands of dollars to get started. Not true. In fact, you can get started with as little as $25 a month. Any little bit helps and the earlier you get started, the better.
Having a Safety Net
Investing is a risk, even when investing conservatively. It’s not always a huge risk, but any risk is something to consider. For this reason, you should have an emergency fund.
Most experts will recommend that you have at least six months of income in the bank or in low-risk accounts such as CDs (certificates of deposit) and money-market accounts.
Savings accounts grow interest slowly. The interest grows so slow, that outside of the benefit of keeping your money in a safe place, the account isn’t doing anything else for you. A CD on the other hand, will grow interest much faster, but the downside is that you can’t withdrawal your money without penalty fees, unless you’re past the maturity date.
Money market accounts are more similar to the traditional savings account, but they provide higher interest. There are only a few limitations. In most cases, you will need to maintain a higher minimum balance in the account. You are also limited to the amount of checks you can write or withdrawals you make per month.
It doesn’t really matter whether you choose a CD, a money market account or a regular savings account, as long as you have money to fall back on. With your safety net in place, you should start investing with money that you can spare.
Creating an Investment Strategy
With investing, it’s important to set goals for where you want to be later in life. If you know where you want to be in 10 years, you can create a plan designed to get you there. Without a plan in place, you’re not likely to get there.
What is that you want your money to do for you in the coming years? Do you want to get married and buy a house in five years? If you have kids, perhaps you want start saving for their college tuition? Use these big time periods in your life to create a plan for investing.
You certainly want to plan ahead for retirement. When do you plan to retire and do you want to retire early? Where do you want to live when you retire?
Consider all of the details, such as the cost of living where you want to live after retiring. If you want to retire early, you might have to start investing 20% or more of every paycheck, if you want to have enough money to live on for the next 30 or more years. If you’re fine with working part-time in your retirement years, you can invest much less.
Types of Investments
Once you have your goals in place, it’s time to start thinking about how you want to invest your money. The three most common options are stocks, bonds and mutual funds.
Mutual funds are great for beginners. Without a lot of money, it’s difficult to invest in a diverse group of investments. A mutual fund makes it possible, by pooling the money of thousands of investors and using it to buy a portfolio of stocks, bonds and other securities. Professional fund managers run mutual funds.
Bonds are another option, and are one of the safest ways to invest, but also have one of the lowest interest rates. With bonds, you are basically loaning money at a fixed interest rate. A treasury bond is a loan to the U.S. government, a municipal bond is a loan to the local government, and a corporate bond is a loan to a business.
Purchasing stocks means to buy partial ownership in a company. When you buy a share, you are entitled to a percentage of the company’s annual profits. Because of the constantly changing prices of shares, stock market investing can be considered aggressive. The general idea is to buy low and sell high, but it’s hard to predict something like that. For long-term investing, it’s safer to invest in companies that you’re sure will grow or companies that are already successful.
There are other types of investment options other than the three mentioned, but mutual funds, bonds and stocks are the most common.
Finally, it’s time to invest. You’ll need either an individually licensed agent or a brokerage firm to help you buy and sell bonds, stocks and mutual funds. At the most basic level, they can simply help you make the trades, but many professionals will also offer advice and portfolio management.
Brokers earn money from investors by charging commission and collecting fees. Discount brokers might charge as little as $15 or less per trade, but they will only execute the trade and nothing else.
A full service broker is often a professional financial planner or money manager, who will work with you to develop a strategy and maintain your portfolio. Full service brokers will charge anywhere from $100 to $200 per trade.
Always research the broker or brokerage firm before deciding to hire. Some have been accused of encouraging clients to make unnecessary trades in order to make more commissions. It’s not often, but it has been known happen.