As someone earning a salary and building up savings, you’ve probably heard before that you should start to invest your money. Whether to save for retirement or a house, or simply to grow the money you have saved up, investing is a great way to make your cash work for you. But how do you know what to invest in at all? And what’s the best place to start? Read on for our tips.
Know the Lingo
What is investing? Essentially, investing is taking your money and putting it into another resource, such as stocks, bonds, or real estate, with the expectation of future returns. This is valuable because you have the opportunity to make more money than you would simply by leaving it in a savings account, which could give you a return of only one or two percent.
Before you turn to the stock market, ask yourself what you’re saving for. Sure, it’s always nice to have more money than what you started with, but what will you do with it once it’s there? Consider your various savings priorities: house, car, retirement, rainy day money, et cetera. Setting clear goals — including researching how much money you need for each of these categories and by when — will not only guide your choice of stocks, but also help you to feel confident about those investments.
Another way to think of your goals is in terms of how much risk you’re willing to assume in your investments. Stocks tend to be of higher risk but also of higher return, whereas investments like bonds are safer but have lower returns.
Choosing what to invest in is a lot like a game of Deal or No Deal: the process is a battle of wits that depends on careful selections. But what should you choose to invest in?
Stocks are a common way to invest money. A stock is a share of a company. When you buy stock, you give that company money and then get to participate in a share of its profits. Even though stocks can give you higher returns than a savings account, they also come with higher risk: If the company does not do well, you could end up losing money.
Bonds are an agreement between the issuer (often a government agency or municipality) and whoever is buying the bond (you, in this case) to loan the issuer money for a fixed amount of time. After that time is up, you receive your money back plus interest.
Mutual funds are another investment option. These are groups of stocks or bonds that many investors participate in. Because they consist of diverse options, they are often lower-risk investments: If one stock does poorly, another can make up for it. Consider mutual funds for long-term investments, like your retirement account. Mutual funds are also a good choice for beginner investors, as they don’t require much maintenance or advanced knowledge about individual stocks or bonds.
You can probably imagine why it’s not a good idea to have all of your money in one investment. If that stock or asset goes down, all of your wealth vanishes with it. To prevent this, make sure you have a good mix of different stocks and bonds, depending on your long-term goals and your risk tolerance. You can always rebalance as time goes on or if your goals change. Mutual funds are another good way to add diversity to your portfolio without having to do the work of stock picking yourself.
Unfortunately, investing is not a get-rich-quick scheme, but it’s a safe and practical way to meet your savings goals. That said, no matter what you invest in, be patient and expect some volatility. Stocks and bonds will have some ups and downs, but it’s the long run that matters, so don’t panic and rush to sell all your stocks if they take a dip. Stay focused on the long run.
Consider using your extra income to beef up your investments. The more you put into your account, the more quickly that money will add up and help you reach your financial goals.
Investing may seem daunting, but if you do your research, set a clear long-term vision, and stay patient and relaxed, you’ll be on your way to meeting your money goals in no time.