How to Invest Money and Make Money Grow for Beginners
Do you want to invest and make money, but have no idea how to start? This practical 10-step guide is loaded with useful resources for beginners.
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Investing can seem daunting, but it doesn't have to be.
Invest Money Wisely
The confusing terminology may as well be a language of its own. And it may seem too much like a gamble with your hard-earned money.
But you've probably heard it before:
If you want to build real wealth, you've got to make your money work for you.
Yes, investing sounds complicated, but it doesn't have to be. We're going to cut through the confusing talk.
Read on to learn what it means to invest and how you can do so wisely.
Why Now is the Best Time to Start Investing
Well, for one: the earlier you start, the longer time your money has to grow. But not only that - the gains (earnings) that you make early on start producing their own gains. This results in money that grows quickly.
This is known as the magic of "compounding gains". It’s smart to take advantage of this while young. Your money has more time to multiply.
But it's not enough to simply understand the importance of investing early in life. You have to understand how to invest.
This where our Definitive Guide to Investing Money for Beginners enters the picture. You'll learn about investing from the ground up. We teach you the basics so you can invest the right way.
Ultimate List of the Web's Best Advice for Beginners
We've compiled a list of the best resources to help you in this investment journey.
Investing can be challenging, but you don't have to do it alone. Plenty of people use the help of a broker to purchase stocks or mutual funds (or even have them manage the investments entirely). Or you can learn about it on your own and manage the money yourself.
This guide can help you with both ends of the investing spectrum. You’ll also learn other options in between. We will focus on the following topics:
- Risks of Investing
- Budgeting for Investing
- Investing Vs. Gambling
- Investing Vs. Saving
- Long-Term Investment Goals
- Selecting a Brokerage
- Selecting Investments
- Understanding 401(k) Investing
- Understanding IRA Investing
- Understanding Other Types of Investment Accounts
Risks of Investing
We're going to be upfront: investments can be risky. They can go down in value. You could even lose all the money you’ve put in.
Sounds scary? Yes, but there are ways to keep the risk low.
One way is to limit your investments to only the more stable ones (such as mutual funds). Or you can do a mix of low-risk and high-risk investments. Though remember, safer investments typically won't offer the same potential rate of return that a higher risk investment provides.
Just as with many things in life, you sometimes have to take risks to achieve higher rewards. But this doesn't mean being reckless. First, carefully decide how much you're willing to risk. And make smart decisions based on careful research.
- Realities of investment risk - FINRA
- Types of investing risk - Wellington Management
- Five things to know about investment risk - U.S. News
- Investment risk tolerance quiz - Rutgers University
Budgeting for Investing
When you're ready to start investing, make a budget for any investments you plan to make. Just like you’d do so for bills, groceries, and car payments.
Think of an investment just like you would any other type of expense. It shouldn’t be something you only do when there’s money left at the end of the month. Even setting a small amount aside for regular investing can make a difference, especially if you're able to start at a young age.
Think there's no way you can invest on your tight budget? These tips may change your mind:
- Nine ways to invest on a small budget - U.S. News
- Investing options for a small budget - The Wall Street Journal
- How to invest on a shoestring budget - Investopedia
- Start budgeting, reap savings - Today
- Investing and money management basics - MetLife
Investing Vs. Gambling
Yes, there's risk involved in investing, and it may feel like gambling at times. Especially if an investment takes a dip during a tough day for the markets.
But let's understand the difference:
Gambling is making short-term choices, usually on games of chance. Buying stocks at random without researching or understanding the trends is gambling. It's just like giving your money to a dealer or slot machine. And the risk is all or nothing.
Investing is when you take the time to learn and make smart selections based on long-term needs. You’re not making choices on whims or guesses. You can choose investments that won't bring you a ton of risk. And if something isn’t going the way you like, you can make adjustments.
Some people like to make fast trades on stocks to turn a fast profit. That's all well and good if they have the time to research and understand the market trends. But we're talking about building wealth for the long term.
- The truth about why we trade - The Wall Street Journal
- Sports betting vs. the stock market - CNN
- Investing is not the same as gambling - Forbes
- Investing versus gambling - Baylor's Christian Reflection
- Three signs you're gambling, not investing - Yahoo Finance
Investing Vs. Saving
A penny saved is a penny earned... Or is it?
When investing your money, that figurative penny could return earnings a lot bigger than if you just simply save it.
You'll often see the terms “investing” and “saving” used interchangeably. But they are not exactly the same.
Saving is the action of putting aside cash you have earned. You usually save for shorter-term goals, such as for a house or vacation. You usually have quick and easy access to your funds (like a savings account). You can withdraw your savings whenever you need to without penalty.
When planning long-term goals, investing your money will go a lot further. Investing is when you put your money into assets (whether that be stocks, metals, or a house) that will hopefully grow over time. There is some risk involved, because there’s no guarantee it will grow. But a smart investment could have a far greater rate of return than just saving.
We recommend a balance of both. Save for an emergency fund and short-term goals, and invest for your future.
- Differences between saving and investing - SEC
- Saving vs. investing, is there a difference? - Vanguard
- Saving money or investing - Bankrate
- Saving money vs. investing money - About Money
Long-Term Investment Goals
We're mostly talking here about investing for your future, such as retirement. You can't possibly expect to save all the money you'd need. So it's important to grow your money for these long-term goals.
Long term investment strategy is different from short term. Because you have more time for growing money, you can afford to take more risks. Ups and downs are bound to occur, but you’ll have time to ride these out.
The downside is your money will be tied up. So do not invest funds that you need for day-to-day expenses. Same goes for funds that you may need in the next several years.
Investing is best used for long term goals. Goals include your retirement, your child's college education, or perhaps a down payment on a vacation home that you want to purchase a decade from now.
- Set a time frame for your financial goals - FINRA
- Five principles for long-term investments - TIAA
- Setting short-term and long-term goals - Capital One
- Calculating investing goals - Charles Schwab
Selecting a Brokerage
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When you're ready to begin investing, you will first need a brokerage to set up and hold your investment account. You can think of it like using a bank to hold your banking account.
Some brokerages specialize in certain types of investment accounts. But most of them offer any kind of account or investment service you could ever need.
You have many different options for brokerages:
If you want to manage your investments yourself, online brokerages give you nearly full reign. If you need help, a full-service brokerage will offer advice and personalized service for a fee. Some banks and insurance agencies are also licensed as brokerages. And with a 401(k) account, your company usually will have selected the brokerage for you.
- Selecting and working with a broker - Texas A&M University
- Choosing an investment professional - FINRA
- Selecting brokerage services that fit your needs - Washington State Dept. of Financial Institutions
- Picking your first broker - Investopedia
- New investor's guide to brokers - About Money
So you've chosen your brokerage... now what?
Get the terminology down before you proceed.
- A stock is a direct investment in a company. This type of investment takes more effort to research and analyze, as they can go up and down quickly.
- A mutual fund is a collection of stocks. It diversifies your investment across several or hundreds of companies, thereby reducing risk.
- An ETF (exchange-traded fund) is similar to a mutual fund in that it holds a collection of stocks. But it trades like an individual stock. (Mutual funds have limitations on how and when they can be traded.)
You also can invest in bonds, money market accounts, savings bonds, annuities, CDs, real estate, precious metals, and other vehicles within certain investment accounts.
For beginners, we recommend investing in ETFs and mutual funds, with a small percentage in stocks.
- What are my investment options? - Duke University
- Investment types and terminology - Wells Fargo
- How to select investments - U.S. News
- Investment types explained - Charles Schwab
Understanding 401(k) Investing
Many young adults are introduced to the world of investing with a 401(k) account at work. This type of account helps you save for retirement by automatically setting aside money from your paycheck into a retirement account.
This is a great way to invest for several reasons. Most of all, the money is not taxed until you take it out of the 401(k) account. So that’s usually when you are retired and in a lower tax bracket. (If you withdraw the funds earlier, you'll pay a penalty and more in taxes).
Many companies will match a percentage of what you contribute as well. This is literally "free" money, so take advantage of it if your company does matching! Keep in mind that 401(k) accounts do have limitations on how you can access the money and on how much you can contribute each year.
- Starting to invest with 401(k)s - CNN Money
- 401(k) investing basics - FINRA
- Tools to better understand your 401(k) - U.S. News
- What is a 401(k)? - The Wall Street Journal
- What you should know about your retirement plan - U.S. Dept. of Labor
Understanding IRA Investing
It’s a smart idea to also save for retirement yourself. You can supplement your 401(k) earnings with an IRA (Individual Retirement Account).
IRA accounts also come with tax benefits. You can hold an IRA at the same time you have a 401(k). But there’s a limit on how much you can contribute each year. You also have to be within a certain annual income to qualify for IRA contributions.
Different types of IRAs have different benefits. Here's a quick overview:
Roth IRAs are contributed with money that has already been taxed. So you will not be taxed again when you withdraw, not even on your earnings. A traditional IRA doesn't tax upfront, but taxes your earnings when you withdraw your funds. If you change jobs and must take your 401(k) account proceeds with you, you can use a rollover IRA to maintain the tax breaks of the 401(k).
- Understanding IRAs - Charles Schwab
- What is an IRA? - Fidelity
- Basics of an IRA - CNN Money
- Seven reasons to invest in an IRA - U.S. News
- IRA center - Wells Fargo
Understanding Other Types of Investment Accounts
Some people need investment accounts other than the popular 401(k) or IRA. If you're self-employed, you can use an SEP-IRA in lieu of a 401(k) to obtain tax breaks.
Those saving for college for a child will want to consider a 529 college savings plan. This account offers huge tax breaks, as all earnings are tax-free. You just have to make sure your contributions remain below the federal gift tax limits.
Or maybe you want to invest money for another goal or without limits. In this case, a general brokerage account is your best bet. Just be aware that you will have to pay taxes on any gains you earn every April 15.
- Investment account types - Vanguard
- Types of accounts and investments - Fidelity
- Account types - Scotttrade
- Benefits of non-retirement investment accounts - T. Rowe Price
There's no pressure to start investing while you're getting up to speed on the terms and what they all mean. Take your time to truly understand what you're about to do. Hopefully, we've helped steer you in the right direction with this definitive guide to investing.
However, keep in mind that the clock is ticking. You're never too old to start investing; but the sooner you start, the more your money can work for you.
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