“Successful investing is about managing risk, not avoiding it.”
-Benjamin Graham
I get asked all of the time the best way to start investing. Here’s the thing: investing is such an important tool for building wealth and providing for your financial future (if done responsibly) and YOU CAN DO IT.
At it’s most basic level, investing is a way to spend money with the hopes of earning a higher amount at the end. The idea of earning more money than you originally put in is what typically draws most people in. However, before you go withdraw all of the funds in your bank account and begin investing all that you have, make sure you are adequately prepared and understand the tips outlined below:
1. Know Your “Why”
Just as you would put a plan in place and create a strategy before any other big life purchase, you should also put plenty of thought into why you would like to invest and what you hope to accomplish. Your investment approach and overall strategy entirely depends on your financial goals, as well as the time horizon you have to achieve them.
For example, someone who is at the early stage of their careers may find themselves saving for retirement and investing entirely differently from someone at the opposite end of the spectrum. As a general rule of thumb, those who have a longer time horizon have more …you guessed it …time, and the ability to accept a certain amount of risk. Those with a shorter time line, may not be able to assume as much investment risk and may instead find themselves interested in a more conservative investment that may help provide some income.
So, before you go and actually get started, take a moment to think through your financial goals. What do you hope to accomplish 3, 6, and 12 months from now? 5 years from now? What have you pictured that #retiredlife to be like? (…a house by the beach and not a care in the world? Us too.) Get thinking, create a plan, write down those goals, and then get ready to get started.
2. Consult Your Budget
Before you actually invest, it is important to make sure you can afford to do so. Take a look at your budget to understand your options: do you already have an adequate amount of money saved in your Emergency fund? Are you making every minimum monthly payment on all outstanding debt and student loans? How much can you reasonably afford to invest each month?
3. Eliminate Consumer Debt
If you currently have significant consumer debt (from credit cards and other high interest loans), you may want to reconsider investing until those debts are substantially paid down. Why? Because consumer debt carries with it some of the highest interest rates you’ll find. Do yourself a favor and check your credit card statement or account online. What is the APR (aka: Annual Percentage Rate) that you’re being charged? Some of the top rewards cards charge an APR of anywhere from 15-25%. Even if the money you invest were to earn 10% (the average annual return of the S&P 500 over the last 90 years), you’d still have that incredibly high interest rate on your consumer debt hanging over your finances.
4. Contribute to Your Retirement
Most people don’t realize that contributing to their 401(k) IS a form of investing. As is the case with employer-sponsored retirement plans, you’re taking money out of your paycheck each month (and typically receiving an employer match, as well) and investing in one of the investment options outlined by the 401(k) plan. Contributing to a retirement plan (either through one offered by your employer or by opening your own IRA), is one fundamental step in beginning to invest. While every circumstance is unique, it generally makes more sense to fund your retirement before opening a separate investment account.
5. Diversify, Diversify, Diversify
You’ve probably heard this term, but what does it mean? Essentially it means not placing all of your eggs in one basket. So, when it comes to opening an account and beginning to invest, there are two key things to consider: asset allocation (how you decide to invest) and expense management.
When you work with a financial professional to begin investing, you’ll want to ensure that you are seeking investment options that offer low expense ratios (read: low fees), and that you’re investing in a variety of options that offer you diversification. For example, putting all of your money in a particular stock just because you happen to like their products may not be the wisest approach. If something unfortunate were to happen to that particular company and their stock lost all value, you’d be directly impacted. However, if you spread out your risk and purchased stocks or shares of various types of funds/companies, the thought is that if one area declines, other unrelated areas may not be impacted, leaving you with a slight level of protection. Regardless of how you choose to invest, it’s critical that you do diversify in order to protect yourself in the case of unfortunate downside.
6. A Little Can Go a Long Way
If, after serious consideration, you find room in your budget to begin investing…then GO FOR IT! Keep in mind that thanks to the magic of compound interest, even a little investment can go a long way. The key is to just get started. You can do it!
Consider this example:
If you had only $5,000 to invest this year and were unable to ever contribute again, you’d have just over $53,000 after 35 years (assuming an average return of 7%)! That literally means you could potentially be turning your initial investment into something worth $48,000 MORE than what you started with.
Want to play with these numbers and see how compound interest may work for you? This compound interest calculator can be a useful tool.
If you’re interested in investing but aren’t quite sure where to start or what makes the most sense for you, schedule your free consultation with us today!
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