How To Start Investing Money – When I was a kid, I thought investing was something only middle-aged men in pin-striped suits did while yelling into cell phones. While I’ve learned better since then, the media still tends to portray investing as a scary, complicated subject that’s only for professionals or people with a lot of money.
Start investing even if you don’t have a lot of money or a degree in finance. More so, you
How To Start Investing Money
But how to start investing? In this guide, I’ll show you how. It’s a lot easier and a lot cheaper than you probably think.
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Note: I am not a financial advisor, nor do I pretend to be one on the internet. This article is for educational purposes only and is not investment advice.
Why bother investing at all? Isn’t it risky? Isn’t your money safer under your mattress or in a savings account?
While it’s true that investing comes with risks, it’s actually less risky than keeping money under your mattress. Besides the obvious risk of all your money being stolen or destroyed in a fire, the invisible forces of inflation will slowly erode the value of your money.
The average annual inflation rate is around 3%. This means that prices increase by about 3% every year.
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That doesn’t sound like much, but that 3% really adds up over time. If you have all your money in cash, it will lose value
According to the FDIC, the average interest rate on savings accounts in the US is around 0.9%. Even if you have a bank that offers 3x more, it’s still not enough to keep up with inflation.
Therefore, just keeping money in a savings account will rarely provide you with enough money to live on when you retire. No matter how much you save, inflation will make that money less and less valuable.
Investment? This is a big question, but in its most basic form, investing is buying something that you expect will increase in value. This can literally be anything from a patch of soil to an antique bidet.
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However, when most people talk about investing, they mean investing in stocks, bonds, or a combination of both.
A stock is simply a piece of ownership in a company (or “stock”) that you can buy and sell. When you invest in stocks, you hope that the value of the stocks you buy will increase, allowing you to eventually sell them at a profit.
Bonds, meanwhile, are a special type of loan that governments (and sometimes corporations) use to raise money for projects.
When you buy a bond, you are essentially lending money to the government or corporation with the expectation that they will pay you back the original amount plus interest. This makes bonds less risky than stocks, although your potential profit from them is also lower.
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The advantage of stocks is that they can make you more money, but they are also riskier than bonds, as a company’s stock can lose value or even fail completely.
Bonds are a much “safer” investment, but this also means a smaller potential reward. Therefore, it is wise to invest in both and spread the risk. This is known as “diversification”.
Investing in a few different stocks and bonds is better than investing in a single stock or bond, but it’s still quite risky.
If all the stocks in your portfolio (your collection of investments) perform poorly, you can lose a lot of money. And if you only invest in a few companies, you can also miss out on potential gains when other companies do well.
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Instead, it makes more sense to spread your money across many different stocks and bonds. In this way, the performance of stocks and bonds is, on average, a better total return.
Fortunately, there is an easy way to invest in large collections of stocks and bonds without having to buy them individually. It is called an Exchange Traded Fund (ETF).
A “fund” is a collection of many different stocks and bonds (often hundreds or even thousands). And “exchange-traded” means that the fund trades on a major exchange.
The above was a very broad overview of the type of investing you can get started with without a lot of money or special knowledge.
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There are other worthwhile types of investments (such as real estate investing and mutual fund investing), but we won’t discuss them in this article because they generally require larger amounts of money, time, and research.
Compound interest is the reason you should invest for the long term. It describes earning interest on top of compound interest and allows your money to grow exponentially. The best way to understand is with a simple example:
Imagine saving $100 a month for 40 years. At the end of that time, you will have saved $48,000. While that’s not a little money, it’s nowhere near enough to live on. Now imagine that instead of just saving money, you invest it in an ETF. You expect to earn an average of 7% interest on this money each year. How much money will you have after 40 years? Answer: $239,562.13
Here is a graph showing the same data. The blue line represents the money you contributed each month, while the red line represents how much money you expect to earn in interest:
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If you want to play with the numbers yourself, here is the compound interest calculator I used to create the graph.
Instead, it’s an approach that’s easy to follow, doesn’t require a lot of money, and is based on good investment principles from people who are much smarter than us. I’ll include links throughout if you want to dig into the details of this approach.
The money you contribute to your 401(k) is tax-deductible, which means it can reduce the amount of income you pay taxes on (potentially putting you in a lower tax bracket and thus lowering your income tax). You can contribute up to $19,500 to your 401(k) for 2021, so your tax savings could be significant.
Many employers will match the contributions you make to your 401(k) up to a certain amount. If your employer offers it, then you should always contribute
You Don’t Need A Lot Of Money To Start Investing
An amount that will be matched by your employer. It’s literally free money; don’t leave it on the table.
What if your employer doesn’t offer a 401(k) or other type of retirement plan? In this case, we recommend that you open an IRA (Individual Retirement Account) and increase your contributions to it.
IRAs don’t have the same type of employer match, and the annual contribution limit is lower ($6,000 starting in 2021). However, IRA contributions
If you still have money to invest after maxing out your 401(k), or if you’re looking for a great place to open an IRA, we recommend M1 Finance.
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M1 allows you to automatically invest money in ETFs (Exchange Traded Funds). As mentioned earlier, ETFs are one of the best ways to start investing. They have no minimum investment, spread your risk and are easy to automate.
Why do we recommend the M1? After all, this is far from the only service that allows you to invest in ETFs.
While not as well-known as other investment services like Betterment, M1 has the most competitive fee structure we’ve found. Unless you are doing something unusual and unnecessary, such as obtaining paper statements, M1 will not charge you any fees to hold or use your investment account.
This sets them apart from other brokers we have reviewed. Just look at the fees charged by these other popular investment platforms:
Start Investing Now: Making Your Money Work For You: A Beginner’s Guide To The Stock Market And Planning A Successful Financial Future By P.w. King
The way movies portray investing can give you the impression that you need to constantly monitor the stock market and be ready to change your investments at any moment.
While this is necessary for professional investors like day traders, it is a huge waste of time for average investors like you and me.
Remember: you are investing for the long term. This means that you should not care what happens to the market in a week, month or even year. Whether returns are low or high
When the market is going bad, it will be very tempting to withdraw all your money to avoid “losing” money. Resist this temptation!
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If you get scared when the market goes bad, it will prevent you from investing consistently. And consistency is what makes this investment strategy work.
Congratulations! Now you have all the information you need to start investing. However, I want to include some common investing mistakes that you should watch out for so that you don’t lose a lot of money.
At some point in your life, a well-meaning friend or family member will tell you how you are doing
That your Uncle Joe or college roommate found a good investment is highly unlikely. Instead, stick to your simple, boring investment strategy.
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In the Internet age, it’s tempting to think that with enough research you can find some secret investment opportunity that will allow you to “beat the market” (earn higher than average returns).
But it turns out that almost no one can beat the market, not even professional investors. According to S&P Dow Jones Indices, 95% of active fund managers fail
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