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When you’re first starting out, rent, utility bills, debt payments, and groceries may seem like all you can afford, especially in inflationary times when your paycheck used to buy less gas, bread, and a house. However, after you’ve managed to budget for those monthly costs and put money aside in an emergency fund, it’s time to begin investing. Deciding what and how much to invest in is the difficult part.
You will have many questions as a novice investor, not the least of which are: What are the best investment strategies for beginners, how much money do I need, and how do I get started? Our guide will address all of these issues and more.
Investing can be a daunting prospect for beginners, but it’s also one of the best ways to grow your money over time. This guide will walk you through the basics of investing, from choosing the right account to picking the best investments for your goals.
1. Choose the Right Investment Account
The first step to investing is choosing the right account, There are two main types of investment accounts: taxable and tax-advantaged
Taxable accounts are the most common type of investment account. They are easy to open and offer a wide range of investment options. However, you will have to pay taxes on any capital gains you earn from your investments.
Tax-advantaged accounts offer tax benefits on your investments. There are two main types of tax-advantaged accounts: IRAs and 401(k)s.
- IRAs are individual retirement accounts. They allow you to contribute pre-tax dollars to your account, which means you won’t have to pay taxes on the money until you withdraw it in retirement. There are two main types of IRAs: traditional IRAs and Roth IRAs.
- 401(k)s are employer-sponsored retirement accounts. They allow you to contribute pre-tax dollars from your paycheck to your account. Your employer may also match a portion of your contributions.
Which type of account is right for you?
The best type of account for you will depend on your individual circumstances. If you are looking for a simple way to invest your money and don’t need the tax benefits, a taxable account may be the right choice for you. If you are looking to save for retirement and want to take advantage of tax benefits, an IRA or 401(k) may be a better option
2. Determine Your Investment Goals
Once you have chosen an investment account, the next step is to determine your investment goals. What are you hoping to achieve with your investments? Are you saving for retirement, a down payment on a house, or a child’s education?
Your investment goals will help you determine the best investments for your needs. For example, if you are saving for retirement, you will want to invest in a mix of stocks and bonds. Stocks are more volatile than bonds, but they have the potential to earn higher returns over time. Bonds are less volatile than stocks, but they have the potential to earn lower returns.
3. Choose Your Investments
Once you have determined your investment goals, you can start choosing your investments. There are a wide variety of investments available, including:
- Stocks: Stocks are shares of ownership in a company. When you buy a stock, you are buying a small piece of that company. Stocks can be a good investment for long-term growth, but they are also more volatile than other investments.
- Bonds: Bonds are loans that you make to a company or government. When you buy a bond, you are lending money to the issuer. In return, the issuer will pay you interest on the bond and repay the principal amount when the bond matures. Bonds are less volatile than stocks, but they also have the potential to earn lower returns.
- Mutual funds: Mutual funds are baskets of stocks, bonds, or other investments. Mutual funds are a good option for investors who want to diversify their portfolio without having to pick individual investments.
- Exchange-traded funds (ETFs): ETFs are similar to mutual funds, but they trade on stock exchanges like individual stocks. ETFs are a good option for investors who want to buy and sell their investments quickly and easily.
- Real estate: Real estate can be a good investment, but it can also be illiquid and require a significant down payment.
- Cryptocurrency: Cryptocurrency is a digital or virtual currency that uses cryptography for security. Cryptocurrency is a relatively new and volatile investment, so it is important to do your research before investing.
4. Diversify Your Investments
Once you have chosen your investments, it is important to diversify your portfolio. Diversification means investing in a variety of different assets. This will help to reduce your risk and increase your chances of earning a good return on your investment.
There are a few different ways to diversify your portfolio. One way is to invest in a mix of stocks, bonds, and other assets. Another way is to invest in different sectors of the economy. For example, you could invest in stocks from the technology sector, the healthcare sector, and the consumer staples sector.
5. Rebalance Your Portfolio Regularly
As your investments grow and change, it is important to rebalance your portfolio regularly. Rebalancing means selling some of your investments that have done well and buying more of your investments that have not done as well. This will help to keep your portfolio diversified and reduce your risk.
6. Be Patient
Investing is a long-term game. Don’t expect to get rich quick. It is important to be patient and let your investments grow over time.
7. Get Help from a Financial Advisor
If you are new to investing, it is a good idea to get help from a financial advisor. A financial advisor can help you choose the right investments for your goals and risk tolerance. They can also help you create a financial plan and track your progress.
Investing can be a great way to grow your money over time. By following the tips in this guide, you can get started on the right foot and achieve your financial goals.
Frequently Asked Questions
What is the best investment for beginners?
There is no one-size-fits-all answer to this question. The best investment for beginners will depend on their individual circumstances and goals. However, some good options for beginners include index funds, mutual funds, and robo-advisors.
How much money do I need to start investing?
You don’t need a lot of money to start investing. You can start with as little as $100 or $1,000. The important thing is to start investing early and consistently.
How often should I rebalance my portfolio?
It is a good idea to rebalance your portfolio at least once a year. However, you may need to rebalance more often if your investments have changed significantly.
What is the best way to learn about investing?
There are many resources available to help you learn about investing. You can read books, articles, and blogs. You can also watch videos and listen to podcasts. The best way to learn is to find a method that works for you and stick with it.
Additional Resources
Investing can be a great way to grow your money over time. By following the tips in this guide, you can get started on the right foot and achieve your financial goals.
Open an investment account
You can invest for retirement in an individual retirement account (IRA), such as a traditional or Roth IRA, if you’re one of the many people who don’t have access to an employer-sponsored retirement account like a 401(k).
See our list of the top IRAs if you’re looking to start saving for retirement.
Retirement accounts, which are intended to be used for retirement and have limitations on when and how you can withdraw your money, are probably something you should stay away from if you’re investing for another purpose.
Consider a taxable brokerage account instead, which allows you to withdraw money at any time without incurring additional fees or taxes. If an individual has reached their maximum IRA retirement contribution and still wants to invest, brokerage accounts are a good choice because IRA contribution limits are typically much lower than those of employer-sponsored retirement accounts.
» Get the details: How to open a brokerage account
Start investing as early as possible
One of the best ways to see good returns on your money is to invest when you’re young. Compound earnings are responsible for this, as your investment returns begin to generate their own return. Compounding allows your account balance to snowball over time.
In addition, a lot of people ponder whether they can start with a small amount of money. In short: Yes.
Thanks to fractional shares, low or nonexistent investment minimums, and zero commissions, investing with smaller sums of money is now more feasible than ever. For comparatively small sums of money, there are many investment options available, including mutual funds, exchange-traded funds, and index funds.
Instead of worrying about whether your donation is sufficient, consider what feels reasonable in light of your objectives and financial status. “Make a consistent contribution to your investments, no matter how small—it could be $50 or $5,000 each month,” advises St. Louis-based certified financial planner Brent Weiss. Petersburg, Florida and the co-founder of financial planning firm Facet.
The way that works in practice is as follows: Let’s say you invest $200 per month for ten years and receive an average annual return of 6%. At the end of the 10-year period, youll have $33,300. Of that sum, $24,200 represents your contributions, or your $200 monthly payments, and $9,100 represents the interest you have received on your investment.
» Learn more about micro-investingAdvertisement
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Of course, there will be ups and downs in the stock market, but if you invest early, you’ll have decades to weather the storm and watch your money grow. Start now, even if you have to start small.
Use our inflation calculator to see how inflation can reduce your savings if you don’t invest if you’re still not convinced about the benefits of investing.
In this NerdWallets Smart Money podcast episode, Sean and Alana Benson discuss how to begin investing, including examining your attitudes toward it and the various kinds of investment accounts.