Financial wellness

How to start investing for the first time

Once you can budget for monthly bills and necessities, investing is the next step to good financial health. While it can seem intimidating, it doesn’t have to be. Learning how to invest is the first step to growing your long-term wealth. 

Read on to discover the ins and outs of investing for beginners.  

What does it mean to invest my money?  

People often hear the term “invest” but may not have a broad understanding of its meaning.  

The general idea of investing is simple. Investing means giving time, effort, or money to something that you expect will benefit you in the future. To illustrate, you might invest in your education. In that case, you put time, effort, and money into it. In return, you’ll receive knowledge and a degree that will likely lead to a better job.  

The general idea remains the same when it comes to investing money. Investing your money is the act of giving funds to something (business, projects, stocks, bonds and more) with the expectation that you will receive a profit in return. For example, you might invest $500 in a startup. If that business succeeds, you might receive $5,000 in return. 

What can I invest in?  

You can invest in many different endeavors. As a beginner, you might want to stick to a more common type of investment. That way, it will be easy to find information about it and feel secure about your choice.  

The most common types of investments include: 

  • Stocks. A stock is a share in a company. Stocks are purchased for a share price, which can be from below ten dollars to thousands of dollars. When you buy a stock in a company, you become a shareholder. That means you own a fraction of the company. 
  • Bonds. bond is like a loan that you give to a company or government. They agree to pay you back in a number of years while your money gains interest. Typically, you know when you the investment comes back and how much interest you will earn.  
  • Mutual funds. mutual fund contains a mixture of stocks and bonds. The mixtures are diverse, often spread across industries. Their determined value happens at the end of the trading day. Professionals manage some mutual funds. Index funds, a type of mutual fund, is governed by no one. These funds simply follow a specific stock market index, like the S&P 500. 
  • Exchange-traded funds. Like a mutual fund, an exchange-traded fund (ETF) bundles together many different investments. Like stocks, you must purchase them for a share price. They trade throughout the day. 
  • Investment trusts. An investment trust is another pooled investment vehicle. In the U.S., Real Estate Investment Trusts (REITs) are a popular choice. They invest in properties and pay scheduled distributions to investors from rental incomes. Investment trusts trade on stock exchanges and can be liquefied immediately.  

What are the different kinds of investment accounts?  

You’ll need to choose a type of investment account before you invest your money in anything. An investment account will empower you to access the bonds, stocks, funds, or trusts you select for trading. When you connect with a financial firm to start investing, the first thing they’ll ask is what type of investment account you’d prefer.  

Common investment accounts include: 

  • Standard brokerage accounts. A standard brokerage account allows you to invest in stocks, bonds, mutual funds, exchange-traded funds, and other endeavors. You may either open an individual taxable brokerage account or a joint account. That decision will depend on how you plan to file your taxes. For these accounts, you must pay taxes on your earnings during each tax year. 
  • Retirement accounts. A retirement account, like an individual retirement account (IRA), is similar to a standard brokerage account. You will have the same range of investment choices. However, taxes will be different. For example, traditional IRAs give you an upfront tax break the year you contribute to them. Roth IRAs give you a tax break in retirement. If your employer offers a 401(k) plan, they might match a portion of the money you contribute to it. Other options for small business owners and self-employed business people might be a SEP IRAs or a Solo 401k
  • Education accounts. If you want to save up for your child’s future education expenses, an education account might be the ticket. A 529 savings plan is a popular choice. States run these education investment accounts but often allow you to use your earnings at schools across the country. Likewise, the Coverdell Education Savings Account can be used for all education expenses.   

What are the risks of investing my money? 

You are taking a risk when you invest. That risk can be large or small, depending on the type of investment you choose to make. To be clear: investing inherently includes the risk of losing your money. 

For example, investing all of your money in a single company’s stock is high-risk. If that company fails, you might lose all of your money. However, that kind of investment is also high-reward. If that company succeeds, you might earn a lot of money.  

On the other hand, investing all of your money in bonds is low-risk. The government or company that you buy the bonds from must return your initial investment. Yet, bonds also generate a smaller return. The gains from interest will not be very high.  

Your goal should be to minimize risk while maximizing your reward. Some ways to aim for this are: 

  • Diversify your investments. Choose a variety of investments. If one of your investments suffers, you will have others to fall back on.   
  • Don’t forget about taxes. Any gains or losses on your investments will have tax implications. You can speak to a tax professional for more details. 

 How much should I invest? 

How much you should invest and in which accounts depends on your situation. Consider your financial position and your long-term goals before you make any investment decisions.  

For example, you might ask:  

  • When will you need the money? If you need to spend the money soon, you might prefer a high-yield savings account vs. other investment types. 
  • What are your long-term goals? Do you want to buy a house in five years? Are you investing for your retirement in fifteen years? Aim to match your investment choices to your timelines. 
  • Can you afford to take risks? When considering whether you should invest in a high-risk/high-reward account, ask yourself one question. Can you afford to lose all of the money used toward investments? 

It’s crucial that you carefully consider how much you invest. To ensure you are dedicating enough funds to reach your goals, keep track of your transfers and account growth. Tools like Excel make tracking a lot easier.  

How do I begin to invest my money? 

There are four steps to investing your money for the first time.  

1.    Do your research. Learn how to invest. Explore the different types of investments and investment accounts. 

2.    Decide which type of investment you want to make, which account type you want, and how much you will spend. Use the three vital questions from the previous section to make these choices.  

3.    Choose a financial firm. There are plenty of financial firms to choose from. Find one that matches your values, has apps, services and potentially retail locations that fit your needs. 

4.    Invest! Many financial firms offer an online dashboard to make investing easy. In most cases, you can also get guidance in person. These are both great resources for learning how to invest.  

If you still feel like you need help getting started or learning how to invest, consider consulting a financial advisor.  

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Everyday Tips and Ideas is meant for informational purposes only and does not constitute professional tax or financial advice. Links and mentions are not endorsements.