How to Invest Money

How to Invest Money

When Should I Start Investing?

Listen to us, you want to wait to invest until you’re debt-free and have three to six months of expenses saved in an emergency fund. Once that happens, you’re ready to start saving for retirement.

Your income is your most important wealth-building tool. And as long as it’s tied up in monthly debt payments, you can’t build wealth. It’s like trying to fill a bucket with water when there’s a hole on the bottom—it just doesn’t work!

Your income is your most important wealth-building tool. As long as it’s tied up in monthly debt payments, you can’t build wealth.

What Are the Risks of Investing?

Investing is a commitment of resources now toward a future financial goal. There are many levels of risk, with certain asset classes and investment products inherently much riskier than others. However, essentially all investing comes with at least some degree of risk: it is always possible that the value of your investment will not increase over time. For this reason, a key consideration for investors is how to manage their risk in order to achieve their financial goals, whether they are short- or long-term.

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Robo-Advisors

After the 2008 financial crisis, a new breed of investment advisor was born: the roboadvisor. Jon Stein and Eli Broverman of Betterment are often credited as the first in the space. Their mission was to use technology to lower costs for investors and streamline investment advice.

Since Betterment launched, other robo-first companies have been founded, and even established online brokers like Charles Schwab have added robo-like advisory services. According to a report by Charles Schwab, 58% of Americans say they will use some sort of robo advice by 2025. If you want an algorithm to make investment decisions for you, including tax-loss harvesting and rebalancing, then a roboadvisor may be for you. Also, as the success of index investing has shown, you might do better with a roboadvisor if your goal is long-term wealth building.

How to Start Investing Money

Many options exist for starting to invest money—ev

Many options exist for starting to invest money—even with small amounts—thanks to many new brokerages on the market.

Several offer fractional shares to invest your money, meaning instead of forking over $3,000+ for a single share of Google (GOOG), you can purchase a smaller fraction in line with the amount of money you have to invest and your desired investment.

Additionally, the best brokers and robo-advisors also avoid charging trading commissions for your investments, meaning you can contribute in increments as small as you can afford.

This is of particular importance to Millennials and Gen-Zers who may not have significant sums of money to invest all at once, but rather have small amounts of cash which come available after accounting for all of the expenses in the monthly budget.

Read below for some of the most popular financial apps for young adults or anyone looking at starting to invest your money.

1. : Best Free Stock App for Beginners to Invest Money

  • Available via desktop, Apple iOS and Android App on Google Play
  • Best For: New investors with limited capital
  • Sign up here

Public.com is a commission-free investing app that targets Millennials and Gen-Zers who have attuned their senses to social media. These age groups want to align their investing with their social preferences as well as keep good company to socialize and learn from others.

The stock investing app boasts an increasingly-common feature geared toward younger investors who may not have enough money to buy some higher cost shares at one time: fractional investing.

This product feature plays on the company’s mission of making the stock market an inclusive, educational investment opportunity which can be fun. They accomplish the latter point by allowing people to invest alongside friends and other well-regarded investors.

Much like social media platforms who provide the standard blue check mark logo to verify public figures, Public.com provides visibility into trade activity and other insights these verified investors wish to provide to the Public.com community.

Key takeaways

  • Don’t start by asking “What should I invest in?” Instead, start by asking, “What am I investing for?” Many people start off by investing for retirement.
  • Once you have a goal in mind, the main choices you need to make are what type of account to use, how much money to invest, and what to invest it in.
  • Although choosing investments can be overwhelming, there are simple choices, like all-in-one funds and robo advisors, that can make it easier.

Simply put, investing can help you get ahead in life. It can be key to helping you grow your worth over time and provide the kind of future for yourself and your family that you dream about. It has the potential to let you literally earn money in your sleep. So there’s no doubt that it’s worth your time to figure out how it all works.

However, when you’re new, it’s a lot. A lot of choices, a lot of new words and concepts, and a lot of complicated, often-competing advice to sift through. And because it has to do with risking your money, it can be stressful too.

But just because it can be complicated doesn’t mean it has to be. There are actually only a few main choices you have to make to start investing. Let’s break it all down—no nonsense.

Other Types of Investment Strategies

As an investor, you may decide to add other types of investments to your portfolio. Types of securities you can add might be higher risk, but can compliment your index funds. Whatever other securities you decide to add, make sure you align them with your investment goals and do some research before to make sure you know what you’re investing in.

A small cap stock is one from a company with market capitalization under $2 billion. These stocks can be a way to invest in companies that are poised for long-term growth and fast gains. 

Adding small cap stocks to your portfolio through an index fund is a good way to incorporate small cap stocks to your investment strategy. A popular small cap index fund is the Russell 2000 index which tracks 2,000 small cap companies across a variety of industries. Of course, there’s no guarantee that a small company will survive, and initial performance isn’t a guarantee it will continue. 

Blue Chip Stocks

Blue chip stocks are shares of large, well-known companies that are household names – think Disney, Amazon, and Johnson & Johnson. These stocks are thought of as being reliable, safe, and able to weather economic downturns over the long-term. 

To identify blue chip stocks, take a look at the Dow Jones Industrial Average. Because they have a proven track record, having blue chip stocks can add stability and reliability to your portfolio. If you have an S&P 500 or total market index fund, chances are you have good exposure to these stocks already. A blue chip index fund or ETF is a good way to start investing in these. The SPDR Dow Jones Industrial Average ETF Trust is one of the most popular blue chip funds because of its low fees. You can also purchase shares directly through your brokerage. 

Real Estate and/or REITs

Buying a property often requires upfront costs like down payment and fees for closing, on top of any renovations you choose to make. There are also ongoing (and perhaps unexpected) costs, like maintenance, repairs, dealing with tenants, and vacancies if you decide to rent out the property. 

If homeownership isn’t for you, you can still invest in real estate through real estate investment trusts (REITs). REITs allow you to buy shares of a real estate portfolio with properties located across the country. They’re publicly traded and have the potential for high dividends and long-term gains. 

“REITs have done superbly well this year. They don’t usually do well with a pandemic, but surprisingly, they have,” says Luis Strohmeier, certified financial planner, partner, and advisor at Octavia Wealth Advisors. Part of the reason is you get access to properties, such as commercial real estate and multi-family apartment complexes, that could be out-of-reach for an individual investor.  

On the flip side, dividend payments earned through REITs are taxed as ordinary income instead of qualified dividends, which may cause you to have a higher tax bill if you invest through a taxable brokerage account. When you invest in a REIT, you’re also inherently trusting the management company to scout income-producing properties and manage them correctly. You don’t get a say in which properties the REIT chooses to purchase. But with that said, you don’t have to deal with tenants, repairs, or find a big down payment to start investing. And if you can invest through a tax-advantaged account, the dividends could grow tax-free. 

Active investing

More work, more risk, more potential reward

  • You do the investing yourself (or through a portfolio manager)
  • Lots of research
  • Potential for huge, life-changing returns

How To Think About Risk and Investing

Different investments come with different levels of risk. Taking on more risk means your investment returns may grow faster—but it also means you face a greater chance of losing money. Conversely, less risk means you may earn profits more slowly, but your investment is safer.

Deciding how much risk to take on when investing is called gauging your risk tolerance. If you’re comfortable with more short-term ups and downs in your investment value for the chance of greater long-term returns, you probably have higher risk tolerance. On the other hand, you might feel better with a slower, more moderate rate of return, with fewer ups and downs. In that case, you may have a lower risk tolerance.

In general, financial advisors recommend you take on more risk when you’re investing for a far-off goal, like when young people invest for retirement. When you have years and decades before you need your money, you’re generally in a better position to recover from dips in your investment value.

For example, while the S&P 500 has seen a range of short-term lows, including recessions and depressions, it’s still provided average annual returns of about 10% over the past 100 years. But if you had needed your money during one of those dips, you might have seen losses. That’s why it’s important to consider your timeline and overall financial situation when investing.

Risk and Diversification

Whatever your risk tolerance, one of the best ways to manage risk is to own a variety of different investments. You’ve probably heard the saying “don’t put all your eggs in one basket.” In the world of investing, this concept is called diversification, and the right level of diversification makes for a successful, well-rounded investment portfolio.

Here’s how it plays out: If stock markets are doing well and gaining steadily, for example, it’s possible that parts of the bond market might be slipping lower. If your investments were concentrated in bonds, you might be losing money—but if you were properly diversified across bond and stock investments, you could limit your losses.

By owning a range of investments, in different companies and different asset classes, you can buffer the losses in one area with the gains in another. This keeps your portfolio steadily and safely growing over time.

What Is the Best Age to Start Investing?

Regardless of your age, you want to be financially ready to invest as soon as you can. That’s because the sooner you begin investing, the more time your money has to grow.

Take Jane, for example. If Jane is debt-free and has her full emergency fund in place, she should be investing 15% of her income. If she started investing $500 a month ($6,000 per year) at the age of 25, she could have between $3.1 million and $5.8 million by the time she’s 65 based on a 10–12% rate of return! Now if Jane waits until she’s 35 to start investing that $500 a month, she could have between $1.1 million and $1.7 million at age 65. Waiting 10 years could cost you millions of dollars at retirement! 

And don’t get hung up on rate of return here. Even with an 8% return, Jane could have a $1.7 million nest egg by 65 if she started investing at age 25. That’s nothing to sneeze at! Remember, time and compound growth are your friends. Make the most of them!

The Foolish bottom line

Investing money may seem intimidating, especially if you’ve never done it before. However, if you figure out 1. how you want to invest, 2. how much money you should invest, and 3. your risk tolerance, you'll be well positioned to make smart decisions with your money that will serve you well for decades to come.

What to Consider Before Investing and Why Long Term Investing is Key

As you begin your investing journey, consider first where you’d like to hold your investments. That could be a taxable brokerage account, an employer’s 401(k), or a tax-advantaged IRA. If you want to invest in real estate, decide if physical properties or REITs match your investment style. 

Then, assess your risk tolerance and how long you want to invest. Keep in mind that, due to compound interest, investing long-term (10+ years) is the most assured way to grow your money. 

It’s perfectly fine to invest entirely in low-cost, diversified index funds. “Adequately diversified investments with a long track record of growth is the key to building wealth,” says Stohmeier. That way, you’re also able to withstand market dips while giving your cash the best chance to grow.

How to Start Investing Your Money: Develop Your Investing Approach

As I explained this to my brother-in-law, I could

As I explained this to my brother-in-law, I could see his disappointment in my not knowing any shortcuts to overnight investing success.

However, we launched into a discussion around how he could develop his own disciplined investing approach by first becoming a student of markets.

Knowing that this discussion could become overly cumbersome in just one conversation, I decided to share only introductory steps, which I outline below.

Investing isn’t easy but, at the same time, it shouldn’t be seen as a frightening endeavor. If done wisely and consistently, investing can separate you from retiring comfortably at a reasonable age and working into your golden years out of necessity.

We all want a comfortable retirement, so why shouldn’t we make smart decisions to get there?

With that thinking, I will do the same here. Short of a formal education in finance, my five high-level steps for gaining familiarity with investing in the stock market are as follows:

Step 2: Choose an account type

What you’re investing for can also help you pick an account to open. Chances are, you’ll want to start investing with one of these 3 main account types:

Brokerage account: When people talk about trading stocks, they’re typically talking about doing so in a brokerage account. You can think of a brokerage account as your standard-issue investment account. Here are the basics:

  • Pros—Flexibility. Anyone age 18 or older can open one.1 You can add as much money as you want to the account, whenever you want, and have access to a wide range of investment options. You can also generally withdraw any cash in the account whenever you want.
  • Cons—Taxes. While a brokerage account may be the simplest to open and start using, it’s typically the most expensive come tax time. That’s because you generally have to pay taxes on any investment profits every year (like if you’ve sold investments for a gain, or received dividends or interest).
  • When to consider. If you’re investing for retirement, it generally makes more sense to first start with one of the next 2 account types. That said, as long as you choose an account with no fees or minimums, there’s no harm in going ahead and opening a brokerage account so you have it at the ready. (Fidelity charges $0 account fees and has no minimums for opening or maintaining a brokerage account.)

401(k): This is an employer-sponsored plan account for investing for retirement. You can generally only invest in one through work. If you’re not sure if you have access to one, check with your employer’s HR department. Some people may instead have access to a 403(b) or 457(b) account, which are similar. Here are the tradeoffs:

  • Pros—Tax benefits, plus potentially free money. 401(k) plans offer tax-deferred investment growth. This means that you can contribute to the account pre-tax, and you generally don’t pay any taxes while your money is sitting in the account potentially growing. Instead, you only pay taxes when you take withdrawals (learn more about the benefits). Many employers will also match your contributions, up to a certain amount—it’s like free money to encourage you to contribute.
  • Cons—Rules and restrictions. There are rules to follow on when and how you can contribute, and strict rules on when and how you can take money out. You may also be limited in what investments you can buy, and you can’t necessarily buy specific stocks.
  • When to consider. For most people, the benefits easily outweigh the drawbacks. Many people start investing for the first time in these accounts. Chances are that if your employer offers a 401(k) or similar account, it’s worth your while to invest in yours.

Individual retirement account (IRA): This is an account for retirement that you can open and invest in on your own (i.e., not through work). Although there are different types of IRAs, here we’re focusing on so-called “traditional IRAs,” which you can think of as the plain-vanilla kind. Here’s what you need to know:

  • Pros—Tax benefits. Traditional IRAs come with similar tax benefits as 401(k)s. You also often get a bit more flexibility and control than you do with a 401(k). For example, you can pretty much contribute whenever you feel like it, and you may have more investment choices. You can typically even trade individual stocks.
  • Cons—Rules and restrictions. There are rules and restrictions on who’s eligible to contribute to an IRA, how much you can contribute each year, and how and when you can take money out. Also, if you do decide to open an IRA, you may have to spend some time deciding which type of IRA to open.
  • When to consider. An IRA may be a good choice if you don’t have a 401(k) or similar option at work. A traditional IRA, in particular, may be a good option if you expect to be in a lower tax bracket when you retire. 

Still with us? You’re doing great. And the next step is simpler—promise.

4. The key is to diversify

The key, experts say, is to diversify, which means have a variety of investments in different things. Don't put all of your eggs in one basket. That keeps balance, and if one investment is going down, another might be holding steady or going up.

For example, if your investments are all in tech and all of a sudden the tech sector starts sliding, so is your portfolio, Sun explained. "If you have some in tech, maybe some in health care and those more traditional companies that pay dividends," Sun said, "then your overall portfolio is a little bit better balanced."

So, try to make sure you have investments across a wide variety of sectors (such as technology, health care, retail, financial, etc.) as well as risk levels. Growth stocks, for example, can gain a lot but also lose a lot. Value stocks are more steady growth. You can also invest in currencies, commodities and riskier investments such as cryptocurrencies and NFTs. Those tend to be more volatile and complex, so you really want to do your homework — and make sure you are only investing what you can afford to lose.

It's OK to get advice from friends when investing, but you need to do your own research and you need to be diversified. If your friend says buy XYZ stock because it went up for them, don't just buy that and leave it at that. It could go down for you. So, if you're diversified, you have a cushion for that.

These tips make investing money for beginners a breeze!

The best way to build wealth through investing is to get started as soon as possible. You can learn how to start investing today! Even if you are just starting with $20, you can build your portfolio over time.

If you want to learn more and make good investment choices, then consider taking our completely free investing course. You’ll learn more about how to start investing in stocks, how to research your investments, and how to pick the right broker for you.

Be sure to subscribe to the Clever Girl Finance YouTube channel, and the Clever Girls Know podcast for top tips on investing and more!

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