Jul 08

Will It Make Me Rich and Other Questions You (Probably) Have About Investing

Investing can feel like something you “should” do — or rather, should have done. After all, if you had invested in Facebook, you could have major money in the bank right now. But investing can seem confusing–and intimidating. Are you investing if you have a 401(k) plan at work? How do you get started? And if you’re struggling to pay all your bills each month, should you even bother? Here’s everything you need to know.

 

 

What is investing?

Investing is putting your money in something — a company, idea, or fund, for example — with the expectation that thing (called an asset) will appreciate, or go up in value. Buying a home that will sell for more than you paid can be an investment. The same can be true for things like art. You can also invest in your education, expecting that an advanced degree will make you more valuable to employers. 

 

If you have a 401(k) or an IRA retirement account, you’ve likely already started investing! With these plans, you put money away now so that hopefully, it’s grown (by a lot) by the time you’re ready to retire. Often, retirement accounts are invested in target-year funds, which are groups of stocks, bonds, and other assets with a mix tailored to the year you expect to retire. (Generally, when you’re further away from retirement, there’s more exposed risk as well as opportunity for growth, while they get safer as you get older.) Of course, no form of investing is completely without risk. Markets continuously fluctuate and crashes can always happen, and when they do, they can hurt your retirement account. If you’re young, the hope is that your savings can recover from the crash and continue to grow before the time you’ll need it.

 

You can also create a portfolio as an individual investor. Portfolios can include individual stocks (such as publicly traded companies, like Uber and Amazon) as well as funds — a holding of multiple companies —  and can also include commodities (like oil). 

 

 

Why investing can be a smart  idea… sometimes 

Finance guru Warren Buffet once said, “if you don’t find a way to make money while you sleep, you will work until you die.” That sounds depressing, but what he means is that it’s essential to not only earn money, it’s important to find avenues that can help your money work for you. And when you invest, your money is (hopefully) earning more money–a lot more more than what it might earn if you kept it in a checking or savings account. For example, over the last hundred years, the annual return on stocks has been about 10 percent. Meanwhile, the interest rate on savings accounts is usually between 1 and 2 percent. In other words, your money has the potential to grow much, much faster in an investment account than it can in a savings account.

 

Of course, unlike with a savings account, the money you initially invest isn’t guaranteed. With a savings account, when you put $100 in, you know you can pull $100 out whenever you need it. That’s not the case with the stock market. While the market could rise, raising the value of your $100, it could also fall, meaning you might have far less than $100 to withdraw. While stock market crashes can be scary, historical data shows that the stock market will, over time, even out. But a crash at the wrong time — such as when you’re about to withdraw money to buy a house or about to retire — could absolutely hurt your finances. However, while investing may never be a sure thing, history shows that putting your money in the stock market is one way you can maximize your finances for the long-term. 

 

 

How do I know investing is right for me? 

 

Your employer offers a 401(k) match

If your employer offers a match on 401(k) contributions, it’s a good idea to contribute savings at least up to the match. That’s because this money is part of your benefits package, but is only accessible if you participate and contribute. Starting your 401(k) in your twenties — or as soon as you can — gives even small deposits plenty of time to grow.

 

 

You have an emergency fund of six months (or more) 

It’s crucial to have money put away for emergencies that you can access easily. If the stock market is down the day your car stops working, you could be in a real bind. That’s why it’s best to build up your emergency fund in a savings account before making the plunge into investments. 

 

Before you create a portfolio or buy a stock, it may make sense to speak with a fee-only financial planner. You may be able to find one through your employer benefits package (some employers offer financial planning as a benefit). Fee-only means they don’t work off commissions and can advise you on avenues to take based on your financial goals. For example, for many people, it makes more sense to invest in index funds, rather than picking and choosing individual stocks. An advisor may also be able to give you insight into brokerages and roboadvisors (companies offering online algorithm products to manage your money)  and help you choose the best investment management tools for you. A financial planner can also assess your other money-related goals — like going to grad school — and determine how investing fits into your plans. 

 

 

How do I know if I’m not ready to invest (yet!):

 

You have debt

If you have high-interest debt, like credit card debt, focus on paying that off first. The interest rate on debt tends to be much higher than the rate of return on investing. (Investments may have a 10 percent return rate over time in the best-case scenario, while consumer debt from credit cards may charge 15 percent or even 25 percent interest.) Pay off your debt first, stop carrying credit card balances, and then consider investing. 

 

Student loan debt or a mortgage is a different story. If you have a good rate on these, you might still consider starting to invest, since they tend to have interest rates that are lower than the potential rate of return on investments. 

 

 

You’re saving for a house

In general, it’s best to consider investing as a long-term strategy. If you’re hoping to buy a home in the next five years, it may make sense to save that money in a high-interest savings account instead, so you know it’ll be available when you need it. That way, you don’t need to worry that a stock market crash will decimate your house savings, the way you might if that money were invested in the stock market. 

 

 

Common first-time investor mistakes

 

Buying a “trendy” asset

Sure, crypto is everywhere, but should you buy it? That depends. Financial experts suggest steering clear of the hype and focusing on what you understand. For beginner investors, that may be investing in funds, which hold a range of stocks, instead of just one and can be easier to understand, track, and predict returns —  and bypassing individual stocks or cryptocurrency. Robo-advisors (companies offering online algorithm products to manage your money) can be a good way to set up an initial portfolio and can help you create the best portfolio for your needs.

 

Not paying attention to fees

Most investing platforms have management fees, which usually average around 1 percent. There may also be transaction fees on buying and selling, annual account fees, and other fees. Familiarizing yourself with fees and comparing fees across investment platforms — one way to do so is to read reviews across different sites — can help you find the best platform for you. 

 

Waiting until you’ve learned everything

While it’s tempting to wait until you’re 100 percent confident before you put your money in the stock market, you risk missing out on the chance for your money to grow. Allow yourself to learn on the go, and ask questions along the way. Some micro-investing apps, like Acorns, allow you to invest spare change from purchases you would have otherwise made. (In other words, if you buy something for $4.50, the app will round up the purchase and invest 50 cents in an automated portfolio.) These apps allow you to see how your portfolio is affected by the market in a relatively low-risk way. 

 

 

Investing may be a big deal, but it shouldn’t feel scary 

Investing is highly personal — and it just may not make sense in your financial life right now. That’s okay. While you should plan for retirement while you’re young, pay down all non-mortgage and non-student loan debt, and build your emergency fund before investing elsewhere, understanding how investing works, and how it may be an option to consider in the future, can help you feel in control of your finances. While the media often portrays investing as a bunch of sweaty guys yelling and swearing — and that may be a small part of it for some people — in reality, its just another tool to help you make your money work for you. 

 

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