Investing - is it important?
You've probably noticed that inflation is at a 40-year high if you've been paying attention. This indicates that life is costing more than it ever has. Everything will cost extra, from grocery shopping to simply fueling up your car to drive to work.
Additionally, you could have realized that your income probably hasn't increased at the same rate. Despite the fact that living expenses are rising, you probably aren't generating enough money to keep up.
We cannot emphasize enough how crucial it is to start investing your money right now, regardless of where in life you are in. You may believe that investing is too hazardous, but the alternative—not having any money invested for your future self—is riskier.
So why is investing so critical?
- You desire to have your money work for you. Money is earned via hard labor. Let your money work for you by generating respectable returns.
- Money held in a bank account depreciates in value. Your purchasing power decreases as a result of growing inflation when you leave money on the sidelines without collecting interest.
- There simply isn't enough interest in a savings account. My bank informed me via email that a savings account was currently earning 2.5% interest for a short period. This is well below the rate of inflation that is now in effect.
- If possible, avoid working past the age of 70. Compound interest will be on your side sooner if you start investing. Ensuring that you won't have to work forever is the whole objective of investing.
- By not investing, you are losing out on "free money." You ought to be making money off of your investments. You miss out on what would effectively be free money when you don't use your money to produce money.
- To develop the habit, you need to start investing early. When you don't have much money, investment serves the purpose of teaching you how to invest so that you'll be ready when your income does increase.
- Start investing your money now more than ever before. The proliferation of so many platforms has made it much simpler to begin investing. It can be set and forgotten. To begin trading, you don't need to spend hours in front of a computer studying stock charts.
It's time to consider the ideal moment to start investing now that you understand why you should (hint: it's sooner than you think).
When is the right time to start?
Although you should begin investing right away, you should address the following two money problems first:
- Pay off high-interest debt. Are there any high-interest debts you have? Because the interest you'll pay will offset any investment gains you achieve, you should make active efforts to pay down the sum.
- Establish reserve money. Work on building up an emergency fund so that you have at least three months' worth of costs saved. You must be sure you could maintain your financial stability even if you lost your work or experienced an unanticipated problem.
Only until you've made headway paying down your high-interest debt and begun to accumulate an emergency fund should you start investing your money.
Educate yourself on investing
Following the creation of a smart investment goal, you should educate yourself on the different types of investments that are available to investors by reading all of the articles in this section of the Bitpanda Academy's Personal Finance section. These articles cover everything from the trusty savings account to corporate stock and fractional shares, bonds, mutual funds, and ETFs.
When learning about these fundamentals, you will also discover that investors diversify their holdings, which simply means they combine several investment types to achieve their objectives based on risks and rewards as well as other considerations.
The next stage would be to educate yourself on the different sorts of investments that are available to investors once you have created your SMART investing objective.
Create investment strategies
After learning about the various investment options, you might wish to consider which investment vehicles pique your interest the most and whether they are appropriate for your objective.
Consider the following when performing your calculations:
- Don't forget to factor in the costs associated with opening multiple accounts, stock depositories, trading, and other types of transaction fees because investing is not free.
- Additionally, bear in mind that capital gains (earnings) from investments are taxed; familiarize yourself with the tax regulations of the nation in which you reside.
- Understand your personal risk tolerance and feel at ease with the risk of any potential investments you make. Historically, lower risk has led to poorer returns and vice versa.
- Consider compound interest and interest rates.
- Consider whether and how those changes might affect your financial condition if you are aware of impending changes in your personal situation, such as relocation, work changes, changes in your family situation, and others.
Now that you have established one or two investment objectives, start reading our following article on interest to grasp the fundamentals of investing.
Guide to investing
1. Pay off credit cards with high-interest rates
Consider what you're spending money on before adding a line item to your budget for investing.
If you have high-interest credit cards, paying them off in full should be your first priority. If your credit card bill has a 20% interest rate, paying it off right away will ensure you a 20% return. This is one of the best little investment ideas because there is no other investment in the world with returns like that.
Once you have paid them off, you can invest the money you were using each month to pay them down in other ways.
2. Cut back on expenses
Consider where your money is going in addition to that and look for areas where you may reduce back. Make sure your budget is accurate to start. It's time to look more closely at where that money is going if the "miscellaneous" category is nearly as big as your mortgage.
If there isn't a single large category that immediately stands out to you as needing to be cut, try cutting your expenditure by a particular proportion across a number of other categories.
You may be able to start your investment program with the money you save if you spend 20% less on eating out or entertainment. Add a line item for investing to your budget once you've figured out where the money is coming from so you'll remember to increase your portfolio each month.
3. Create a reserve fund
The creation of an emergency fund is another action you may take to begin your investing plan. Three to six months' worth of living expenses should be saved up in a separate account that you can use in the event of an emergency. Put some of your money into a savings account that you only use for emergencies to start building up your emergency fund.
According to a recent GOBankingRates report, 69% of Americans have savings totaling less than $1,000. If you don't have an emergency fund, you could have to take money out of your savings to cover an unanticipated auto repair or a medical expense. You ought to always have enough cash on hand to cover unforeseen costs without having to sell your investments.
4. Utilize your 401(k) match
The majority of people would readily take cash if someone presented it to them at their door in a bag. But it's as if you didn't bother to answer the door when free money was knocking if you're not taking advantage of your company's 401k match.
Contribute to your 401(k) at least as much as your employer will match as your first investment. Some businesses will match a specific portion of your pay dollar for dollar, while others will only match 50 cents on the dollar. In any case, it's the triple threat of investing: - Your contribution is automatically deducted from your salary, ensuring that you don't forget; - Within certain parameters, you can deduct your donations from your income, which lowers your taxable income. The final possibility is that your company will match your donation.
401(k) plan absent?
Even though 57 million Americans are employed by companies without 401(k) plans, such workers are nonetheless capable of successfully saving money and making investments on their own.
Here are two excellent substitutes:
Exchange-based funds (ETFs)
Exchange-traded funds (ETFs) are similar to mutual funds, except ETFs trade like stocks and their values fluctuate based on each trade, whereas the prices of mutual funds are set at the close of the trading day.
You may, for instance, purchase an exchange-traded fund (ETF) like the Standard & Poor's depository receipt (SPDR) Trust that aims to replicate the performance of the S&P 500 without the difficulty and expenses involved with buying 500 individual equities.
ETFs give the chance to diversify your portfolio as well as the chance to purchase a single investment that includes a big number of stocks. Similar to mutual funds, a range of ETFs are offered to suit your investing objectives. By searching for the ETF ticker symbol on a number of financial websites, the regular investor can easily find information on ETFs and their performance.
Let a robot invest your money
Robo-advisors, automated platforms for financial planning powered by algorithms, were developed in order to make investing as easy and accessible as feasible. These businesses gather your financial data and goals with little to no human interaction, provide advice, and then automatically invest your money so that you pay lower fees.
Those who are just starting out on the path to financial independence may find these platforms to be very beneficial. According to the 2022 Investopedia Financial Literacy Survey, adults in Generation Z (18 to 25 years old) were more financially literate than those in any other generation at their age. Only one-fourth of those who were already stock market investors—26% of those surveyed—felt they knew enough about the market to be able to describe it to someone else.
5. Employ a website for online investments
Diversifying your portfolio is essential for lowering risk, but you shouldn't accept mediocre results or have your returns eaten up by fees and taxes. You can use an internet platform to guide your investment choices.
Betterment is an online financial tool that aids in helping you choose the best investments based on your risk tolerance and time horizon. You can indicate whether you are setting money aside for retirement, a big purchase, a safety net, or just general investing.
The platform uses inexpensive index funds, and you can set up automatic monthly investments of a little sum. Depending on your amount, fees range from 0.25 percent to 0.40 percent.
6. Put your change to work
There are instances when you have to deceive yourself to raise the capital to invest. Investing your spare change is one method for doing this. Numerous apps let you invest minute sums that you won't even notice, gradually establishing a portfolio.
- Acorns round up your debit or credit card purchases to the nearest dollar and invest the spare change. Therefore, if you use a debit card to pay for a coffee that costs $4.19, Acorns will debit your account for $0.81 to round the price up to $5. Your Acorns account receives this money, which is then invested.
- Stash: Takes into consideration your monthly spending plan and deposits any slack into your investment account.
- Clink: Allows you to designate a portion of specific transactions, such as purchases at restaurants or stores, to go to your investment account.
All of these tools can make it reasonably simple to add money to your investing account.
7. Research online brokers
Use an online brokerage to keep your costs low if you want to try your hand at selecting your own stocks or mutual funds. There are several online brokerages to select from, and many of them have trade fees as little as $4.95. A full-service brokerage frequently charges additional money for account management, in addition to taking a cut of your assets.
- Ally Invest: Has a promotional offer of $3.95 per trade if you have an average balance of $100,000, but otherwise charges $4.95 each trade (or make 30 or more trades in a quarter).
- E*TRADE: Charges $4.95 for 30 or more trades every quarter or $6.95 per trade.
- Merrill Edge: $2.95 for each trade.
Although online brokerage companies might provide guidance on your investments, the final decision is yours, so do your research before you invest.
8. Believe in an investment club
A group of investors that meet frequently to discuss and make investments in stocks, mutual funds, or other securities is called an investment club. Typically, the club combines its funds and makes decisions about investments based on a majority vote. This gives the club access to investments such as shares of expensive stocks or alternative investments that each individual might not be able to buy.
Risks do exist for investment clubs. If your money is mishandled, you often have no remedy because an investment club is normally exempt from registration requirements with the Securities and Exchange Commission. Additionally, you might discover that the other club members don't share your goals or interests, thus the bigger group may disregard your recommendations.
Since the other members may be impacted if you sell your part, some investment clubs can be challenging to leave.
9. Inquire about the “Employee Stock Purchase” plan
Ask if your employer has an employee stock purchase plan if it is a publicly traded business.
One of the best investment options available, it allows staff to buy business stock without paying any fees and occasionally at a discount from the market price. Up to IRS limits, you might be able to have the cost of the stock deducted from your compensation. It's possible to deduct your investment from your taxable income if you participate in one of the eligible employee stock purchase programs, which are some of the plans that are available. These plans are designed for retirement.
A wonderful approach to investing at a discount in a business whose operations you are familiar with is through an employee stock purchase plan. When you have ownership of a firm, you could feel more invested in its success. But keep in mind that you shouldn't have too much of an investment in any one business, including your own. To be safely diversified, you should also have other investments.
10. Diversify your investments
When talking about diversification, it's crucial to have a variety of investments, but keep an eye on your overall portfolio. If you want to know if you are sufficiently diversified, take a look at the big picture because you can have investments in several areas. As some of your positions will decline while others grow, a well-diversified portfolio will be better able to withstand market volatility. For instance, when bond prices decline, stock prices frequently — but not always — rise, and vice versa. If one of these markets has a sharp decline, having some stocks and some bonds in your portfolio will provide you with protection.
Stocks, bonds, and cash are the three asset types you should diversify among. If you feel comfortable making such kind of investments, you might also choose to incorporate commodities or real estate. Since stocks are a broad category, it is advisable to diversify even more by size and type.
Your bond investment might be distributed between corporate, municipal, and Treasury bonds. Depending on how much risk you want to take and how long you want to leave your money invested, the ideal asset mix will differ.
11. Take charge of your portfolio
It may get harder to manage your portfolio as it expands. You should be aware of the specific stocks you own in addition to any asset allocation recommendations made by an online investing platform. You may manage and keep track of your investments using the software.
- StockMarketEye: Keeps track of all of your positions and any that you might be thinking about investing in. You can check to see how much money your investments are making — or losing — and determine whether there might be more profitable investments for you to make.
- Fund manager: keeps tabs on your holdings, reports on them, and offers technical analysis.
These programs have a rather steep learning curve and call for a time commitment from you because they are similar to those used by professional money managers.
12. Request free counsel
Most likely, you have friends or relatives who work in the financial services sector who could be prepared to offer you investing advice. If they are knowledgeable about what they are talking about, this might be very helpful to you while you attempt to invest on a tight budget.
Additionally, several online platforms provide free investment advice, but it may be relatively generic.
Financial Planning Days are held in October and are sponsored by the Certified Financial Planner Board of Standards, Inc., the Financial Planning Association, the Foundation for Financial Planning, and the U.S. Conference of Mayors. These activities include one-on-one financial counseling and classroom-style educational seminars. There is no selling involved, and it is free.
FAQ
How do you budget for future expenses?
You must figure out how much you have available to save each month if you want to meet your long-term financial goals. You can do this by adding up all of your costs, including prorated annual costs, and deducting the sum from your monthly take-home pay. Whatever is left over could be invested to achieve a future objective. Keep in mind that your ability to save money this month may not be the same as your ability to save money at this time next year. It's crucial to monitor your budget and make adjustments as needed because of this.
Which is the best way to achieve long-term goals?
Be honest with yourself about how much you can realistically set aside. It's likely that you will get miserable and give up before accomplishing your objective if you are overly ambitious and create a strategy that requires you to live in terrible poverty for years. Make sure the money you have set up for future use is working hard and not being eaten away by inflation by coming up with a realistic monthly savings amount, being diligent, and these other tips.
Where should I invest my savings?
Savings can be invested in a variety of ways, based on your risk tolerance and other criteria like when you'll need the money. Do some research, carefully analyze your options, and if you still need help, think about talking to a financial expert.
What is an emergency fund?
A reserve of funds designated for emergencies is one you wouldn't normally access. In the event of the unexpected, it is accessible. You get in a vehicle accident and have medical expenses to cover, or you lose your job and still have rent to pay. The goal is to save something, even if creating an emergency fund can be challenging when you're living paycheck to paycheck. Some financial experts advise accumulating at least enough cash to pay for three months' worth of necessary living expenditures. Others advise saving enough money to cover costs for at least six months. You must determine what is best for you.
How much money should you start with in the stock market?
If you're an average worker or a novice investor, you should be aware that it doesn't cost much to get started. Start small—between $500 and $1,000—and add to it as you earn and accumulate more funds.