If you’re wondering how to invest money, you’re definitely not alone. According to Market Watch, one in five Americans say they “don’t know enough” about markets to get involved. Nearly one in 10 don’t trust the people who are supposed to advise them.
This hesitation is unfortunate because they’re missing out on massive opportunities to build their net worth. When done correctly, investing your money can actually be a straightforward process.
Here’s how you can start investing your money and some simple ways to do it safely.
Why You Should Invest Your Money Rather Than Save
Most people wondering what to do with their money might be tempted to simply put it in the bank or even stuff it under their mattress. Both are terrible ideas…
Why? Because growing your money requires investing it, not just saving it.
Traditional banks pay virtually nothing in interest anymore. Stashing your money under your mattress will actually cause it to lose purchasing power over time due to inflation’s erosive effects.
What you need (and what helps millions of people annually grow their fortunes) is the power of compound interest – the ability to earn returns on your contributions as well as all previous earnings.
Consider this example: you invest $6,000 every year ($500 per month) for the next 30 years. At the end of 30 years, you’d have $6,000 x 30 = $180,000, right? Wrong. Thanks to compound interest’s power, if you invested in funds averaging 10 percent annualized returns, your money could potentially grow to just shy of $1 million!
Yes, investing your money instead of simply saving it created over 5 times more wealth for you. Not a bad deal at all!
(Try your own numbers using this free compound interest calculator from Investor.gov.)
This demonstrates a key principle: when you harness compound interest’s power, your money has the greatest potential for exponential growth over time.
Sounds straightforward… but what investments will help get you there?
What You Should Invest Money In
When it comes to traditional investing forms, several solid options exist. Here are some of the most popular choices:
- Individual stocks – Ownership shares in companies publicly traded on the open stock market.
- Bonds – Debt securities from government entities or major corporations.
- Mutual funds – Investment collections that may contain various assets (domestic stocks, foreign stocks, bonds, commodities, real estate, etc.)
- ETFs (exchange-traded funds) – Funds similar to mutual funds but traded on the open market.
- Precious metals – Assets such as gold and silver.
- REITs (real estate investment trusts) – Shares in collective funds that own various real estate holdings.
Index Funds
If you’re concerned about picking the wrong investments and potentially losing money, consider simplifying your approach by narrowing it down to just one choice: An index fund.
An index fund is simply a financial asset (usually a mutual fund or ETF) containing all the same holdings as a major market benchmark. For example, with stocks, the most widely popular benchmark is the S&P 500 index, which includes the 500 largest and best performing U.S. companies.
The theory behind this approach is simple: Why waste time trying to identify winners when they’re already part of an index fund? This makes the process far more efficient while allowing even novice investors to capture the market’s average return.
Believe it or not, that’s something even professional fund managers struggle to achieve. According to CNBC, 85 percent of large-cap funds underperformed over the last 10 years, and nearly 92 percent trailed the S&P 500 index over the last 15 years.
Currently, the long-term average return of the S&P 500 index is 10 percent. That’s quite impressive, especially considering how easy it is to invest in one.
So where should you begin?
Where To Invest Money
One of the best places to start investing your money is through your retirement plans. These accounts generally allow you to buy any of the assets mentioned above while providing several tax-advantaged benefits as an incentive for using them.
Employer-Sponsored Retirement Plan – 401(k), 403(b), etc.
An employer-sponsored retirement plan such as a 401(k) or 403(b) is a collective plan that your company allows you to participate in.
Every paycheck, they’ll deduct your investment contributions before taxes are taken out. This means you’re not paying any upfront taxes on your savings. Instead, you’ll defer your taxes until you withdraw them for retirement someday in the future.
Another excellent feature of 401(k) plans is employer matching contributions. Just for participating in the plan, your employer will often make matching contributions. That’s essentially free money!
The contribution limits for 401(k)s are $19,500. If you’re age 50 or older, you can contribute up to $26,000. Employer matching contributions don’t count towards these limits.
Traditional Or Roth IRA
An IRA (individual retirement account) is a retirement plan you establish outside of your employer with a financial service provider of your choice.
Traditional IRAs work similarly to 401(k) plans regarding tax deferment. Roth IRAs, however, flip the tax benefits. Instead of delaying tax payments, you pay them now when making contributions and then enjoy tax-free income later during retirement.
The decision between a traditional or Roth IRA depends on what you believe your tax situation will be in the future versus now. For example, someone expecting to be in a higher tax bracket in the future may want to consider a Roth-style plan instead of a traditional one.
IRA contribution limits are $6,000. If you’re age 50 or older, you can contribute up to $7,000.
Full-Service Or Discount Broker
Whether you’re interested in starting an IRA or investing on your own terms, a broker will give you the best selection of options. They also maintain strong reputations for customer service and providing advice when needed.
You could choose a well-known, full-service broker such as Vanguard and Fidelity. Or you could try popular discount brokers such as E-Trade or TD Ameritrade.
Robo-Advisors
If you’d prefer having someone else select your funds, consider trying a robo-advisor. Robo-advisors have gained popularity thanks to their simplicity and ease of use. You can tell the robo-advisor about your goals and risk tolerance, and they’ll match you with the appropriate fund styles.
Some top choices include services like Betterment, Wealthfront, and M1 Finance.
Final Thoughts: How To Invest Money
Now you understand the why, where, what, and how of investing your money. Make sure to use this guide to find the smartest ways to invest money. Time to get started with your investing journey!
