How To Invest Money
If you’re wondering how to invest money, then you’re not alone. According to Market Watch, one in five Americans say they “don’t know enough” about markets to get involved. And of those, nearly one in 10 don’t trust the people who are supposed to advise them.
That’s unfortunate because they’re missing out on huge opportunities to grow their net worth. Investing your money can actually be a fairly straightforward process when done correctly.
Here’s how you can get started investing your money and some simple ways to do it safely.
Why You Should Invest Your Money Rather Than Save
Most people who are wondering what to do with their money might be tempted to just put it in the bank or even stuff it under their mattress. But those are bad ideas …
Why? Because in order to grow your money, you have to invest it, not just save it.
The typical bank pays almost nothing in interest anymore. And putting your money under your mattress will actually cause it to lose purchasing value over time due to erosion of inflation.
The thing you need (and what helps millions of people every year to grow their fortunes) is the power of compound interest – the ability to earn money on top of your contributions as well as all of your previous earnings.
Take, for example, a situation where 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? No, thanks to the power of compound interest, if you invested in funds that had an average annualized return of 10 percent, then your money could potentially grow to just shy of $1 million!
Yes, investing your money as opposed to simply saving it created over 5 times as much wealth for you. Not a bad deal at all!
(Try your own numbers using this free compound interest calculator from Investor.gov.)
So, it just goes to show you – When you take advantage of the power of compound interest, your money has the greatest potential to grow exponentially over time.
Seems easy enough … but what are some investments that will help get you there?
What You Should Invest Money In
When it comes to traditional forms of investing, there are several good options to choose from. Here are just a few of the most popular ones:
- Individual stocks – Shares of ownership in companies that are publicly traded in the open stock market.
- Bonds – Debt from the government or major corporations.
- Mutual funds – Collections of investments that may contain any number of assets (domestic stocks, foreign stocks, bonds, commodities, real estate, etc.)
- ETFs (exchange-traded funds) – Funds which are similar to mutual funds, but traded in the open market.
- Precious metals – Assets such as gold and silver.
- REITs (real estate investment trusts) – Shares of a collective fund that owns various real estate holdings.
If you’re at all worried about picking the wrong investments and potentially losing money, then you may want to simplify your approach by narrowing it down to just one choice: An index fund.
An index fund is simply just a financial asset (usually a mutual fund or ETF) that contains all of the same holdings as a major market benchmark. For example, when it comes to stocks, the most widely popular benchmark is the S&P 500 index which are the 500 largest and best performing U.S. companies.
The theory behind this is simple: Why waste your time trying to find the right winners when they’re already part of an index fund? Not only would this make the process way more efficient, but it also would allow even the most novice investor the ability to capture the average return of the market.
Believe it or not, that’s something that even professional fund managers struggle to do. According to CNBC, 85 percent of large-cap funds underperformed in the last 10 years, and nearly 92 percent are trailing 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 not too shabby, especially when you consider how easy it is to invest in one.
So where should you get started?
Where To Invest Money
One of the best places to get started investing your money is in your retirement plans. Not only will they generally allow you to buy any of the assets mentioned above, but you’ll also enjoy 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 the company you work for will let you participate in.
Every time you get paid, they will pull out your investment contributions before the taxes are taken out. That means you’re not paying any taxes on your savings up-front. Instead, you’re going to defer your taxes until someday in the future when you withdraw them for retirement.
Another great thing about 401(k) plans are employer matching contributions. Just for simply participating in the plan, your employer will often make matching contributions. That’s like getting free money!
The contribution limits for 401(k)s are $19,500. If you’re age 50 or older, then you can contribute up to $26,000. Employer matching contributions do not count towards these limits.
Traditional Or Roth IRA
An IRA (individual retirement account) is a retirement plan that you set up (outside of your employer) with a financial service provider of your choice.
Traditional IRAs work very similar to 401(k) plans when it comes to tax deferment. Roth IRAs, on the other hand, flip the tax benefits. Instead of delaying your tax payments, you pay them now at the time your contribution and then enjoy tax-free income later on when you retire.
The decision about whether or not to go with a traditional or Roth IRA will depend on what you believe your tax situation will be like in the future versus now. For example, someone who believes they will be in a higher tax bracket in the future may want to consider using a Roth style plan instead of a traditional one.
The contribution limits for an IRA are $6,000. If you’re age 50 or older, then you can contribute up to $7,000.
Full-Service Or Discount Broker
Whether you’re interested in starting an IRA or just investing on your own terms, a broker is going to give you the best selection of options. They also have a strong reputation for customer service and providing advice when you need it.
You could choose to go with a well-known, full-service broker such as Vanguard and Fidelity. Or you could try any number of popular discount brokers such as E-Trade or TD Ameritrade.
If you’d rather have someone else pick your funds for you, then you may want to try a robo-advisor. Robo-advisors have been gaining in popularity thanks to their simplicity and ease of use. You can tell the robo-advisor about your goals and tolerance for risk, and they will match you up with the right style of funds.
Some of the top choices are services like Betterment, Wealthfront, and M1 Finance.
Final Thoughts: How To Invest Money
Now you know why, where, what, and how to invest your money. Make sure to use this guide and find the smartest ways to invest money. Now get going with your investing!