Investing your money is one of the most important financial moves that you can make. By investing, you can put your money to work for you and steadily grow your wealth over time.
Importantly, investing doesn’t have to be time-consuming, complicated, or scary. It’s easy to start investing and putting your money into the market can make a huge difference in your ability to reach your financial goals.
In this guide, we’ll explain why investing is important and show you how to get started today.
What is Investing?
Investing is a broad term for putting your money into anything that you think will increase in value over time. You can invest in stocks, in a house, or even in a business you want to start.
Investments can be short-term or long-term. For example, you could invest in a company for a year and then sell. Or you could invest in that same company for 10 years or in a house for 30 years.
Investing doesn’t necessarily mean that you’ll see an increase in value right away. Some investments take a long time to grow in value. Others provide consistent payouts, or dividends, over the life of the investment.
Of course, there’s always a chance that an investment loses money. However, over the long term, popular investments like the stock market and homes have consistently grown in value.
Why is Investing Important?
Investing is an incredibly important piece of managing your money and reaching your financial goals. Here are some of the key reasons to invest:
Protect Against Inflation
Inflation is happening constantly, even in the best of economic times. Thanks to inflation, your money will gradually lose its value if you don’t invest it. A dollar that goes uninvested today might only be worth the equivalent of 80 cents by the time you retire.
The idea of losing money to inflation is pretty unappealing. The good news is that when you invest, the returns you make on your investment can offset inflation.
Many conservative investments, like treasury bonds, are designed to keep up with inflation and have relatively little chance of losing money. More aggressive investments, like stocks, offer a rate of return that’s higher than the rate of inflation. However, they have a higher chance of losing money.
Increase Your Income
If you want to get ahead financially, investing is one of the best ways to do it. Meeting your big financial goals – like buying a home or paying for your kids’ college tuition – can be difficult on a salary alone. Investing offers a way to increase your income and provide the financial buffer you need to pursue your financial dreams.
Put Your Money to Work
Another reason to invest is simply because it’s the most efficient thing to do with your money. If you have cash that’s just sitting in a bank account, you’re wasting a big opportunity. By investing that money, you can increase its earning potential.
Importantly, the sooner you invest, the better. Investments generate what’s known as compound interest. If you invest $1 today, it might be worth $1.05 at the end of the year. At the start of next year, then, you’re investing $1.05, and the year after that, $1.11. The financial benefits of compound interest grow more quickly the longer your money is invested.
Prepare for Retirement
One of the most common reasons that individuals invest is to save for retirement. In fact, investing is so central to achieving retirement that many employers offer retirement plans like 401(k)s and have incentives to encourage employees to contribute to those plans.
To understand why investing matters for retirement, we have to return to the idea of compound interest. Let’s say you contribute $10,000 per year to a retirement account for 20 years. If that money is simply saved rather than invested, you’d have $200,000 after 20 years.
However, if you invest that money and earn a modest rate of return of 5%, your money will compound every year. After 20 years, you’ll have $347,192 in your account. That’s nearly 75% more money thanks to investing!
How to Start Investing
Now that you know why investing is so important, we’ll show you how to get started. Investing can be surprisingly simple even if you’re completely new to the market.
Step 1: Open a Brokerage Account
The first step to invest is to open a brokerage account. There are many brokerages that offer free investment accounts with no minimum deposits and no fees for buying and selling stocks.
Some of the most well-known brokerages include Webull, TD Ameritrade, Charles Schwab, Fidelity, and Merrill Edge.
Step 2: Research Stocks
Once you have a brokerage account set up, the next step is to research stocks to invest in.
If you plan to invest in individual companies, you’ll need to do in-depth research to decide what companies make the best investments. Check out services like Yahoo Finance or Zacks to dive into companies’ financial details and to find out what professional analysts think about them. It’s also a good idea to read online articles to get different perspectives on a company’s prospects.
If you don’t feel comfortable doing your own research or don’t have the time, an alternative is to use a stock-picking service like The Motley Fool’s Stock Advisor. Stock Advisor delivers two new stock picks each month, so all you have to do is invest. Stock Advisor has a pretty incredible record of choosing winning stocks, beating the return of the overall stock market over the past 20 years. New members can get 55% off the service with this link.
Step 3: Determine Your Goals and Risk Tolerance
Another important aspect of investing is to determine your goals and risk tolerance.
Your investing goals will impact the timeframe over which you’re investing. Investing for extra income is very different from long-term investing for retirement. Make sure that the stocks you’re buying are expected to generate returns on a timeframe that matches your goals.
Your tolerance for risk also plays a role in determining what to invest in. Some stocks are riskier than others. If you’re investing for the long term, more risk might be okay – after all, you won’t need to withdraw that money right away if the stock goes down temporarily. On the other hand, if you’re investing for only a few years before you plan to buy a house, you may want to be more conservative in your investments.
Step 4: Invest
Once you know what you want to invest in, it’s time to start investing.
A key to successful investing is to be consistent over time. It’s a good idea to choose a fixed amount to invest at the start of every month. Many brokerages have auto-investing tools that allow you to schedule recurring investments so you don’t even have to think about it.
Investing is essential to meeting your financial goals. It can protect your money against inflation, help you get ahead financially, and prepare you to retire when you want to. Learning how to invest is relatively easy and investing consistently can enable your money to grow.