In order to become wealthy or reach your financial goals, you’ll have to learn how to invest money wisely. Of course, that is easier said than done as there is a magnitude of information and investment options out there for you.
Where does one actually start and ensure they are doing the right thing? Investing money is very much based on your personal interests, timelines, risks you can afford, and many other factors. “What” and “how” you invest might be very different from the next person.
However, if you want to become an investor there is a basic framework to enhancing your knowledge and steps to begin properly.
Why Should You Start Investing ASAP?
Investing early allows you to get a head start and puts time on your side. And by starting as soon as possible, you begin to develop disciplined money habits that help you prioritize your overall financial health. But here are some of the top reasons you need to begin investing early.
The Power of Time
When you start investing young, even if it’s just smaller amounts — you have time on your side. Meaning you have years before retirement or when you may start withdrawing from your investments.
You can afford to make some mistakes or be aggressive early on, because you have time to recover if something goes wrong.
For example, if you started investing in your 40s, you’d have to contribute more to match someone who begin investing in their 20’s and is the same age as you.
If you are getting a later start, that’s okay! But remember, time will help your finances.
The Magic of Compounding
Compound interest is simply the interest on the principal amount, plus whatever interest has already accrued.
Example: You invest $100 into an account that accrues 1% interest each year. After the first year, you will then have $101 ($100*.01 = $1, $1 + $100 = $101).
And if you did not contribute anything else in the second year, you would then add your 1% interest on your current $101. So after year two, you now have $102.01. This would then repeat year after year.
Investing Average Returns
Now pending where and what you choose to invest in, most likely the stock market will be a big portion of your portfolio. And when it comes to investing money wisely, this is generally one area you want your retirement money to be.
So why the stock market?
Even though you’ll face things like stock market corrections, bear markets, and even a recession period, the stock market has historically always recovered.
The historical average stock market return according to NerdWallet is 10%, but you also can’t forget to factor inflation which drops that return 2-3%.
While you want to have cash handy, not investing leaves your money vulnerable to inflation. And investing in a high yield savings account might be safer, but your interest rates are likely in the 1-3% range max (or even less than 1%).
Tips On How to Invest Money Wisely
While there are plenty of investing tips to consider, I won’t dive into every little thing. Especially since investing strategies can get more complex and require much more detail. Instead, the goal here is to give the average person enough knowledge to get started and still be successful!
1. Define Your Investing Goals
Once you know the type of investor you’ll be, start creating some investing goals for yourself. What are you trying to achieve with your investing? How much are you looking to invest over time? How will you reach those investing goals?
Asking yourself questions and answering them will help get your mind in the right place. But it also helps you figure out the foundation you want when it comes to your investments.
2. What Do You Want to Invest In?
Understanding what assets are available to invest your money in is important. It will help you determine how you might want to diversify your portfolio. A mix of asset classes, or diversification, gives you a well-rounded portfolio that can weather ups and downs of the economy.
Choose the investment allocation based on your goals, keeping it simple is generally best. But as you grow your wealth, you can expand the asset classes you invest in.
3. Narrow Down Your Investment Accounts
You’ll probably add more investment account types as you build your interests and start diversifying more. So it’s okay if you don’t open a few at once, just pick the ones that absolutely make the most sense today.
Always pay attention to fees, minimums, and other important FAQs. These can all impact your future nest egg. But I put together some tips on what to look for when opening your first investment account if that interests you further.
4. Keep Investing Simple
How to invest wisely comes down to keeping your investment strategy simple. For most people, buying and holding is going to be the appropriate approach. The easiest way to do that via the stock market is to create a three fund portfolio.
This is simple using three index funds to create broad diversification that will allow you to stay hands off. It helps you remove constant tinkering and hopefully, stops you from making emotional decisions based on what the market is doing.
That’s not to say you won’t want to expand or have more control in the future, but it’s a great way to get started. Too often new investors lose money in the stock market by complicating or making rash decisions early on.
5. Use Investing Tools to Help
There are tons of personal finance tools to help you reach your goals. In all sorts of categories which can be beneficial. Of course, how do you know which ones are best for investing?
Two that I have found valuable include:
- Personal Capital for net worth and monitoring growth. They have additional financial features and even paid financial advising services if you’d want to do that. Otherwise, Personal Capital is free to use.
- Blooom helps you get recommendations, uncover fees, and advice about your retirement accounts for free. The 401k Analyzer is quite helpful. They also have additional paid services to help your investing further.
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