The options for investing savings are expanding, but they all still fall into three main characteristics: security, income and growth.
These concepts also represent each investor’s objectives. While an investor may have more than one or even all three of these goals, the success of one comes at the expense of the other.
The first task of any successful individual investor is to strike the right balance between these three objectives.
However, before putting your hard-earned money into an investment vehicle, you should have a basic understanding of how to invest your money properly. The best way to invest your money is the one that suits you best. To find out, you need to consider your investment style, budget, and risk tolerance.
What kind of investor do you want to be?
In the world of investing, there are two main categories when it comes to investing: active investing and passive investing. Both styles are useful as long as you focus on long-term profit, not just short-term. However, your lifestyle, budget, risk tolerance and interests may give you a better choice.
Active investing means spending time researching investments as well as building and maintaining your portfolio. To be a successful active investor you need three things:
- Time: Active investing requires a lot of hustle. You need to research investment opportunities, perform fundamental analysis and monitor your investments after purchase.
- Info: All the time in the world won’t help you if you don’t know how to properly analyze investments and stocks. Before you invest in it, you should know at least a few basics of stock analysis.
- Willpower: Many people just don’t want to spend hours on their investments. And since passive investing has always produced strong returns, there’s nothing wrong with this approach. Active investing certainly has the potential for higher returns, but you have to be willing to put in the time to get it right.
Passive investing, on the other hand, is like putting the plane on autopilot instead of manually flying it. In the long run you will still get good results and the effort will be much less. Simply put, passive investing means investing your money in investment vehicles with someone else doing the heavy lifting – investing in mutual funds is an example of this strategy. Or you opt for a hybrid approach. For example, you can hire a financial or investment advisor or use a robo-advisor to create and execute an investment strategy for you.
Start investing ASAP
Investing when you’re young is one of the best ways to get a steady return on your money. This is due to income compounding, which means that the return on your investment begins to generate its own income. Merging allows your account balance to snowball over time.
At the same time, the question often arises whether it is possible to start with a small amount of money. Bottom line: Yes.
A smaller initial investment is now more possible than ever with low or zero investment minimums, zero fees and fractional shares. There are many investments available for relatively small amounts, such as index funds, stock exchange funds and mutual funds.
If you’re not sure if your contribution is enough, focus on an amount that seems manageable based on your financial situation and your goals. It doesn’t matter whether you invest $50 or $1000 as long as you are consistent.
Here’s how it works in practice: Let’s say you invest $200 per month for 10 years and earn an average annual return of 6%. At the end of the 10-year period, you will have $33,300. Of that amount, $24,200 is the money you contributed – the $200 monthly deposit – and $9,100 is interest earned on your investment.
How much money can you invest?
An important step before investing is to create an emergency fund. It represents money that is held in a way that allows it to be withdrawn quickly. All investments, whether stocks, mutual funds, or real estate, involve a certain level of risk, and you never want to have to divest (or sell) those investments when needed. An emergency fund is your safety net to avoid this.
Most financial planners recommend that the ideal emergency fund is enough to cover six months of expenses. While this is certainly a good goal, you don’t need to put a lot aside before investing – the idea is that you don’t want to sell your investments every time a flat tire or some other unexpected event occurs.
It’s also a good idea to get rid of high-interest debt (like credit cards) before you start investing. Think of it this way: the stock market has historically returned 9-10% per year for a long time. If you invest your money in this kind of return and pay your creditors an annual interest rate of 16% or more, you will lose money in the long run.
In short, it is important to know your goals and objectives before investing. Whether it’s funding your retirement, buying a home, or starting a new business, knowing how to work will help you choose an investment that will help you achieve your goals.
