Is your money… lazy? Lazy money sits in a checking or savings account. You don’t want lazy money. Instead, you want your money to work hard on your behalf.
Take away all the technical and financial terms and all investing really means is the ability to turn the money you have today into more money later on.
Many people are intimidated by the idea of investing and don’t know how to start. But the basics are simple and you can start to see benefits sooner than you may think. Here’s everything you need to know:
A Quick Overview
Investing is different than saving. When you save money, it doesn’t grow over time on its own. However, investments are designed to make money or return a high yield over a long period of time or a long term.
Investments also run the risk of losing money. Of course, you can find a wide variety of very low-risk investments. But always make sure you understand any potential losses which may incur.
The main thing to understand about investing is that it’s a long-term activity. You won’t make money overnight. In fact, any investment promising big, quick returns is usually pretty high risk. Investing is a way to meet long-range financial goals for upcoming stages in your life.
The first step is to determine your goals. You want to make money, of course, but your goals should be a bit more specific. Clearly defined goals are easier to meet than general ones. You’ll be able to plan your investments to reach a specific return by a specific period in the future.
Common investment goals include:
Funding a college education
Saving for retirement
Saving for a house
Supporting an aging family member
Alternatives to Investing
Many people think investing is too confusing to worry about, so they keep their money in a checking account. While you won’t lose money that way checking accounts don’t make money, either.
But here’s the thing. Your bank takes the money you put in your account and invests it anyway. It’s just making money for the bank, not for you. If you invest that money yourself, then you get the profit!
Investing isn’t a one size fits all situation. Here are the most common ways to invest:
Employer Retirement Plan
Probably the most popular type of investment is participating in an employer’s 401(k) or similar retirement plan. By setting up automatic deductions from your paycheck, adding to a 401(k) is simple and easy. Plus, most employers match contributions, which can add up over time.
Individual Retirement Account
An Individual Retirement Account is an account designed to help save for retirement. There are two types: Traditional and Roth IRAs. The difference involves the taxes you pay. Roth accounts have no deductions on income while Traditional IRAs have tax-deferred growth, which means you pay taxes when you access the account once you retire.
U.S. Stock Exchange
Roughly 54% of Americans invest in the stock market. When you purchase a stock, you’re purchasing a piece of a company. Not only can you make money when the company succeeds but you also have voting rights to help control the company direction.
Foreign Stock Market
It’s a big world out there. You don’t have to limit yourself to the U.S. Stock Exchange. Consider investing in any of the major stock exchanges around the world in countries such as the London Exchange Group, Japan Exchange Group and Shanghai Stock Exchange.
Investing in overseas markets offers a lot of variety. Plus, it’s easy to do online from the comfort of your own home. But the international aspect can add complications including time differences, language barriers and more.
A mutual fund is basically a bunch of different stocks bundled together. By spreading out your investment, you’re taking less risk than buying an individual stock. Mutual funds are typically considered a safe, steady investment.
Short for cash deposit, a CD is certified by the federal government. You receive a set, guaranteed interest rate. However, you have to hold on to the CD for a predetermined period, from months to several years.
A bond is a long-term investment backed by the federal government. You purchase the bond for one price with the promise you can sell it later for a higher price. Typically, you’ll need to hold onto the bond for a few years.
What’s the Best Type of Investing?
There’s no universally-recognized best way to invest. Instead, you need to consider your budget, timetable and goals.
Your entire financial situation, including everything you own, is called your portfolio. One of the most important rules of investing is to keep your portfolio diversified. Simply put, don’t put all your eggs in one basket.
For example, if you invest primarily in one stock and that stock takes a nosedive, you could be looking at serious losses. Spread your investments around so you’re not entirely dependent on any one type. Also, always understand the potential risks of any investment.
Investing plays an important role in helping shape the future for you and your family. Fortunately, there’s no need to be intimidated. Most investing is actually simple and safe. Get your money working for you today so you can enjoy the benefits tomorrow!