Ever wonder how the rich got that way? Or how some people are able to retire early or even at all? In almost all cases, the answer is simple: they invest. Don’t be afraid; investing isn’t all that complicated once you learn the jargon and some basic principles. Once you learn the basics, you can achieve your financial goals whether it’s the purchase of a home, a new car, a boat or planning for your retirement. Learn about how to start investing your money today.
Investing is a slow trek, not a sprint. Don’t expect to know everything after reading one article and certainly don’t think you’re going to double your money overnight. Also, prepare to invest your time because you’re going to have to do some research along the way if you want to get the most out of your efforts.
Begin by Putting Your Money to Work
You probably grew up being taught that the way to make money was to get a job or open a business and while that, of course, is true there is another way: you can put your money to work for you and quite simply, that’s investing. So while you’re at work, at home or even on vacation, the money you’ve earned and saved continues to generate additional income for you—hopefully more than it would if you left it in a bank.
How to Start Investing Money
There are many different ways to invest. Perhaps the best known are to put money into stocks, bonds and mutual funds. These methods are often referred to as investment vehicles. Each of these methods has pros and cons, and some are riskier than others. Don’t neglect saving money to have more money to invest. Learn about 5 ways to save up to $5,000 a year.
Investing Money in Stocks
Sometimes referred to as equities, when you buy stock in a company or corporation you are essentially becoming a part owner of that firm. Owning stock gives you the right to vote at shareholder’s meetings and means you are entitled to any profits the company allocates to its shareholder’s which are called dividends. While stocks provide a relatively high yield (another way to say return on your money,) they are perhaps the riskiest of investments because their value can rise and fall based on a variety of factors. What’s more, not all stocks pay dividends, so the only way to make money is for the stock itself to increase in value and for you to sell it at a profit. Don’t forget to pay off your high-interest debt first. It won’t matter if you’re gaining a small return in your investments if you’re buried in debt. Don’t fret, we have 5 tips on how to get out of debt immediately.
Investing Money in Bonds
The term bond is generally used to designate any security (another way to say investment) that is created based on debt. When you purchase a bond, you are lending your money to a government or a company and in return they agree to not only pay back the loan in an appointed amount of time, but to do it with interest, thus your profit. If you’re buying a bond from a stable government or company, your return is almost guaranteed meaning it’s virtually “risk-free.” This safety, however, has a price: since there’s almost no risk, there’s also not a whole lot of profit either.
Investing Money in Mutual Funds
A mutual fund is a compilation of stocks and bonds chosen and administered by an investment expert. When you invest in a mutual fund, you are pooling your money with a group of other investors and allowing a professional to make buying and selling decisions about the stocks and bonds contained within the fund. Mutual funds are organized with a distinct focus: large stocks, small stocks, bonds from certain countries, bonds from governments, stocks in certain industries, etc. The upside of a mutual fund is you get to invest without having to do all the research about these securities yourself. The downside is that mutual funds, while earning more than bonds, don’t usually generate the same return as stocks you might have researched and chosen on your own.
Other Investment Opportunities
Other popular investments also include options, futures, FOREX (foreign exchange trading), precious metals, and real estate. While these alternate investment vehicles offer more significant returns on your money, most investment professionals warn beginners to establish a solid financial portfolio of securities before moving into riskier, more speculative investments such as these.
What is Compound Interest and How to Calculate It?
Perhaps the simplest way to describe compound or compounding interest is to say that it’s interest earning interest. Let’s say you invest $10,000 at 6%. In one year you will have $10,600 ($10,000 X 1.06). Now for the second year, you leave the $600 you earned in interest in the account as part of the “principal” (another way to say the amount of investment). This year you’ll earn $636. Okay, while $36 doesn’t seem like all that much, consider that the following year, you now have a principal of $11,910.16 ($11,236 X 1.06) and so on. The key to compound interest is to continue to reinvest the interest you’ve earned so that your interest itself is “accruing” (another way to say earning) interest.
And simple interest? Its interest computed based solely on the principal balance so even if you leave any interest you earn in the account, you’ll only profit on the base amount deposited. In general, not a very good deal.
The Compound Interest Formula
The generic compounding interest formula is:
- PV is present value
- r is interest rate
- n is number of periods
- FV is future value
The Best Investment Strategies
While investors differ, investment strategies tend to fall into two categories based on investment objectives and investing personality. Generally speaking, the shorter the time you have to invest, the more conservative you should be. For instance, a 25-year-old can take greater risks than a 75-year-old because a younger individual has more time to counteract any pitfalls. Another example, a multi-millionaire can afford to invest $100,000 in a speculative investment because it’s just a small portion of his net worth while a young married couple hoping to buy their first house would never invest in speculative ventures. Knowing who and where you are in the investment cycle is imperative to plotting an effective strategy that you’re comfortable with.
Risk-Tolerant vs. Risk-Averse
One of the keys to investing for most people is having a “diversified portfolio” or in other words, a “mixed bag” of investments; some risky, some conservative, thus the terms “tolerant” and “averse.” This strategy works for most investors except, perhaps, those nearing or already in retirement. Why wouldn’t an older person want a portfolio with both risky and conservative investments? If your income stream is about to decrease or cease entirely, you’ll probably be relying much more heavily on the proceeds from your investments to afford your lifestyle. If you’re at this stage in life, you probably don’t want to do anything to decrease the main principal you have to invest. Again, being comfortable with your risk vs. your rate of return is what it’s all about.
Finally, perhaps the most important things to remember about investing are that you can never have enough time or enough information. These are just the basics guidelines on how to start investing money. Additional research and careful planning will go a long way! Before even investing your money, learn about how to pay off your credit cards and eliminate debt.