Financial Wellness 101: Learning the Basics of Investing
So, you’ve decided to start investing?
That’s fantastic! Investing is an excellent way to build your wealth over time. If you have long-term financial goals, learning how to invest should be on your radar. To do it well, you’ll need to understand the benefits of your investment and decide what kind of investments make the most sense for your situation. Investing might seem complicated at first, but don’t worry; we’ll show you the ropes and set you on the right path.
Investing vs. Saving
Let’s start by clarifying the difference between investing and saving your money. When saving, you’re simply putting money away for a rainy day. Investing requires a bit more strategy. The goal of investing is to grow your money over time. If you want to fund a long-term goal, such as buying a house or retirement, investing is the best route. The reason is that if you only save your money, your dollar will lose value over time due to inflation. $10,000 today is worth less than 10 years ago, but it’s worth more than it will be 10 years from now. By growing that sum with investing, your money can effectively retain — and even gain — value over time.
Know the Risk of Investing
No matter what you may hear from well-meaning family members or “experts” on social media, no investment is a sure thing. Every investment involves some risk. Some investments are less risky than others – for example, bonds tend to be more reliable than stocks, especially in volatile markets. That being said, in any investment situation, you should expect some level of risk and understand your willingness to take on risk (also known as your risk tolerance). If that tolerance is high, you can dip your toes into high-risk/high-reward investment options. If your tolerance is low, it’s best to stick with investments that are historically steady in their return.
One of the best ways to lessen your risk when investing is by diversifying your investments. You’ve heard the old saying, “don’t place all of your eggs in one basket.” Well, that logic applies here as well! It’s rarely a smart idea, for example, to place all of your investments in one company’s stock. Instead, it’s wiser to have your hand in multiple investment methods. This way, if one investment loses value, your other investments can pull their weight, and you’ll be less likely to suffer a huge loss.
When to Start Investing
The short answer is – the earlier, the better. The longer you can invest your money, the more return you’ll make over time. Another way to explain this is through compound interest, or the interest you earn on interest. Yes, we know this sounds confusing, so let’s look at a practical example to make our point. If you invest $100 and that money earns you 5% each year, you’ll have $105 at the end of that year. In the second year, that 5% interest will be applied to the $105 you have in the account, so you’ll have $110.25 by the end of year two. Essentially, your money will start to make you money, and it will make more over time, which is why it’s in your best interest to start investing as early as possible.
Common Ways to Invest
There’s more than one way to invest, and each investment strategy comes with its own set of pros and cons. Let’s take a look at a few of the most common ways people choose to invest so that you can get an idea of which option(s) might be right for you.
Stocks are probably the most recognizable investment strategy on our list. A stock represents a piece of ownership in a company. The performance of the company determines the price of the stock. Stocks can be somewhat volatile, as they are known to fluctuate quite a bit.
There are two different ways to make money with stocks. The first way is to purchase shares of stock and sell them at a higher price than you originally paid for them. The second way is if the company pays out dividends to their shareholders, which is typically done with pricier stocks. To start investing in stocks, you can buy them through an online trading platform or go through a stockbroker or a financial advisor.
In simplest terms, bonds are a loan you make to a corporation, government, or local municipality. Because the money you pay for the bond allows the company or agency to make investments of their own, they agree to pay back your original investment plus a predetermined amount of interest after a certain period. Bonds are typically less risky than stocks because they aren’t dependent on market fluctuations, but some risk is still involved. If the bond issuer runs into financial trouble, they may default on the bond or run into a reinvestment risk.
Mutual funds are a collection of different investments (usually stocks) rolled into a singular investment. The investments in a fund typically have a common theme – they may be from the same sector, asset class, or market index. Mutual funds are an easy way to diversify your investment portfolio in one fell swoop and take some of the guesswork out of purchasing individual stocks or bonds.
Feeling inspired to start investing? We thought you might! Whether you start with stocks, bonds, or mutual funds, we hope the information we’ve shared will help you start building your investment portfolio today. Your future self will be so glad that you did!