Investing your money into the stock market and bonds isn’t something you do later; it’s something you start doing as early on in your life as possible. Why? To give your money the most amount of time to work for you.
You see, if you save $100 in your sock drawer, 30 years from now when you go to check on it, you will still only have $100. Conversely, if you invest $100 in a mutual fund, even if you never made another investment, with a 7% annual return it has the potential to grow to $761.23 after 30 years with the help of compounding interest.
This amount is clearly not enough to retire on, but the point is to illustrate that by doing nothing at all your money can get to work and grow for you over the long-term if invested. Which is why investing is such a powerful tool to help you reach your financial goals and enable you to save enough to support your lifestyle and needs in retirement.
How Does Investing work?
Here’s what every new investor needs to know and how to get started:
Investing 101: A Brief Background
You understand the benefits of investing, but how exactly it works can be summarized like this. Investing is simply putting your money to work for you. Here are the core types of investments any new investor should be familiar with:
When you invest in stocks, you are taking a bet on capitalism for lack of a more eloquent definition. You essentially become part owner of the companies in which you own stock. You invest in companies over the long-term. As a company grows and becomes more profitable, so do you because the stock price rises and profits may also be distributed in the form of dividends.
When you invest in bonds, you are also investing in a company or government, but you are more specifically lending them money, in which they pay you back eventually in the form of principal plus interest. These are considered safer investments and will yield a lower return rate than stocks. (For related reading, see: The Basics of Bonds.)
When you invest in mutual funds or exchange traded funds (ETFs) you are investing in a group of both stocks and/or bonds. By owning a share of a mutual fund or ETF you are owning a piece of all of the stocks and bonds that are held in that fund, allowing you to be more diversified than owning a single stock or bond. This is generally less risky than buying just one stock or bond.
Getting Started in Investing: What’s First?
Now that you understand the different types of investments that are appropriate for the new investor, getting started is easier than you might think. (For more from this author, see: 4 Steps to Help You Build Wealth Right Now.)
For most people just starting out with minimal assets to invest, there is a lot you can do on your own with the help of technology and online tools. Robo-advisors are automated, algorithm-based online wealth management services that provide portfolio management based on your responses to a simple risk tolerance questionnaire. They use the same software as financial advisors, but they only focus on portfolio management and don’t offer holistic financial planning services that account of other aspects of your financial life.
This is perfectly fine to get you started and get you invested. Once your money and your income grows to a point that feels more complicated to handle on your own, you can always seek out a financial professional to help you. But to get started, here is a list of a few solutions you can check out:
If you’re ready to take charge of your financial life, you’re already on the right track. Long-term investing can only benefit your financial life if you start. So, start where you are and do what you can. Establishing this important habit of saving and investing has the life-long potential to increase the quality of your life in retirement.
(For more from this author, see: If You're in Your 30s, Will You Be Able to Retire?)