The world of investing can feel intimidating and confusing when you first dive in. First, there’s the terminology. What’s a 401(k)? Or a mutual fund? An IRA? Then, there’s knowing the how of investing. What do you do first? Should you hire developers or financial advisors?
If these are questions on your mind, don’t worry. Here are 8 tips to get started investing and managing your money.
1. Read Up on the Terminology
Before you get started, it’s important to understand the vocabulary of an investor. There are many terms to know, such as:
- No-transaction-fee funds: As implied by the term, these investments won’t cost you any money to carry out.
- Mutual funds: With oversight from a portfolio manager, a mutual fund is essentially a pool of money from multiple investors. Along with the other investors, you purchase securities such as stocks and bonds.
- Exchange-traded funds (ETFs): Similar to mutual funds, investors pool their money to make a variety of investments. These, however, are funds that are traded and offer you greater flexibility in how you move your money around. For instance, you won’t have to meet some investment minimums in this case.
2. Start with Your 401(k)
Starting a retirement fund is a relatively simple way of investing for beginners. Many employers will offer you the opportunity to invest in a 401(k), automatically deducting a percentage of your paycheck to put into the retirement fund. Some will even match your contributions up a certain amount. Keep in mind that while this will help set you up for a successful retirement, there will be penalties if you cash in your 401(k) too early.
Some organizations offer 403(b) plans instead of 401(k) plans. The accounts function similarly, the main difference being the type of employer — 403(b) plans are limited to certain tax-exempt organizations, such as public school systems.
3. And Then Consider a Roth IRA
When it’s time to move beyond the 401(k) or 403(b), you could venture into other retirement savings accounts. You can put annual contributions into an IRA and defer taxes on the money until you withdraw funds when you retire. There are certain contribution limits that exist depending on your age.
An alternative to the traditional IRA is the Roth IRA. Your contributions to this account come after taxes, and the money will be tax-free when you withdraw it. You can also contribute to both accounts, keeping the contribution limits in mind.
4. Diversify Your Investments
It’s a good idea to invest in multiple asset classes — types of investments — in order to account for various circumstances. One type of asset might be more worthwhile at a given time than others, and you’ll be able to withstand the ups and downs of, for example, the stock market. This is called diversifying.
Some of the most common assets include:
- Stocks and equities
- Real estate
- Derivatives, which are contracts that imply future value
5. Invest Regularly at Set Times
In order to maximize your chances of making your investments work for you, make sure you’re making new investments regularly. Set a schedule so that you’re frequently investing at set intervals, which will ultimately help your portfolio grow and make you more successful in the long run.
6. Determine Your Financial Goals
You’ll need to map out your goals in order to invest successfully. Plan out your long- and short-term investments accordingly. With short-term investments, you’ll receive a lower return more quickly. Long-term investments tend to yield higher payoff, but you’ll need to wait longer for them to come to fruition.
Most portfolios will include a combination of long- and short-term investments. However, the makeup will still depend on your goals. For example, if you’re looking toward a large purchase soon, you probably need money more urgently than a long-term investment can offer you.
7. Account for Other Financial Priorities
There are some types of funds you shouldn’t invest. For instance, if you have debt, make sure you’re setting aside non-invested money to pay it off on a regular basis. You should also maintain a savings fund to account for essential expenses, such as rent or mortgage payments, and any emergencies you may encounter. These are priorities you should take care of before you decide to invest.
8. Use Technology to Assist You
You don’t need to do it all alone! There are plenty of tools out there to assist you with your investments — even free ones. Try portfolio trackers and other software to see how your investments are performing. There are many options, such as Mint, which allows you to manage all your financial accounts — checking, savings, investment, retirement, and more — in one place.
Another helpful tool is the robo advisor. Much like a human financial advisor, a robo advisor will work with you to understand your financial goals and help you develop an investment portfolio, providing guidance along the way. This is a significantly cheaper alternative to a human advisor.
Investing may seem complicated, but with the right guidance — from humans and machines — and a little research, you’ll be reaping the rewards and growing your money in no time.