One good way you can ensure you have enough savings for your retirement is through investment. The earlier you start investing, the better because you get to net in so much money with time as opposed to starting investing when you’re older.
As a newcomer, you may be overwhelmed by the wide range of investment options you have to choose from. You need to be fully aware of the ultimate investment goal before you start your investment journey.
How can one get started with investing in the right niche without being overwhelmed by the number of options available? Your ultimate goal as a newcomer in investing is to acquire your investment for less than its true value and to have your investment returns grow with your investment’s value.
Furthermore, as a beginner, you do not know about or really care about standard deviations, emerging markets, or REITs. You may pick up these as time goes by. Your major focus should be on the risk involved in making the investment and the returns on investment.
Where Should I Invest Money?
The following are some preparation steps to guide you to know where to invest your money. These are part of the planning phase of your investment. The following are factors to help you decide where to invest.
For example, you need to decide how much to invest. How much you invest is determined by your investment goal.
- Define Your Investment Goal
You have the option of investing for the long run or a short term basis. For example, retirement goals are a long term investment project while stocks could be more short term.
- Decide How Much You Can Invest
You need your budget or to start budgeting to be able to allocate funds for investment. There are different budget allocations for investment. However, on average, you should invest between 10% and 20% of your income. Your investment goal also influences how much you allocate.
- Start As Early As Possible
You will be able to earn a worthwhile return on your investment due to compound interest. For example, if you decide to invest a $200 a month at a rate of 6% compound interest, in 10 years, you will have a total of $33,300.
You will have earned an interest of $9,100. Furthermore, you will gain more experience if you start at a young age and you will be able to persevere the ups and downs of investments.
- Open An Investment Account
Your investment goal will help you decide what account to use. If you are saving, a savings account is best. If you are investing in your retirement, you could use an individual investment account (IRA).
- Evaluate Your Investment Options
It would be best if you also evaluated where you should invest your money. There are various types of investments you could opt for. We will discuss them in detail below.
- Pick an Investment Option
You need to evaluate the amount of time you have, your investment goal, and how much you need to invest for you to decide on an investment option.
Ways To Start Investing With Little Money
Let us analyze your investment options to help you pick one with the acceptable risk in terms of the investment amount, period, and investment goal.
1. Savings Accounts
Some may argue that savings and investments are separate. It is true, but you should also think of savings as investing in your future. For example, if you run a business, you can rely on savings to help you request a loan, or you could use the actual savings to expand your business.
A savings account is the first step of action to all your investments. Savings accounts may have a low return, but if they accumulate over some time, you can proceed to more significant investments like real estate.
Savings have a low risk of losing your money as your money just sits in the bank. Some banks may pay interest for your savings, but they generally have minimal returns.
Savings will help you achieve short term investments. They will help you achieve short term investments like a television set or a vacation. However, they precede any form of wealth. This means you can save in the long run to achieve a goal like retirement funds.
Savings are a highly accessible and liquid form of investment. Unlike other investments, you can easily get cash from your savings account. You don’t have to earn a six figure salary to start saving. You can learn How To Save Money On A Shoestring Budget and meet your goals.
2. 401(k) or Other Employer Retirement Plan
a. 401(k) Plan
A 401(k) account is an account that your employer in the private sector offers as part of your retirement savings or investments. The amount allocated to this account comes from your paycheck.
The money deposited in your 401(k) account is yet to be taxed. However, you will be liable to pay taxes on any withdrawals made from your 401(k) account.
b. 403(b) Plan
The 401(k) and 403(b) plans are very similar. The significant difference is the 403(b) is meant for some non-profit organizations and educational institutions employees. The 403(b) allocations are also drawn from your paychecks.
The deposits to the 403(b) account are not taxable, but the withdrawals are subject to tax.
c. Thrift Savings Plan (TSP)
Federal employees use the thrift savings plan. It was established to create similar investment options to the federal employees as the ones the private sector employees have with 401(k) accounts.
Employer retirement plans offer a variety of investment options as they hire investment managers. In most cases, the employer also shoulder’s investment risks.
3. Individual Retirement Accounts (IRAs)
You set up an individual retirement account on your own. The employer is not involved. Self-employed people usually rely on individual retirement accounts. There are two common types of individual retirement accounts. The Traditional IRAs and Roth IRAs.
a. Traditional IRAs
The Traditional IRAs allocate after-tax dollars to your retirement account. Every year, your contributions will be subject to tax deductions. Furthermore, you will have income tax when you withdraw the funds at your retirement age.
b. Roth IRAs
I consider Roth IRAs to be a better option. You will allocate after-tax amounts to your retirement account. However, your investments will grow without any tax obligations. You may also withdraw during your retirement without having to pay income tax.
You can compare Traditional IRAs and Roth IRAs to decide which one works best for you.
Robo-Advisors are investment services that are automated. Robo-Advisors invest and re-balance bonds and stock on your behalf. You need to deposit money and decide how much you will invest in bonds and how much to invest in stocks. As a result, the popularity of Robo-Advisors is on the rise.
As a beginner, you can also rely on Robo-Advisors for information. You can access their responsive websites for content, graphs, and charts. You will get to save time, and it is an excellent bargain if you compare what you will accomplish against the cost.
You will find Robo-Advisors that are better suited to perform certain functions and ones that are tailored to a particular group of investors. For example, WealthFront is better suited for first-time investors and Acorns helps Students and young investors.
You can analyze the top Robo advisors to figure out which one works best for you.
5. Index Funds
An index fund is a little similar to the mutual fund only that it operates based on a financial index. What this means is you will build multiple portfolios based on a given market index that represents a section of the financial market.
You will not have to repeatedly choose security investments (stock picking) or strategize the appropriate time to buy and sell (market timing). As a fund manager, you will build a portfolio and let the holdings reflect a particular index’s securities.
It will imitate the performance of the given index including a significant part segment or the whole stock market also indicate the performance of the given index in terms of risk and return. The index fund provides low portfolio turnover, low operating expenses, and broad market exposure.
Index funds are ideal core portfolios for retirement funds. You may come across them if you hold a 401(k) account or an individual retirement account (IRA). You will adopt a passive investment strategy if you opt for index funds.
Most index funds mimic the S&P 500 companies. If you choose these as your index, it means you will invest in the same 500 companies in the index or a large segment of them.
6. Investment Apps
Most of our functions in this decade are delegated to mobile apps. Mobile Apps allow for remote access and simplify many processes. For example, you needed to call a stockbroker when you previously needed to trade stock.
Stockbrokers charged a high percentage of commission. Nowadays, you can manage your investment portfolios and witness returns from a mobile app without having to pay commission. The apps perform many functions such as investment learning, automated investing, savings investments, college investments, retirement investments and more.
Some of the Investment Apps You Can Consider:
a. Robin Hood (Free Stock Trades)
Robin Hood was known for giving the poor what he stole from the rich. As we have mentioned above, stockbrokers charge a lot to carry out your trades. The app Robin Hood offers free stock trades with no hidden costs.
b. Acorns (Automated Investment)
Acorns will invest your funds automatically in exchange-traded fund (ETF) portfolios that are professionally managed. You will need to contribute regularly and link your bank accounts to the app. You also decide how much to invest.
c. Stash (Learn about investments)
Stash is similar to Acorn. However, Stash will help you learn how to make competent investment decisions rather than invest automatically.
7. Mutual Funds
Mutual funds involve the use of a professional to manage your investments. A mutual fund is a huge collection of money a professional asset manager receives from investors. It is up to the manager to choose the bonds and stocks to invest in.
The investment manager can either be an individual or a company. In most cases, you will require a minimum amount of investment to enlist on a mutual funds portfolio. Most investment managers request a minimum investment amount for mutual funds range between $500 and $5,000.
There are some companies that will issue a waiver on the minimum investment amount. However, you will need to agree to make automatic monthly investments. The automatic investments range between $50 and $100.
You will also come across automatic monthly investments in the exchange-traded fund (ETF) and Individual Retirement accounts (IRA). You will find the convenience of automatic monthly investment especially if you can schedule the payments from your payroll.
Your human resource department can help you to set up automatic monthly investments as an employee. An example of a mutual fund company that accepts automatic monthly investments is Transamerica.
8. Real Estate
Real estate investment is one of the most lucrative strategies in the investment field. You can even use leverage to get into various real estate investments. Leverage is like a debt. It is borrowed capital a firm or individual uses to acquire or expand financial assets.
You can start out on a real estate investment by making down payments. You will only need a 5% down payment as compared to the 20% to 25% of mortgage down payment you make.
You Can Use One or All of Four Methods to Generate Real Estate Investments.
- You Can Become a Landlord and Rent Out Rental Properties. You will need to manage tenants and to cover maintenance and vacant months.
- You Can Join a Real Estate Investment Group. You will be more of a hands-off landlord in a real estate investment group. You will earn a return on your investments without performing landlord duties.
- You Can Use Real Estate Investment Trusts. Real estate investments are traded like a stock. They are bought and managed by companies using investors’ money.
- Real Estate Trading. You will be buying and selling real estate property, earning a profit. You will need to have valuation and marketing skills and strategies.
9. Online Stock Brokers
You can rely on online stock brokers to access financial markets easily and at a low cost. They use online platforms to communicate and source for clients. Different online stock brokers are oriented to fulfill various types of investment needs of their clients.
They deal with long term, sophisticated, and active clients. As a client, you need due diligence to find an online stock broker that is suited to address your needs. For example, you will need to communicate your needs.
Some of the Questions You Need to Answer Include:
- What type of investor are you? Active or passive?
- How much do you know about trading?
- What kind of help do you need?
- What are your investment goals?
Remember to read the disclaimer section of the brokerage website. You will be able to understand how to go about issues like fraud, insurance for company failure and more about online stock brokers.
Crowdfunding is a process by which someone will pitch an idea to family, friends, customers, and investors to generate capital to start the business.
There Are Three Types of Crowdfunding:
- Donation-based crowdfunding. Your investment in donation-based crowdfunding is not expected to yield any financial returns.
- Reward-based crowdfunding. You will anticipate a reward for your contribution to reward-based crowdfunding. The reward could be a service or a product from the company.
- Equity-based crowdfunding. You have a right to own equity if you contribute to equity-based crowdfunding. You will gain financial returns for your investment and a share of the company’s profits.
You can participate in online crowdfunding via various platforms. Just make sure you understand the type of crowdfunding before you give your money.
11. Investment Bonds
Investment bonds are also known as fixed-income investments. A bond is a form of investment loan you give to a government or company. You will purchase bonds at a given interest rate. The interest rate will be constant in your payments, whether it increases of fluctuates in the future.
You can also opt to purchase perpetual bonds. You will receive interest payments forever with perpetual bonds. However, there is a risk that the company may shut down as perpetual bonds are mainly issued during a financial crisis.
As a beginner there are a number of investment options you can pick from. Remember to weigh the risk factors when selecting a particular investment. For example, you may lose money when you purchase perpetual bonds from a company, and they end up shutting down.
Look at the investment price factors too before you settle on any particular investment. For example, most mutual funds companies will require you to meet the minimum investment amount before they can agree to manage their investments in their portfolio.
The cost factor can also drive you to choose an investment app over an online stockbroker as the apps offer free trading. You can also use apps to learn more about investments through content, graphs, and charts.
Remember that every investment starts with savings and setting an investment goal.