So it’s finally time to start investing money, but where do you start? When first starting out, it can seem very confusing and overwhelming. It isn’t actually as hard as you think! If you’re unsure about investing, make sure to read my post on 5 Reasons Why You Should Start Investing.
How To Start Investing Money:
Contribute to Your 401k
To begin with how to start investing money, contribute to your 401k. This is by far the simplest and most practical way to begin investing. If your employer is offering a 401k as part of your benefits package, you need to take advantage of it.
Ideally, you want to contribute about 15-20% of your income towards your 401k, however any amount is better than none. In your 401k program, there is almost nothing you need to do for your money to be invested. Most 401ks will give you investment options along with investment risk levels, so you can choose what you prefer.
If you are just starting out in your career, and you still have plenty of time to save for retirement, I recommend going with a more aggressive investment strategy.
Open a Brokerage Account
If you are not investing through an employer sponsored 401k account, then you will need to open your own brokerage account. All big banks in the United States have brokerage accounts for investments. Check with your bank about opening an account with them.
Check out this post for Best Brokerage Accounts for First Time Investors. This can help you determine where to open your brokerage account. I use Charles Schwab because they have great customer service, and are a great bank for international travelers.
When you open a brokerage account, you are allowed access to make investments by being able to buy stocks, bonds, mutual funds, ETFs, etc.
Deposit Money Into Your Brokerage Account
All of the brokerage accounts I listed in this post have a $0 account minimum. You can open your account with no investment money and then start contributing.
There is no minimum amount of money you need to start investing either. You need to consider what stocks, mutual funds, ETFS you want to buy and how much one share costs. For example, today, one Amazon stock is selling for $3,286 while one Ally bank stock is selling for $27.
Initially, it doesn’t matter how much you are starting out with. Make it a goal to continuously contribute some of your paycheck into your brokerage account. Keep that money in investments. Money sitting in the bank and not accruing interest isn’t going to be totally beneficial in the future.
Plan Your Investment Strategy
This is really important when you start investing money. You should have a defined goal. What do you want the outcome of your investments to be, and what is your timeline for these goals?
If you’re young and just starting in your career, a riskier investment strategy can be implemented. This means, more investments in stocks that are held over longer terms.
If you plan on a shorter investment of less than 5 years, then you are safer with other options. These include putting your money into a high yield savings account, certificate of deposits, or low risk investment profiles.
Types of Investments
When you’re first starting to invest, there are multitude of options to invest money in, so let’s go over some.
Stocks are shares of corporations that you can buy as an investment. They fluctuate in price along with the market. You could, for example, buy a stock for $5 and then hold onto it for a few days to a few years. When you sell that stock, it could be worth $20!
All of the brokerage accounts listed have extensive research platforms to allow you to see how certain stocks are doing. I will purchase stocks based on their long term growth. Ideally, holding onto stocks for many years will generally gain you a safe return on your investment.
Bonds are one of the less risky types of investments. However, the return rate will be lower than other types of investments. Bonds are loans given to a company or the government paid for by investors.
By purchasing a bond, you are allowing the loan borrower to pay you back with interest. Bonds are paid out once or twice a year. They are generally less risky, but with a lower amount paid out. Obviously the biggest risk in bonds is that the issuer could default.
Government bonds, then city and state bonds are considered the least risky. Then you have corporate bonds. As with any type of investment, the lower the risk, typically the less you’ll make on your return.
Mutual funds are funded by shareholders and professionally managed. Basically, you buy shares into a mutual fund where numerous people are contributing. Professional investors will choose where to purchase stocks.
If you’re looking to start investing, mutual funds are typically a less risky investment because they provide diversity. When investing in mutual funds, you need to plan to have your money put away for 10+ years. The best way to double your money through mutual funds is to invest long term.
When researching which mutual funds to buy, consider your brokerage firms ratings, as well as historical rate of return. Mutual funds tend to also have higher fees, so consider this when choosing which fund to invest in.
Index funds are a type of mutual fund, but without management. Instead, they passively track an index. As an example, an S&P 500 index fund will copy the S&P 500 through the stocks they are holding.
This eliminates management, and you will make more money without paying those fees. You make money on the dividends that are paid out on the index fund. You can also sell your share in the fund to make a profit.
Exchange Traded Funds
Exchange traded funds are in many ways similar to mutual funds. The overall concept is the same. Multiple shareholders purchase shares in the fund, and professionals will manage it to increase diversity.
The main difference between mutual funds and ETFs is how they’re traded. ETFs are traded on exchanges, like stocks. Mutual funds and index funds only allow trades once per day at the end of the day.
ETFs typically have lower fees as well, and you can potentially make more money off them. However, they can be a riskier investment than a mutual fund depending on how you are trading.
Lastly we have options. This is a contract you purchase which allows you the option to buy or sell a stock at a set price by a set date. Options are a little more confusing, and can get expensive. When you purchase a contract, you are essentially paying for “insurance” on that stock.
To put it in the simplest terms, when you buy a call option you are predicting the stock you want to buy will increase in price. This way, you can lock in a stock for $10 and only pay $10 for that stock even if it increases to $15 a share.
When you buy options, you are paying for the contract not the stock itself. These are much more complex investments, and if your just starting investing I don’t recommend buying options.
Start Investing Money Early
Lastly, when you’re going to start investing money, do it early! When it comes to investing time is going to be on your side. A lot of people will make the mistake of waiting for the market “to do something”. This is not the right mindset. The market does of course fluctuate, but when you keep your investments long term you will see it through to the other side.
Let’s think in long term. If you start with 0$ and contribute $200 a month to an investment account with 6% interest, in 10 years you will have $32,494.69. That is a gain of $8,494.69 just in interest!