Once you have your budget squared away and you’ve built a rainy-day fund, investing is a critical step on the journey to building wealth – and ultimately financial independence. There are many asset classes someone could invest in – but starting out, don’t think too grandiose.
Investing isn’t a get rich quick scheme – it is something that you do consistently over the long haul. Month in and month out – invest funds you designate as investment money in something such as a mutual fund. Consistent monthly investing can be referred to as “dollar cost averaging” – regardless of whether the market is up or down, you make your investment. Over time, you essentially buy your investments at an average cost.
For many, a good starting point for investments is through retirement savings tools – such as a 401k, a 403b, an IRA or a ROTH IRA. Once you have contributed to retirement plans, you might want to think about building a taxable investment account in mutual funds, stocks or other investments. No matter what you do, don’t put all your eggs in one basket – the key is to build a diversified investment portfolio – i.e. spread your risk among various asset classes, don’t invest in just one Company.
Given you probably don’t want to work until the day you kick the can, saving for retirement is an important goal. There are a couple of ways to save for retirement – through employer based plans such as 401k plans – or through personal IRA’s or ROTH IRA’s. If your employer offers a retirement savings program – and more importantly – an employer match of any contributions you make, it’s a no brainer to take advantage of it. Otherwise you are essentially leaving free money on the table and not being compensated at the level you should be compensated at by your employer.
If you start young, saving 10% - 15% of your compensation should set you up well for retirement assuming typical market returns over the course of a long career. If you start later, you will need to save more money to fund retirement.
Investing is a great way to build up a nest egg to fund other big goals – and to enhance your ability to meet your income targets later in life. There are many ways you can invest – through mutual funds, through ETF’s, through discount brokers and full-service brokers. In some cases, you can buy stock direct from the transfer agent if a company has a direct stock purchase program (do note that record keeping is a bit more challenging when you invest in direct stock purchase programs). The bottom line is there are many ways to save for the future.
In recent years, some new options have joined the financial services marketplace. Depending on your goals, and how much time you want to spend on managing investments, some of the new players can be ideal choices. You set a goal, and these new offerings do the much of the hard work for you.
Investing is by its nature riskier than saving money at the bank. At a bank, your money is insured by the FDIC up to a certain point. So as long as your leave the money in the institution, you won’t lose it (unless you are paying fees for your account).
Investing is a little different. In the stock market, a return isn’t guaranteed. In fact, you could lose some or all your money. But this doesn’t mean you shouldn’t have money invested in the stock market – in fact, if you want to build wealth, it’s an important part of diversifying your finances.
There are a number of approaches you can use to invest including value investing and growth investing. Depending on your goals and place in life, there are number of factors that you need to consider around your investment style. When you first start out, one of the biggest keys is having some level of diversification – this helps to offset market fluctuations. Investing in a low- cost index style investment can be a great place to start – but again, make sure you do your homework.