The world of investing can feel like an overwhelming territory to navigate. You might even put it off by thinking to yourself, “I don’t have the money to start investing,” or “it takes money to make money.” The truth – you don’t need to be some big wig on Wall Street to start investing money in the market. Everyone can and should start investing as soon as possible, even if those investments are small.
Spend Wisely and Save
Building wealth begins with smart money management. Saving money by making wise consumer decisions such as drinking home-brewed coffee and packing lunch is a great place to start. Even $10 a week can build up to over $500 by the end of the year! Before too long, you’ll have a decent amount saved to get your investment juices flowing. And, with as little as $500-$1,000, you can make a big difference in your investment journey.
Decide Your Strategy
Once you have the money, you have to decide where to invest it. There are two types of investment strategies one can take, active and passive or some combination thereof. Once you decide which investment strategy is best for you (and both are often appropriate), you’ll need to choose the savings vehicle. Brokerage accounts, 401K’s, ROTH and Traditional IRA’s, are some of the many options.
Traditional Savings Accounts
In the current interest rate environment, most savings accounts are paying very little interest. Even so, they are considered an extremely safe place for your money. While this approach isn’t technically an investment option, it can be a great way to start saving a targeted amount for future investments.
Lucky enough to work for a company that has a 401K account for their employees? If so, it’s important to put a portion of your paycheck into that account as soon as possible. Many financial experts recommend putting away 10%-15% of your paycheck into saving for retirement, but even 3%-5% is a start. For those approaching retirement age, it might be prudent to invest more.
This approach to investing is called dollar-cost averaging or systematic investing. Instead of investing a large amount of money at once, you divide the number into weekly, monthly, or quarterly deposits. This tactic can minimize the risk by exposing only part of your money to market declines. That allows you to buy more stocks at a lower price than when the market is expensive.
Traditional and Roth IRAs
If your company does not offer a retirement plan, you can open your own account. IRA’s are a great way to save for retirement in the place of a 401k if you don’t have access to one, or as supplemental savings. The difference between Traditional and Roth IRA’s comes down to taxes.
Consider a Traditional IRA account as a tax-deferred account. The money going into the account is pre-taxed. You will incur taxes at withdrawal, though. Roth IRAs are tax-free withdrawal accounts because the money put into the account is funded with after-tax dollars.
What about types of investments?
For some who are just starting out, we typically recommend starting with the basics, such as mutual funds or Exchange Traded Funds (ETFs). Mutual funds are those where the funds of multiple investors come together to buy and sell a variety of different stocks. The distinction in the name refers to the structure of the fund rather than how the fund is invested. When you invest in a mutual fund, you are buying and selling shares of the specific company through which you entrusted your money. Those who manage mutual funds aim to beat the market average.
Index funds, when structured as an exchange-traded fund (ETF), also diversify your portfolio across hundreds of stocks while following a specific index, like the S&P 500. Rather than buying and selling shares of the company, when trading in ETF’s, one is trading the ETF itself with other investors.
Reach out for help
Are you putting off investing because you’re just not sure where to start? If so, it’s time to reach out to the professionals. A financial advisor can help you decide the best course of action for your financial situation. By doing so, you’ll be able to plan ahead for the future and do so in a way that feels comfortable to you. Contact Great Lakes Investment Management for a free consultation.