How to Invest
If you have even a little money saved up, investing it can help it grow. In fact, if you invest effectively enough, you could eventually live off the earnings and interest from your investments. Start with safer investments, such as bonds, mutual funds, and retirement accounts, while you’re still learning the market. When you’ve built up enough money, you can move on to riskier investments, such as real estate or commodities, that have higher potential returns.
Starting with Safe Investments
Open a money market account. Money market accounts are savings accounts that typically require a higher minimum balance, but pay a much higher interest rate. Often, this rate is in line with the current market interest rates.
Your money is typically fairly accessible, although the bank may place limits on how much you can withdraw and how often. A money market account shouldn’t be used for your emergency fund.
If you have an existing relationship with a bank, that may be a good place to open a money market account. However, you might also want to shop around for the best interest rate and minimum deposit requirements that meet your needs and your budget.
Many credit card companies, such as Capital One and Discover, also offer money market accounts that you can start online.
Hedge your investments with a certificate of deposit (CD) account. A CD holds a set amount of your money for a set period of time. During that period of time, you can’t access your money. At the end of the time period, you get your money back plus interest.
CDs are considered one of the safest options for saving and investing. The longer the term of the CD, the higher the interest rate typically will be.
All FDIC-insured banks offer CDs with different terms and minimum deposits, so you can easily find one that suits your needs.
Some online banks, such as Ally, offer CDs with no minimum deposit requirement.
When you open a CD account, read your disclosure statement carefully. Make sure you understand the interest rate, whether it is fixed or variable, and when the bank pays interest. Check the maturity date, and evaluate any penalties for early withdrawal.
Pick stocks in companies and sectors you understand. As a beginning investor, you don’t need a broker to start investing in the stock market. You can use a dividend reinvestment plan (DRIP) or direct stock purchase plan (DSPP) to bypass broker fees and commissions and purchase stock directly from the company.
As a beginner, you can start investing small amounts, even as little as $20 or $30 a month, using these direct plans. There is a list of companies that offer direct investing with no fees at https://www.directinvesting.com/search/no_fees_list.cfm.
If you buy into companies that you already know and understand, your research will be fairly easy. You can recognize when the company is doing well, and you can tell what trends are going to work in the company’s favor.
Diversify your portfolio with a mutual fund. Mutual funds are a collection of stocks, bonds, or commodities that are bundled together and managed by a registered investment advisor. Because of their inherent diversification, they have a low risk and are appropriate for long-term investment.
In some cases, you may be able to buy shares directly from the fund. However, typically you’ll go through a broker or financial advisor to buy shares in a mutual fund.
Mutual funds are a relatively inexpensive way to diversify your portfolio when you’re just starting out. You can get mutual fund shares far more cheaply than what you would pay for a piece of all the assets in the fund.
Open a retirement account. Retirement accounts allow you a tax-free way to save for retirement. The most common options are the 401(k) and the IRA. A 401(k) is set up through your employer, while you open an IRA individually.
Many employers match your contributions to your 401(k), up to a certain amount. Aim to always contribute at least as much to your 401(k) as your employer will match, so you don’t miss out on that free money.
With a traditional IRA, you can contribute up to $5,500 yearly tax-free. You’ll pay taxes when you withdraw money during retirement. You also have the option of a Roth IRA, which is not tax-free at the time you contribute. However, retirement withdrawals from a Roth IRA are tax free.
All IRAs generate compound interest, which means the interest your money earns is re-invested into your account, generating still more interest. For example, if you make a one-time contribution of $5,000 to a Roth IRA when you are 20 years old, your account will be worth $160,000 when you retire at age 65 (assuming an 8 percent return) without you having to lift a finger.