Some dedicate their entire careers to investing, or giving advice on investing. However, entering the world of investments doesn't have to be overwhelming. In fact, it can be highly beneficial to any working adult.
The earnings you make through investing should be a contribution toward your future or retirement. This means that, if you have a lot of loans to pay off or find yourself strapped for cash, you might consider holding off investing until you have significant income. If you have money that is going into a savings account and remaining untouched, however, investing can be a more profitable option.
Consider your options
Once you have determined that you have excess cash that you feel comfortable going without, you first need to consider how you wish to invest. There are many ways to invest your money, here are three ways for beginners:
- Certificates of Deposit: These are pretty risk-free, because they are insured by the Federal Deposit Insurance Corp. With a CD, you will put your money in for a fixed amount of time - usually a few months or years - at a specified interest rate. Since they are very low risk, the interest rate is usually also low. When the chosen amount of time is up, you can choose to keep it in the CD at the current interest rate, or withdraw it to use as you wish.
- Mutual funds: These allow you to buy a share in a fund and the company will invest your money for you in securities. They are a good way to diversify your investment portfolio, which alleviates some risk.
- Exchange-traded Funds: These are similar to stocks in that they can be bought or sold at any time during the trading day. However, like mutual funds, they are for a number of different stocks at a time. First-time investors like these because they are low cost, but a good way to become acclimated to the stock market.
When beginning to invest for the first time, you should consider whether you plan on making a monthly contribution or if you only plan on investing once in a while when you can spare the money. If the former is the case, a mutual fund is a good investment, especially if done through a 401(k) or Individual Retirement Account, both of which have tax benefits.
Set your allocation
Once you decide how you will invest, you'll want to choose how to allocate your money. A young investor can afford to put more of his or her investment toward high-risk options, because if the investment goes wrong, there is still plenty of time to make it up before retirement.
On the other hand, when you are first starting out, it's important to make sure you have enough stake in less risky investments.
When determining how much you will allocate to which types of investments, many professionals explain a good rule of thumb is to consider your age. Some say to subtract it from 100, while others say to subtract it from 110. The remainder is the percentage that you should invest in riskier investments, like stocks; the rest should go to safer ones, like bonds.
For instance, if you are 25 years old and you use the rule of 100, you would dedicate 75 percent of your investment in stocks and the remaining 25 percent in bonds. However, this is always a personal choice. If you feel more conservative, or if you are aiming to retire early, you may want to allocate only 70 percent to stocks, to put a larger portion in a more secure investment.
NMLS #407985