Investing, like all financial goals, starts with your financial plan and monthly budget. They help you identify how much money you have, no matter how big or small, to invest.
Investments should be part of your financial plan, just like an emergency savings fund or retirement account.
Here’s how it works. Let’s say you invest $100 a month for 10 years and earn an average 6-percent annual return. At the end of the 10 years, you’ll have $16,247. That includes your $12,000 contribution plus $4,247 you earned in interest. Investing is a long-term financial strategy. The earlier you start the more you’ll likely benefit. With that in mind, here are three steps to help you start investing.
3 Steps to Start Investing
1. Decide how much you have and want to invest.
This is determined by your financial goals and your budget. Many financial experts recommend establishing an emergency fund and paying down debt before you start investing. The reason: investing comes with some risk. You want to be sure you won’t need the money you invest for a while down the road. But, don’t be discouraged if you don’t have thousands of dollars to invest right now. Every dollar saved or invested adds up over time. There are investment accounts you can open with as little as $100.
2. Identify your investor type.
Before you invest, you need to decide if you want to be passively or actively involved in your investments. There are three different investor types.
Active investors take a hands-on approach when it comes to their investments. They do all of the research and work themselves. It can be time consuming but active investors like having total control over their investment portfolios.
Passive investors take a hands-off approach. They don’t like or have the time for the day-to-day management of their portfolios. They like a “set it and forget it” model. Passive investors typically work with robo advisors who use computer algorithms to determine portfolio strategy and manage accounts.
Moderate investors like to be somewhat involved in managing their investments. For a fee, they hire an advisor to help make decisions and manage their portfolios. This advisor helps them make the best decisions so they’re more likely to reach their goals.
3. Determine your risk tolerance.
Investopedia defines risk tolerance as “the degree of variability in investment returns that an investor is willing to withstand in their financial planning.” In other words, it’s how comfortable you are with the fact that your investment may lose money. Stocks and bonds are two types of investment accounts that come with high risk. Certificate of deposits (CDs) are a type of investment account that comes with hardly any risk.
Before you begin investing, sit down and think about your risk tolerance. This will help you figure out your investment portfolio.
Bonus Step: Meet with a financial advisor.
A financial advisor is a professional who can help you develop strategies and plans to meet your financial goals. They can help you create a financial plan, retirement plan, or budget. They can also help you get started with investing. Investing can feel overwhelming when you’re just getting started. There are many investment accounts out there to meet any budget. Talk with a financial advisor to discuss your situation, goals, and create a plan that best meets your needs.
An important thing to remember about saving and investing is it’s okay to start small. Every little bit adds up. As you look for ways to reduce your expenses so you can build your savings and investments, get creative. Co-living is a great way to reduce your rent, and PadSplit makes it easy for you to save money on living expenses each month. Calculate your savings today.