Congratulations! You’ve made it to step 3 of managing money. You’ve already created a budget and started tracking your expenses, and now you’re ready to begin investing.
Why do I need to start investing?
Once you have enough cash to cover your everyday needs, as well as to start putting money in an emergency fund (which shouldn’t be invested as you need quick access to it!), it’s essential to start investing to help build yourself a solid financial future.
Most savings accounts pay very little interest. You can open a high-interest savings account to put your emergency fund in (check into any fees first – no point in losing more in costs than you earn in interest), but that type of account won’t cut it for any other kind of savings.
Investing appropriately can help you earn money over time through the magic of compound interest! While returns vary, you’ll undoubtedly make more via the stock market than you ever could via a savings account.
What kind of investments should I get into?
What kind of investments you should get into will vary. The most common types are bonds, stocks, ETFs, and Mutual Funds.
Both mutual funds and ETFs hold portfolios of stocks and bonds, but ETFs trade on exchanges (like stocks) and tend to have lower fees. Stocks are generally considered the riskiest investments, with bonds being the least risky, guaranteeing an interest payment. ETFs and mutual funds tend to fall in the medium-risk category.
The key is diversity! You don’t want just to buy a few stocks or a few bonds. ETFs and mutual funds are good at spreading the risk out, so even if one investment is going down, another one may be going up. Your goal should be to minimize your risk and maximize your returns!
I’ll talk more about diversifying your portfolio in my next post.
How do I get started investing?
There’s the “traditional” way to get started – where you speak to a financial advisor, talk to them about your goals, and then put together an investment plan for you. The problem with this approach is that it can be pricey, as you pay higher fees, and you may get pushed into investments that aren’t necessarily right for you. If you really want a hands-on approach, ask friends and family for recommendations and make sure you’re clear on what fees you’ll pay your advisor.
The other option is a robo advisor or online broker. They tend to offer reasonably low fees, and you can select a portfolio that suits your investment goals, risk tolerance, the required rate of return. Some brokers offer only set portfolios, whereas others may provide more customized ones.
The Takeaway
This may seem overwhelming, but it doesn’t have to be. And the great thing is – once you’ve got your investments all set up, your hard work is done!
