With the first start of a new year, now is the time for many people to make financial decisions. And one of you may be to finally start investing. Investing your money is an excellent way to increase wealth, but if you are a total beginner, the process can seem overwhelming. Here’s how to tackle it in the coming year.
1. Determine how much you can afford to invest
It’s a good idea to commit to investing a specific amount each month if your budget allows, so look at your existing expenses and see how much cash you can reasonably afford to share. This way you can arrange for your money to be invested automatically so that you are not tempted to spend it on other things.
For example, if you earn $ 4,000 a month, of which $ 3,000 goes to necessities like food and rent, you will have $ 1,000 to work with. Of these, you will probably want money for leisure and discretionary spending, so you may decide to invest $ 500 and keep the remaining $ 500 to yourself.
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2. Choose the right account to invest in
If you are going to invest money, you have choices. You can invest in a retirement plan such as an IRA or 401 (k), or you can open a traditional brokerage account and use it to buy shares.
Investing in a retirement plan holds tax benefits. With a traditional IRA or 401 (k), your contributions will be tax-free, and your profits in the account will be tax-deductible (meaning you will not pay tax on them before taking withdrawals). With a Roth IRA or 401 (k), you will get no tax break on your contributions, but profits in your account are from you to enjoy tax free, and withdrawals will also be tax free.
In the meantime, a traditional brokerage account will not give you any tax savings, but it will shall gives you more flexibility. With a retirement plan, you generally have to leave your money alone until the age of 59 1/2, or otherwise be fined. With a brokerage account, you can access your money at any time. You may decide to split your investments between a retirement plan and a brokerage account, but the key is to understand the pros and cons of each choice.
3. Map a strategy
Your goal as an investor should be to achieve the highest possible returns while keeping your risk to a minimum. Therefore, your age should play a role in your decision. If you are fairly young, it usually pays to earn stocks, which have historically yielded much higher returns than bonds, but are also much riskier. However, if you are investing in your 60s for the first time, a portfolio with bonds can be a safer bet.
4. Choose the right investments
The stocks you add to your portfolio should not be random. On the contrary, you should choose stocks that offer a lot of value and lend to long-term growth. Of course, it will take time and research to identify the stocks, and although there are guides that can teach you how to choose the right stocks, you can start with index funds instead.
Index funds are managed passively and are aimed at matching the performance of the market indices with which they are associated. When you buy index funds, you are effectively buying a bucket of stocks, and the value of your portfolio will generally rise and fall along with the performance of the broad market. Although you will not beat the market with index funds, you can do well if you have it in your portfolio.
If you still need to start investing, do not wait a moment longer to get started. The sooner you do, the sooner you can put money to work. And if you follow these steps, it will be easier to get things off the ground.