When to start investing?
Starting to invest is a smart choice, but it’s a complicated one. Few people have straightforward money situations and opportunities. It’s not really as simple as “start investing as soon as you can.” Investing is a priority, but there are other financial steps you need to take first.
For example, having a fully stocked emergency fund in an accessible savings account is a huge financial priority. You want to have three to six months’ worth of living expenses tucked away.
Emergencies happen all the time, and having the capital to deal with them is a necessity. You don’t want to have to tap into your investments to deal with a car repair or a hospital bill.
Other financial priorities could include paying down high-interest debt. If you have a debt that has a higher interest rate than your investment return, you’re losing money each day you carry the debt. So it works in your favor to pay down high-interest debt as soon as possible.
Define Your Investment Budget
Budgeting may get a bad rap, and maybe not everyone should have one. But in reality, if you want to become an investor, having a budget can be extremely helpful in saving money to use for investing. When making your budget, be sure to include plenty of funds for investing.
Now, there are plenty of methods for setting up and maintaining a budget. It doesn't have to be rocket science. You can use a spreadsheet and just paper and a pen. Or you can use one of the helpful online services that do the heavy lifting for you. Betterment and Personal Capital have free budgeting and personal finance software that we particularly like.
Choose investments that match your tolerance for risk:
Stocks: Individual shares of companies you think will increase in value.
Bonds: Bonds allow a company or government to borrow your money to fund a project or refinance other debt. The principal is then returned on a set maturity date. (Here’s more on how bonds work.)
Mutual funds: Investing your money in funds — like mutual funds, index funds, or exchange-traded funds — allows you to purchase many stocks, bonds, or other investments all at once. Mutual funds build instant diversification by pooling investor money and using it to buy a basket of investments that align with the fund’s stated goal. Funds could also be actively managed, with knowledgeable managers selecting the investments used, or they'll track an index. A Standard & Poor’s 500 mutual fund, for instance, will hold 500 of the most important companies within the us.
Real estate: land may be a thanks to diversify your investment portfolio outside of the normal mixture of stocks and bonds. It doesn’t necessarily mean buying a home or becoming a landlord — you'll invest in REITs, which are like mutual funds for land, or through online real estate investing platforms like Fundrise, which pool investor money.
Real Estate
Real estate is also among the best investments for your long-term goals—but approach this with caution. Unless you are rolling in cash, you’ll end up taking out a housing loan which can last well above 10 years.
In addition, the real estate market follows an up-and-down cycle. The uptrend is when people are buying properties left and right, and a downtrend is when people sell, driving prices down. If you buy during the peak of an uptrend, and sell during a downtrend, you can either break even or lose money.
Lending Your Savings
Money lending is as old as civilization. An investor saves up wealth and then lets others borrow it with the promise of repayment plus interest based on the risk and length of the loan. Issuing a loan, whether to a business, a person, or a bank, is a common way of investing money.
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