Did you know that 55% of Americans own stocks in the stock market?
While you might hear stories of people getting rich quick through investing, the historical average stock market return is about 10%.
Is it time for you to start building your portfolio, but you aren’t sure how and where to invest money?
Here are ten key tips on how to invest money wisely.
Table of Contents
- 1 1. Start Early
- 2 2. Create an Emergency Fund
- 3 3. Use Automation to Your Favor
- 4 4. Have a Plan and Stick to It
- 5 5. Make a Budget
- 6 6. Knowledge Is Power
- 7 7. Set up Retirement Accounts
- 8 8. Don’t Put All Your Eggs in One Basket
- 9 9. Stay Informed
- 10 10. Avoid High Commissions
- 11 Final Thoughts on How to Invest Money Wisely
1. Start Early
If you listen to any of these tips for investing, listen to this one. The results of investing earlier will be exponential, so you are doing yourself a huge favor by starting as young as possible.
The sooner you begin investing, the less money you’ll need to reach your goal each year.
Investing earlier means your money will start to compound more quickly, even if you don’t have a lot to invest. For example, say you were to begin investing $200 a month beginning at age 35 with an average return of 8%. By the time you are 65, you’ll have saved a little under $300,000.
Now, say you started investing the same amount monthly with the same average return rate, but ten years earlier. By the time you’re 65, you’ll have a little under $700,000. That’s a big difference!
2. Create an Emergency Fund
As a part of your money management plan, it’s important to not confuse saving and investing. While it’s great to grow your money, it’s also important to have savings for short-term goals and emergencies.
Unless you have a large amount of cash in reserves, you shouldn’t invest your savings. This is because it’s possible that the value of your savings could drop exactly when you need it for an emergency or something else. You don’t want to put your savings at risk, rather you want to preserve it so it’s there when you need it.
3. Use Automation to Your Favor
It’s really easy to put off investing and saving. This is why it’s such a good idea to automate your investing.
Set it up so that money is automatically transferred from your bank account or paycheck every single month. You can either have the money transferred to a savings account or an investing account. The reason automation is so effective for investing is that it removes the temptation of spending the money elsewhere.
4. Have a Plan and Stick to It
The best way to invest money is to have a long-term plan and stick to it. This is because stock market dips can make you nervous and want to get your money out of the market. In reality, this is a good buying opportunity for regular investors.
Without a steady plan, you could panic and take your money at exactly the wrong time. Trust your plan and don’t let sensational news headlines throw you off your strategy.
5. Make a Budget
Having a budget is necessary when you want to save and invest. Without one, it’s easy for little things to add up and your bank account to be empty at the end of the month. Remember, putting a little bit away each month is better than nothing.
6. Knowledge Is Power
While it’s possible to put your financial plan totally in someone else’s hands, the more you know the better off you are. When you have your finances in order, it’s a great idea to learn as much as you can about investing.
Study up on investing terminology so that you can make the best possible decisions about your investments. Learn about mutual funds, bonds, stocks, and certificates of deposits (CD’s).
7. Set up Retirement Accounts
When you start investing, you’ll also want to look into the tax implications of different routes. One of the benefits of retirement accounts is that there can be many tax advantages.
With IRAs and 401Ks, initial investments are tax-deductible. Other retirement funds will require that you pay taxes upfront, but then you won’t need to when you withdraw the funds in retirement.
8. Don’t Put All Your Eggs in One Basket
Diversification is important in investing because markets and sectors are fluctuating constantly. If your portfolio isn’t diversified, you could take a hurtful hit if a particular security or ETF plummets.
When your portfolio is diversified, you will tend to have some stocks that are falling and some stocks that are rising at the same time.
Diversification doesn’t necessarily just mean investing in different stocks in the stock market. It can also mean putting money in real estate, precious metals, or other avenues. To learn more about whether or not gold is a good investment, check out this investment article.
9. Stay Informed
When you have money in the market, it’s a good idea to stay informed about market, business, and economic news around the world. While market speculation is an incredibly difficult task and even experts frequently get it wrong, it is still smart to be aware of current events.
10. Avoid High Commissions
When it comes time to invest, there will likely be some professionals who will try and convince you to make certain investments that result in high commissions for them.
Do your research before investing to make sure that you aren’t paying a high commission rate. Investing is a big decision, and it’s absolutely vital that you don’t let people with less than good intentions take advantage of your hard-earned money.
Final Thoughts on How to Invest Money Wisely
Learning how to invest money can feel like learning a different language. Luckily, there are countless resources online to help you learn about budgeting, saving, and investing.
When you decide to invest, you’re investing in your own future. Take the time to make smart decisions, and be wary of anyone who seems to promise something that seems too good to be true.
Did you find this article on how to invest money wisely helpful? If so, be sure to check out the rest of our blog for more informative articles!