I used to shy away from conversations about investing because I thought it was meant for wealthy people with enough money to do what they wanted.
My financial security was a checking account with a few dollars in it. I didn’t spend much, but at the same time, I didn’t have enough to show for it because all the money I’d saved was within reach when something came up.
Another reason I didn’t get into investing earlier is I knew nothing about it. To me, the whole concept of stocks, crypto, and real estate sounded too complex and intimidating.
Looking back now, I’m glad I got rid of that mentality and would like to help you do that, too. This is why I’m writing a detailed article on how to invest money for beginners.
Regardless of your income, there isn’t a suitable time to start securing your future. The earlier, the better. You can do that for as little as $10.
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How To Invest Money for Beginners
Financial independence, accumulation of wealth, and tax benefits are among the advantages of investing money. But the question is, where do you start, and how much do you need?
Before investing, determine what you want and how much risk you can take. You can do it with the help of a financial advisor or navigate the waters independently.
Below is a step-by-step guide on how to invest money as a beginner:
1. Know Your Investment Goals
Like any other venture, having a clear investment goal keeps you focused on the endgame. It acts as a guide on the exact steps to take toward financial independence.
Delving into investment without a goal will lead to jumping from one venture to another or even poor financial decisions, which may lead to loss of money.
Ask yourself these questions:
- What is your ultimate goal for the money?
- How long do you want your money to mature to meet your goal?
2. Know Your Risk Tolerance
Risk is a scary term for everyone who plans on investing. The mere thought of losing money in an investment may make you settle for “safer” methods like letting your money sit in a bank.
However, safe ways won’t make you wealthy. You won’t raise a down payment for your house or secure your children’s education by playing it safe.
You can only stomach a certain amount of risk, so understanding your risk tolerance is crucial to success.
Assessing your risk tolerance guides you in choosing an investment type that suits your needs without compromising your mental health.
What’s the fun in putting your money away in an investment if you constantly worry about it?
If you have a high risk tolerance, you may find ventures like cryptocurrency, day trading, and startup investments intriguing.
However, safer options like real estate, ETFs, and government bonds may work for you if your risk tolerance is lower.
3. Determine What Kind of Investor You Want To Be
The kind of investor you want to be generally boils down to your goals, capacity, time horizon, and risk tolerance.
All factors considered, investors fall into two broad groups: short-term and long-term.
Short-Term Investor
A short-term investor mainly aims to generate quick returns within a short period.
This investment strategy capitalizes on market fluctuations by buying assets when they’re low and selling them when their prices increase.
There are two types of short-term investment strategies:
- Day trading: This involves buying and selling investments like stocks within the same day. This venture is very risky and challenging, especially for beginners.
- Swing trading: Swing trading focuses on leveraging seasonal price fluctuations to make a profit. Unlike day trading, this investment strategy is more flexible as you can hold your investment for a few days or months.
Long-term Investor
A long-term investor capitalizes on time to make a profit. The longer the time, the more time your money has to compound. Generally, long-term investments are less risky compared to short-term.
Here are some common long-term investment strategies:
- Dividend investing: Involves investing in dividend stocks that pay dividends, say quarterly. You can reinvest your profits or channel them towards another goal. Dividend investments may not pay much at once, but they’re an excellent source of passive income over time.
- Value investing: This involves purchasing undervalued stocks whose value may increase in the future.
- Index investing: This is the most popular and safest long-term investment strategy. Index investing entails diversifying your portfolio by investing in several companies at once. This way, you spread the risk and increase returns.
4. Decide How Much To Invest
Once you’ve determined your goals and time horizon, the next step to successful investment is determining how much you want to channel toward your investment.
Most financial planners recommend investing 15% of your paycheck each month, but this isn’t written in stone. You might want to consider a higher percentage if you start your journey late.
The amount of money you put into your investment should be proportionate to your income. It’s better to settle for small amounts over a long period than to compromise your quality of life.
5. Determine What You’ll Invest In
There are many investment avenues you can venture into that align with your goals and risk tolerance. Here are some of the most common ones:
Stocks
When you buy a stock, you own a share representing ownership in a company. As mentioned, investing in different companies is a practical way to spread and reduce risk.
Generally, you earn returns when the stock appreciates and vice versa. So, consider buying low and selling high.
You can put your money in dividend stocks for regular passive income or flip non-dividend ones in the stock market.
ETFs
Want the flexibility of stocks without tying yourself down to one company? Exchange Traded Funds are a collection of bonds and stocks, which earn higher returns while spreading the risk.
Index Funds
Index funds focus on specific market indexes, like the S&P 500. Investing in these funds gives you access to a diverse pool of assets represented by a particular index.
Index funds enable you to diversify your portfolio within a single investment instead of putting all your eggs in one basket like stocks.
Arrived pools funds from investors and purchases a property. From there, investors receive quarterly payments based on their share capital.
Mutual Funds
Mutual funds work under the same concept as REITS. Only this time, investors pool funds towards a collection of bonds and stocks rather than real estate.
You can manage your mutual funds actively or invest in a passive index like the S&P 500.
Cryptocurrency
Cryptocurrency is one of the riskiest and most profitable investment vehicles out there. Platforms like Nexo allow you to purchase, hold, sell, and take a loan against your crypto portfolio.
Related – How to start investing in cryptocurrency: A full Guide
6. Open an Investment Account
After choosing an investment vehicle to meet your financial goal, open an investment account with a platform like Acorns You can round up your spare change or make recurring investments on Acorns to secure your financial future.
The app is based on time’s compounding effect, which lets you reap benefits in the long run, even with small strides.
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7. Build Your Portfolio
You now know that investments come with risks. You risk losing your money even if you choose safe methods like real estate.
However, building a diverse portfolio helps reduce the risk by spreading it across different assets. This way, even if you lose your money in one, the rest covers the loss.
Consider investing in different vehicles simultaneously instead of putting all your eggs in one basket. For instance, you can invest in real estate, stocks, and index funds.
8. Monitor and Rebalance Your Portfolio Over Time
Your investments will likely shift due to market fluctuations. After a year, your investment pattern may not suit your goals as it did initially.
This is why monitoring and rebalancing your portfolio regularly is a good idea. This simply means readjusting your investments to align with your financial goals.
For instance, if your initial investment of 40% in bonds and 60% in stocks no longer serves you, you can adjust it to 30% in bonds and 70% in stocks.
The Best Investing Apps for Beginners
Now that you know how to invest money as a beginner, I’m sure you’re wondering whether to approach your bank.
Banks are one way to invest, but several apps have been developed to make investing easy and flexible and guide diversifying your portfolio based on your goals and risk tolerance.
These investment apps have lower fees. Plus, they have an automation feature that lets you invest money passively. Here are some of the best apps worth considering:
Acorns
Acorns is widely known for its automatic round-up feature. It rounds up your spare change and invests it in a portfolio of ETFs, bonds, stocks, and REITs.
This is how rounding up works: when you purchase a product for $1.25, Acorns rounds up the amount to $2.00. The platform then channels the extra $0.75 towards your investment portfolio.
This may seem like a small amount to invest, but with time and consistent recurring investments, you can gradually build savings toward financial stability without sacrificing your living standards.
Acorns has an additional feature called Acorns Earn, which works similarly to cashback sites.
This feature lets you earn bonus investments by shopping at 15,000 top brands, like Kohl’s, Apple, Nike, and Groupon.
You can expect to make around $45/hour on average, although experienced developers earn up to $100/hour. And the national average now lies around $119k/year.
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