Getting started with investing for beginners can be overwhelming. The number one reason people don’t invest is FEAR. You can end up losing, hundreds, thousands or millions of dollars by waiting to invest. When it comes to investing, time is the most important thing over amount of money because of compound interest.
Compound Interest
What is compound interest? Compound interest simply means that your interest earns interest. Let me say that again with an example. Say you put $100 dollars into a bank and you make $10 the first year. At the end of the year you’ll have $110. Let’s saying you leave that money exactly where it is for another year. At the end of that second year you’ll make $11 dollars and will have $121 dollars. If you continued doing that for 10 years with that same rate you would have $259.37.
Now that’s not very impressive but you doubled you $100 dollars by simply putting it in an account and gaining compound interest on it. Where compound interest gets more interesting is when you consistently contribute while your interest earns interest. With the same example if the only change I made was contribute $100 every year for 10 years. I’d have $1,852.48.
In terms of retirement if you are able to save 100,000 invest it and all you did was invest it and earned 10% year after year for 30 years and did nothing else, you would have $1,744,940.23. A lot of people ask how do I get start with investing for beginners after they saved up $50,000 or $100,000 etc. This is why the answer is invest it, set and forget, because time is the greatest contributor to compound interest.
How Exactly Can I Get Started With Investing For Beginners
Know that investing is a two step process. Step one is putting the money into an account. Step two is choose an investment. I made this mistake when I first got started by not knowing it was a two steps process. I thought it worked the same way bank accounts did where you put your money into your bank account you forget about it then you start earning interest. It doesn’t, investment accounts: 401K, IRA,403(b), brokerage accounts have one more step after you deposit your money. Then you choose what you want to buy.
Choose Something: What Do I Invest In? – Investing For Beginners
Stocks
When you buy a stock you basically buy a small part of that company. You earn money from them if the stock prices goes up or if the company does payouts, called dividends. A company’s stock price will typically go up or down depending on how the company is performing. Stocks are high risk but also have a high reward potential. If the company does well, you can earn from the increase in the stock price and dividends. But if the company does not do that well, then you do not make any money and you can lose all of the money you invested.
Mutual Funds
A mutual fund is basically a kind of fund where you pay a mutual fund managers to invest it in stocks, bonds and other things for you. Why would you want to invest in a mutual fund? For two maybe even three reasons. Number one is that it’s diversified, because if you invested on your own, then you will have to buy one stock of each company which would be very expensive. The second reason is trying to choose individual stocks can be difficult.
I wrote a step by step guide on how to help choose a stock but you’ll still have to put in the work and time to find a good pick. The third reason is that you would leave the investment to the experts who manage the mutual fund. You do pay more for this and mutual funds usually do have a minimum investment requirement, but it’s great way of getting started with investing for beginners.
Bonds
When you buy a bond you basically are lending money to that company. You typically are offering them a loan because they are in debt, but since they are with the government they are seen as a more stable loan. You get interest on the money that you lend, and you get the principal amount back at the end of the term. These are typically low risk for a lower reward.
Platforms Based on Your Comfort Level
I Can Do It Myself
If you are someone who is confident in analyzing and choosing a stock and managing your own investments platforms such as Vanguard, Charles Schwab, Fidelity, etc will be great for you.
Handle It For Me
If you are someone who is not confident in analyzing and or choosing a stock and managing your own investments platforms then a robocalls advisor would be good for you. For a small fee they will pick and manage your investments based on your risk level and when you want to retire. Some robo advisors are Betterment, M1 Finance, Acorns. I personally used Betterment because of their tax loss harvesting feature, but have heard great things about M1 Finance and Acorns as well. If you are interested in robo advising, you can get an entire 30 days free to manage your account with Betterment
Ultimately even if you’re a little scared to invest, get started because you have options! You don’t need to be a complete expert to get started, you don’t need to be rich, you don’t need a lot of money, you just need to start.
