With the start of the new year beginning, now is the time for many people to make financial decisions. And one of yours can finally be to start investing. Investing your money is a great way to increase wealth, but if you’re a newbie, the process can seem overwhelming. Here’s how to deal with it next year.
1. Find out how much you can invest
It’s a good idea to commit to investing a specific amount every month, as your budget allows, so to that end, take a look at your existing expenses and see how much money you can reasonably afford to pay. That way, you can have your money invested automatically, so you won’t be tempted to spend it on other things.
If, for example, you earn $ 4,000 a month, of which $ 3,000 goes to essentials like food and rent, you will be left with $ 1,000 to work. From this, you will probably want some money for leisure and discretionary expenses, so you can decide to invest $ 500 and keep the remaining $ 500 for you.
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2. Choose the right account to invest
When it comes to investing your money, you have options. You can invest in a retirement plan like an IRA or 401 (k), or you can open a traditional brokerage account and use it to buy shares.
Investing in a retirement plan has tax benefits. With a traditional IRA or 401 (k), your contributions will be tax-free and your earnings on that account will be tax-deferred (that is, you will not pay taxes on them until you make withdrawals). With a Roth IRA or 401 (k), you will not have a tax break on your contributions, but the earnings in your account will be yours to enjoy tax free, and withdrawals will also be tax free.
A traditional brokerage account, in turn, will not provide any tax savings, but go give you more flexibility. With a retirement plan, you usually have to leave your money alone until you are 59 and a half or you will face expensive penalties. With a brokerage account, you can access your money at any time. You can 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 out a strategy
Your goal as an investor should be to generate the highest possible returns while keeping risk to a minimum. To this end, your age must play a role in your decision. If you are young enough, it is generally worth investing heavily in stocks, which have historically generated much higher returns than bonds, but are also much more risky. If you are investing for the first time at age 60, on the other hand, a portfolio with many securities can be a safer bet.
4. Choose the right investments
The actions you add to your portfolio should not be random. Instead, you should choose stocks that offer great value and contribute to solid long-term growth. Of course, identifying these stocks will take time and research, and while there are guides out there that can teach you how to choose the right stocks, you can start with index funds.
Index funds are managed passively and aim to match the performance of the market indices with which they are associated. When you buy index funds, you effectively buy a stock bucket, and the value of your portfolio generally increases and decreases in conjunction with broad market performance. Although you don’t beat the market with index funds, you can do very well with them in your portfolio.
If you haven’t started investing yet, don’t wait another minute to start. The sooner you do this, the sooner you can put your money to work. And if you follow these steps, it will be easier to get things off the ground.