If you’ve made a habit of saving money, then you may want to take the next step and invest some of it. Investing money is putting it in financial instruments with the expectation that it will earn more of it for you sometime in the future. Use this guide to learn about investing for beginners.
Productive and Non-Productive Assets
When investing, you should put your money in productive assets. Productive assets are those that should generate more money and cash flow. They include:
Although the timeline for growing money from these assets are different, they can all generate a profit and greater cash flow. With property, the turn around on profiting from it may be immediate if you’re buying an occupied rental property or farm. The others are long-term investments, including stocks.
Along with putting money in productive assets, some people buy non-productive assets in hopes that they will increase in value. Some non-productive assets are:
They are non-productive assets because they do not produce anything. Their value may increase, but they will still be what they are, whether it is a gold bar, a painting, or a diamond watch. To make money from a non-productive asset, not only do you need it to increase in value, but you also need to find the right buyer for it.
The only reason to buy non-productive assets is that you like them and want to own them. There is no guarantee that a piece of art will increase in value or that your old comic books will be worth more in a few years. You should only buy these things if you enjoy looking at them or owning them.
Purpose for Investing
The first decision you should make when investing money is why you want to do it. Are you saving for retirement, do you want to build wealth, or help fund your child’s education? The answer to why you want to invest your money can lead you to the proper type of instrument.
If your goal is to help your children pay for their college educations, then you can open a 529-savings plan. It is a plan that allows parents to save for their children’s higher education without paying taxes on the money they contribute and it can be withdrawn tax-free as long as the money goes toward tuition, housing, or textbooks.
Along with parents being able to contribute to the account, relatives who want to chip in can as well. Many types of 529 plans exist, so you need to weigh the tax benefits for each one that is available in your state.
Several financial tools exist for saving money for retirement. If your job offers it, you should consider opening a 401k account. A 401k is a defined contribution plan in which the employer contributes to the employee’s retirement fund.
The employee also contributes by having a set sum taken out of each paycheck before tax deductions. The money will grow tax-free until it is withdrawn, then the employee, who is now the retiree, may pay taxes on it.
Another type of retirement investment is an Individual Retirement Account or IRA. Several types of IRAs are available from banks, credit unions, or investment brokages. The contributions to an IRA are tax deductible until they reach the Internal Revenue Service limits.
The money in an IRA is invested in a variety of investments including:
Contributors can select the investments they want, or they can leave it up to the company that manages the account to pick them.
Many people invest their money to build their wealth. How you do so will depend on how much risk you’re willing to take and the amount of money that you can invest. Although it can be risky, you can build wealth by investing in stocks like Warren Buffet.
A less risky way to begin to build wealth is to invest in real estate. There are two ways to make money with real estate, and you can buy houses that need repairs and then sell them once the work has been done. Fix-it-uppers are usually less expensive than move-in ready houses, and you can make a profit by selling them once the repairs have been made.
Another way, which is more long-term but can help you make more money than other investments, is to buy houses or apartment complexes and rent them to tenants. If you’re leery about doing this because you don’t want to become a landlord, you can hire a management company to take care of the day to day business of renting.
A management company will do everything from finding tenants to making repairs on the properties to sending you a cut of the rent every month. When you are able, you can use your savings to buy another rental property and increase your revenue from it. Real estate investing is a good way to live the lifestyle you want now or to save for retirement or your children's education.
What Can You Afford to Lose?
After determining why you want to invest, next, you will need to calculate how much money you can afford to lose. Like gambling, you don't want to put money into stocks, real estate, or any other investment that you cannot afford to lose. In other words, don't use your main income for investing.
If you have a savings account with a significant amount of money in it, then you can use some of that for buying investments. With a savings account, you’re not making much interest, so it’s money that is sitting there. By investing it, you can get a better return on it by putting it into accounts that pay higher interest rates or give you a better return on your money.
Pay yourself first, pay your bills, and then make investments. By doing this, you will not lose money that is meant for making your mortgage payment, feeding your kids, or paying the electric bill. So, spend some time and calculate how much you have for investing.
Where to Put Your Money
Next, you will need to determine where to put your money. This decision can be difficult, especially for first-time investors. With some investments, like stocks, IRAs, or mutual funds, you will need to seek out a financial advisor or at least a broker. Investments in these financial instruments cannot be made without a licensed broker.
While you don’t necessarily need a financial advisor to invest in real estate, put money into CDs, or other types of long-term savings accounts, it may be a good idea to sit down with one. Unless you plan to read everything about investing for beginners, it is good to seek advice from someone who has experience in the field.
How Many Risks Should You Take
When deciding where you should invest your money, you will also need to figure out how much risk to take. The stock market is going to be riskier than mutual funds or bonds, but the rewards are usually higher. However, all investments should be considered long-term.
Warren Buffet didn't make his money by day trading. Instead, he bought stocks and held onto them until they were selling. Then he sold them for the highest amount he could. He made some great decisions or had good instincts because he is worth approximately $85 billion today.
However, you can grow your money at a slower pace by putting it into mutual funds and selecting companies that do tasks in which you believe. For instance, if a company makes organic children’s clothing or baby food, and this is important to you, then you can invest in them through a mutual fund.
Mutual funds usually grow slowly, but they can have setbacks as well if they have investments in stocks. So, before you put your money anywhere, you need to read about the company and how the mutual fund is invested.
Diversify Your Investments
You’ve probably heard the saying, “don’t put your eggs all in one basket.” This phrase originally came from Don Quixote in 1605. It means not to put all your money in one place in case it is lost. So, when it comes to investing money, you need to diversify your investments.
Instead of only purchasing stocks, have some money in mutual funds, a 401k or IRA for retirement, and in a high paying interest savings account. When you do buy stocks or mutual funds, spread your money around and buy a variety of them, not just one stock or mutual fund.
If you do have some losses in the stock market, then your other investments may still be okay, so you don’t lose everything. Although you don’t necessarily need a financial advisor to invest money, you will need the help of a licensed broker to help you buy stocks, bonds, and other financial instruments.
There is much to learn about investing for beginners, so take your time and read as much as you can on the subject before deciding why you want to invest and where to put your money.