Investing is putting your money into something expecting a return on your money over time. It’s how your money makes money while you sleep. A vast majority of net-worth comes from investment gains. The following are some of the steps for How to Start Investing or Millennial Investing by FinanceShed.
Be Ready to Invest
Before you consider investing, first make sure you’ve set aside at least six months’ worth of expenses in an emergency fund. You should also start a retirement portfolio and contribute at least enough to get your maximum employer match. Once you’ve done that, you can start investing any discretionary income.
Understand Investment Options
Every investor needs to understand his or her choices before deciding what to invest in. New investors may feel overwhelmed by the sea of options, but here are the basics:
- Stocks – Shares of public companies. Stocks are Typically more Risky to Invest in because shareholders only earn money when the company increases its value. Some companies offer dividends, which are payments to shareholders.
- Bonds – Take it shares of government or be it a corporate debt, when you purchase a bond, it is similar to lending money. They are generally low-risk as they have fixed interest rates.
- Mutual funds – Groups of stocks or bonds that are professionally managed. Mutual funds are a great way to diversify your portfolio, but they come with operating and shareholder fees.
- Exchange-traded funds (ETFs) – Groups of assets that are traded throughout the day, like stocks. They offer diversification and are less expensive than mutual funds.
- Index funds – Types of mutual funds that follow stock indexes, such as the S&P 500. Like ETFs, they also offer diversification and affordability.
Watch the Fees
Although funds offer investors a way to diversify, they come with expense ratios or operating costs. They’re expressed as percentages because they represent the fraction of an investor’s assets the fund’s manager takes as a fee. To get the best bang for your buck, look for funds with low expense ratios.
Additionally, you could be hit with inactivity fees for infrequent trading and account transfer fees when you move your money around.
Observe Tax Rates
Like it or not, your investments are subject to taxes in some form, so it’s smart to plan for them in your budget. Different types of assets are taxed differently, so educate yourself about the levies associated with your investments. If you are investing through a retirement account such as a 401(k) or Individual Retirement Account (IRA), your contributions are tax-deferred.
This means that you won’t pay taxes on that money until you take it out of those accounts during retirement. However, by opting to contribute to a Roth IRA or 401(k), you’ll pay taxes now but enjoy tax-free withdrawals during retirement.
Most companies offer an employee match, which is essentially an employer contribution that matches your contribution up to a certain percentage of your income (3%-5% is average). If you have it, it is essentially free money and an incredible benefit. To get your employer match at least invest the maximum required.
When you’ve considered these factors and made your decision, it’s time to do the investing. Online brokers are a common way to trade because they provide platforms and tools to aid in investing but aren’t nearly as expensive as traditional brokerage accounts.
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Online management services such as Wealthfront, Betterment, and Future Advisors are another resource for young investors.