Hear us out. As a young adult, you get thrown a ton of advice and a lot of it has to do with your finances. Why pay attention to investing now when retirement is decades away?
We’re going to cut through the confusing talk. Read this guide to learn why now is the best time to start investing.
When You’re Young Investments Multiply Over Time
Not only does your money have a longer period of time to grow when you invest when you’re younger, but the gains (earnings) that you make early on start producing their own gains, resulting in money that grows quickly. This concept of "compounding gains" is what gives credence to the idea of investing early in life.
Simply understanding the importance of investing early in life isn’t enough, though. You have to understand how to invest. That’s where our Definitive Guide to Investing Money for Beginners enters the picture. You’ll learn about investing from the ground up, which hopefully will convince you to invest the right way and start taking advantage of compound gains.
Ultimate List of the Web’s Best Advice for Beginners
Understanding investing can be a challenge, but you don’t have to go it alone. Plenty of people select a broker who can purchase stocks or mutual funds on their behalf or manage the investments for them. Some go the other direction and choose to learn about investing on their own so they can manage their money themselves.
This guide can help you with both ends of the investing spectrum, as well as other options in between, focusing on the following topics:
Risks of Investing
Budgeting for Investing
Investing Vs. Gambling
Investing Vs. Saving
Long-Term Investment Goals
Selecting a Brokerage
Selecting Investments
Understanding 401(k) Investing
Understanding IRA Investing
Understanding Other Types of Investment Accounts
Risks of Investing
It’s best to discuss this truth upfront: investments can be risky. They can go down in value. You could even lose all the money you put into your investment.
Sounds scary? Yes, but there are ways to keep the risk low.
You can limit your investments to only the safest ones out there or you can spread out them out into a mix of low-risk and high-risk investments (remember, safer investments typically won’t offer the potential rate of return that a higher risk investment provides).
Just as with many things in life, you sometimes have to take more risk to achieve higher goals. They key is to arm yourself with as much as information as you can about risk and your tolerance of it.
Realities of investment risk – FINRA
Types of investing risk – Wellington Management
Five things to know about investment risk – U.S. News
Investment risk tolerance quiz – Rutgers University
Budgeting for Investing
When you’re ready to start investing, make a plan and budget for any investments you plan to make, the same way as you (should) budget for the electric bill and groceries.
Think of an investment just like you would any other type of expense — and not something you can do when you have a little extra money at the end of the month. Even making a small amount of room in your budget for a regular investment can make a difference, especially if you’re able to start at a young age.
Nine ways to invest on a small budget – U.S. News
Investing options for a small budget – The Wall Street Journal
How to invest on a shoestring budget – Investopedia
Start budgeting, reap savings – Today
Investing and money management basics – MetLife
Investing Vs. Gambling
Because of the risk involved in investing, it’s sometimes compared to gambling. And it may feel like gambling at times, especially if an investment takes a dip during a tough day for the markets.
But there is a significant difference, and it’s worth noting: With gambling, you’re making short-term choices, usually on games of chance. Buying stocks at random without doing the research or understanding the trends is gambling. It’s similar to giving the money to a dealer or slot machine, and the risk is all or nothing.
Investing is when you take the time to learn and make smart selections based on long-term needs, not whims or guesses. You can choose among investments that won’t bring you a ton of risk and you make adjustments along the way.
The truth about why we trade – The Wall Street Journal
Sports betting vs. the stock market – CNN
Investing is not the same as gambling – Forbes
Investing versus gambling – Baylor’s Christian Reflection
Three signs you’re gambling, not investing – Yahoo Finance
Investing Vs. Saving
You’ll often see the terms investing and saving used interchangeably, but they are not exactly the same.
Saving is the action of putting aside cash you have earned, usually for shorter-term goals, such as a house down payment or a vacation. You usually have easier and quicker access to your funds (like a savings account). The money stays secure in the account and you can withdraw it whenever you need to.
When planning long-term goals, you’re more likely to be smarter with your money if you invest. Investing is when you put your money into assets (whether that be stocks, metals, or a house) that will hopefully grow over time. There is a certain level of risk involved with investing, but a smart investment could have a far greater rate of return than just saving.
Differences between saving and investing – SEC
Saving vs. investing, is there a difference? – Vanguard
Saving money or investing – Bankrate
Saving money vs. investing money – About Money
Long-Term Investment Goals
By starting your investing when you have a long-term time horizon for allowing your money to grow, you can set yourself up for overcoming the short-term ups and downs that are bound to occur. You’ll be better able to ride out those fluctuations, because you’re invested for the long term.
The downside is your money will be tied up. So do not invest funds that you need for day-to-day expenses or that you may need to use in the next several years. Long-term investing is best used for your retirement, for a young child’s college education, or perhaps for a down payment on a vacation home that you want to purchase a decade from now.
Set a time frame for your financial goals – FINRA
Five principles for long-term investments – TIAA
Setting short-term and long-term goals – Capital One
Calculating investing goals – Charles Schwab
Selecting a Brokerage
When you’re ready to begin investing, you will need a brokerage to set up and hold your investment account. If you want to think of it like using a bank to hold your banking account, you can.
Although some brokerages specialize in certain types of investment accounts, most of them offer any kind of account or investment transaction you could ever need. Full-service brokerages offer advice and personalized service, all for a fee, while online brokerages give you nearly full control, providing limited help. Some banks and insurance agencies are also licensed as brokerages. With a 401(k) account, your company usually will have selected the brokerage for you.
Selecting and working with a broker – Texas A&M University
Choosing an investment professional – FINRA
Selecting brokerage services that fit your needs – Washington State Dept. of Financial Institutions
Picking your first broker – Investopedia
New investor’s guide to brokers – About Money
Selecting Investments
You’ve chosen your brokerage…now what?
Get the terminology down before you proceed.
A stock is a direct investment in a company.
A mutual fund is a collection of stocks from companies that are related, allowing you to diversify your investment across several or hundreds of companies, reducing risk.
An ETF (exchange-traded fund) is similar to a mutual fund in that it holds a collection of stocks, but it trades like an individual stock. (Mutual funds have limitations on how and when they can be traded.)
You also can invest in bonds, money market accounts, savings bonds, annuities, CDs, real estate, precious metals, and other vehicles within certain investment accounts.
For a beginner, we recommend investing in ETFs and mutual funds, with a small percentage in stocks.
What are my investment options? – Duke University
Investment types and terminology – Wells Fargo
How to select investments – U.S. News
Investment types explained – Charles Schwab
Understanding 401(k) Investing
Many young adults are introduced to the world of investing with a 401(k) account at work. This type of account helps you save for retirement by automatically setting aside money from your paycheck into a retirement account.
This is a great way to invest for several reasons, but primarily because the money is not taxed until you take it out of the 401(k) account, which should be when you are retired and in a lower tax bracket (you’ll pay more in taxes and a penalty if you withdraw the funds earlier).
Many companies will match a percentage of what you contribute as well. As this match is almost like “free” money, taking advantage of it is a smart idea. Keep in mind that 401(k) accounts do have limitations on how you can access the money and on how much you can contribute each year.
Starting to invest with 401(k)s – CNN Money
401(k) investing basics – FINRA
Tools to better understand your 401(k) – U.S. News
What is a 401(k)? – The Wall Street Journal
What you should know about your retirement plan – U.S. Dept. of Labor
Understanding IRA Investing
Many people supplement their 401(k) earnings with IRAs (Individual Retirement Accounts), which also come with tax benefits. You can hold an IRA at the same time you have a 401(k), but there are limitations on the amount you can contribute each year and how much annual income you can have to qualify to make an IRA contribution.
Different types of IRAs have different benefits. Roth IRAs tax the contribution up front but don’t tax the gains at withdrawal. A traditional IRA doesn’t tax the money you put in but taxes the earnings you made over time when you withdraw your funds. If you change jobs and must take your 401(k) account proceeds with you, you can use a rollover IRA to maintain the tax breaks of the 401(k).
Understanding IRAs – Charles Schwab
What is an IRA? – Fidelity
Basics of an IRA – CNN Money
Seven reasons to invest in an IRA – U.S. News
IRA center – Wells Fargo
Understanding Other Types of Investment Accounts
Some people need investment accounts other than the popular 401(k) or IRA accounts. If you’re self-employed, you can use an SEP-IRA in lieu of a 401(k), for example, to obtain tax breaks.
Those saving for college for a child will want to consider a 529 college savings plan, which offers tax breaks. You can contribute to an account for a minor, avoiding taxes on what you earn, as long as your contribution amounts remain below the federal gift tax limits. If you want to invest money over the amount you’re allowed per year, you can look into investing in a general brokerage account. Just be aware that you will have to pay taxes on any gains you earn every April 15.
Investment account types – Vanguard
Types of accounts and investments – Fidelity
Account types – Scotttrade
Benefits of non-retirement investment accounts – T. Rowe Price
There’s no pressure to start investing while you’re getting up to speed on the terms and what they all mean. Take your time to truly understand what you’re about to do. We’ve helped steer you in the right direction with this definitive guide to investing.
However, keep in mind that the clock is ticking; make the most of the time you have now, when the money you have now can work its hardest—which is when you’re young.
How to Invest Money: The Definitive Guide appeared first on CreditDonkey