Being able to properly manage your finances comes down to two key directions: short-term and long-term. In the short term, creating financial stability requires you to exercise full control over your money, ensuring that you can pay your bills, expenses, etc. without difficulty each month. In the long term, you can help create a better future for yourself and your dependents by investing.
There’s a common yet false perception that investing is only for the rich and that ordinary people shouldn’t concern themselves with using their funds as investments. Nothing could be further from the truth, as everyone can stand to benefit from investing. The good news is that there are plenty of investments for beginners; you just need to learn where to start.
Investing is important, and if you’ve already taken the first step toward improving your financial situation by managing your money with a budgeting app like PocketGuard, you’re ready for the next stage. This article will help you start by covering the crucial aspects of what exactly investing is and how to approach it, along with some of the best investments you can make as a beginner. In no time at all, you’ll be able to create your very own investment portfolio.
What is Investing?
Investing involves using personal funds and money to acquire assets with the expectation that their value will appreciate over time. These assets can include tangible items like real estate, art, or gold coins, or they may take the form of financial assets such as company shares or bonds issued by corporations (referred to as “corporate bonds”) or governments (referred to as “government bonds”). The commonality among these assets lies in their potential to yield capital gains or income for the investor.
Investing differs from conventional saving as it involves using your money to generate returns, with the concurrent risk (which can be low or mitigated) that your investments fail. Investing is also distinct from speculation, where funds are not actively employed but wagered on short-term price fluctuations. As such, investments offer a middle ground between relatively low-risk/low-return savings and higher-risk/possibly higher-return speculation.
Investing earmarks your money for the future and actively leverages it to work on your behalf, creating what is referred to as passive income. This requires you to make strategic choices, to allocate resources to assets or projects that are anticipated to appreciate in value over an extended period of time.
What are the Benefits of Investing?
Income
As we’ve already mentioned investing can consistently provide you with passive income. This can come in various forms, including dividends from shares, coupons from bonds, and other sources. This income can be used as cash or re-invested to further increase your returns.
Inflation Proofing
Inflation has increased significantly over the last two years, which has seriously affected the viability of savings accounts by reducing the actual value of money. By investing, you can help to prove your financial security, as they offer higher returns than saving, allowing you to use your funds to get ahead of inflation.
Stock Market Consistency
The stock market has historically outpaced inflation, providing not only capital protection but also consistent potential for making your money work for you. With long-term returns for the S&P 500 index averaging around 10% per year, investing in stocks offers a promising avenue for sustained financial growth.
Flexibility
Investing comes in many shapes and sizes, and you have a huge range of potential options to choose from. This means that you can enjoy considerable flexibility as a result, creating an investment portfolio that can adapt to changing circumstances rapidly while also providing your money with stability.
Best Practices for Investing Beginners
Investing is a great way to ensure your long-term financial security, but it’s not without risks. That’s why you should have a plan for your investment portfolio so that you’re not wasting your money on poor investments. It’s a good idea for you to engage with professional experts, especially if you’re amongst the beginners, and you should also adhere to the following best practices.
1) Never invest more than you’re willing to lose. If you invest everything and they fail you could be left with nothing.
2) Always do your research about new potential investments. If it seems too good to be true, don’t invest your money.
3) Diversifying your investing portfolio will allow you to spread your risk and protect your funds from loss.
4) Markets will inevitably rise and fall. When they do, don’t panic, remain calm, and remember to take a long-term view with your investing.
5) Start investing a small, set amount every month to maintain consistency. Then consider increasing that amount of money slowly.
6) Save up emergency savings funds before you start investing. This is a good practice in any case and will help to protect you if your investments fail.
What Are the Best Investments for Beginners?
There are a lot of options available to you as you start your investing journey, and ultimately, the choice is yours as to where you put your money. However, we do recommend that you take it slow and steady in the early stages by focusing on shares, funds, etc. that have a low risk of failure. We spoke to several leading investing experts about how to make your money work in a way that reduces risk to the lowest possible level.
Roth IRA
A Roth IRA is a tax-advantaged individual retirement account that’s based on funds and contributions made with after-tax dollars. Withdrawals are tax-free after the age of 59½, contingent on the account being open for a minimum of five years. The primary objective of a Roth IRA account is to earmark funds for retirement and is unusual in that it is not classified solely as an investment.
A Roth IRA can be an excellent investing choice in general thanks to the advantages of tax-free withdrawals. However, it’s particularly beneficial (and most well-known) for those investing in a more comfortable retirement. Before you begin investing in a Roth IRA, you need to verify whether you are eligible by determining your modified adjusted gross income (MAGI).
There are also several rules about how you can use your Roth IRA. In 2024 for example, an individual’s maximum annual contribution to a Roth IRA is $7,000, while those aged 50 and older have a higher limit of $8,000 for their annual investment. It’s an excellent investment for long-term financial stability and a good start for beginners, just make sure you’re fully eligible.
Certificates of Deposit
Certificates of Deposit (CDs) are used to boost interest on savings, albeit with a longer commitment than a high-yield savings account. Available for varying durations, such as six months to five years, CDs restrict access to funds before maturity, incurring penalties for early withdrawals. As a result, they have a low-risk profile, and in the United States, federally insured banks provide insurance coverage of up to $250,000 per depositor.
Most CDs have a fixed interest rate, providing a predetermined return at the end of the term. However, variable-rate CDs exist, offering the potential for higher returns if interest rates increase. While a fixed-rate CD provides more stability to those investing their money, it may limit gains if rates rise after the investment is locked in, so choosing between each option depends on your individual preferences and market expectations.
Once your CD is established and funded, the bank or credit union will handle it like most other deposit accounts. You can expect regular statement periods—either monthly or quarterly—with the choice of paper or electronic statements. Interest payments, usually monthly or quarterly, will be deposited into your CD balance, contributing compound interest over time.
Mutual Funds
Mutual funds allow you to access a diversified portfolio of stocks, bonds, or other assets that would be difficult to assemble independently. Generally speaking, mutual funds mirror major stock indexes like the S&P 500, which is composed of 500 major American companies known for their relative stability. As such, mutual funds provide a high degree of flexibility and risk safety.
There is always risk in investing but mutual funds go a long way toward mitigating the dangers for beginners. You’re not reliant on a single investment that could fail if market conditions worsen sharply, and there are many investments available to beginners that could be included in a mutual fund. What is more, the composition of a mutual fund can change over time to match your specific investing requirements.
When you start among the beginners with a mutual fund, you can place a higher emphasis on stocks, with their higher risk and substantial long-term earning potential. As you get older and closer to retirement, you can transition your fund portfolio to include more bonds, which have lower risk and more stability for consistent retirement income. As such mutual funds are a dynamic approach and a great choice for beginners to investing.
ETFs
Exchange-traded funds (ETFs) and mutual funds have some similarities in that they represent a portfolio of various types of investments; however, the key difference is that ETFs don’t have minimum investing requirements. This means that investors can start out with a single share plus associated fees or commissions. This low barrier to entry for your money means that almost anyone of any income level can get started with ETFs.
ETFs are a particularly good option for new investors who are particularly interested in shares but don’t have a lot of experience or find individual stocks to be overwhelming. By using an ETF, beginners can start making automatic investments in stock shares by tracking market indices or groups of stocks. Some examples of these include the aforementioned S&P 500 as well as the FTSE 100 in the United Kingdom.
While ETFs simplify investing for beginners, they have a higher degree of risk than mutual funds, so you do need to be cautious. For example, you could hold a wide range of shares in different companies, but if these entities are all operating in the same industry, say, tech companies, a large market shift could put your investments at risk. As such, ETFs are ideal for those who want to take a higher degree of risk over the short term.
Individual Stocks
Investing in individual stocks is a riskier option and is an option for what could be described as an advanced beginner’s option. Stocks represent partial ownership in a real business and tie your fortune to the company’s performance over time. It’s probably the most well-known example of investing in popular consciousness, and while the risks are high, the rewards can be high too.
If you’re still among the beginners when it comes to investing, we highly recommend that you take a long-term view with stock purchases. That’s because stocks are priced on every second day of trading, which means that there’s an attraction to adopting a short-term trading mentality where you use your money to be on price fluctuations. While it is possible to make money doing this, there’s also a lot of risk involved.
We recommend that you take an alternative approach and base your stock trading strategy on a five-year plan. This will help to mitigate the risk of price fluctuations, and you’ll still be able to enjoy high rates of return on your money if the shares increase in price. Remember, the average stock market return has been about 10% per year for nearly the last century.
Invest in Your Future Today
Investing your money in stocks, funds, certificates, etc will help to ensure that your future is financially stable. We hope this guide to investing for beginners has been helpful, and there are other articles on our blog you can read to learn more.
There is also one other step you can take towards investing in better finances for you and your loved ones – That’s using PocketGuard.
Start by signing up for a free PcoketGuard today to protect and manage your money, ensuring you are ready to start investing your funds. With your day-to-day finances under your control, you’ll be ready to become one of the many beginners looking to improve their financial future. Send us a message via our contact form, and one of our team members will get back to you with more information.
Dec 26, 2023
