Until recently, maybe the only time you thought about the word “investment” was in your relationship. But if you’re slowly starting to realize that a simple savings account isn’t gonna bring that rich life, here’s a download on how you can consider investing your money.
Investing can be simple. Once you begin, you can sit back and hopefully earn money while binge watching that shameful TV show. (Remember to take snack breaks and check in on those investments.)
Monetary investments typically earn interest or appreciate over time. What’s even better is compound interest, which is when your investment earns interest over a specific time period. When that time period ends and a new one starts, your investment starts to gain interest on the gross figure (which includes the interest you previously earned).1 Think of it as interest upon interest.
Another concept is capital gain, which is the profit from the sale of your investment or property. The simplest example of this is to buy a house and then sell it for a higher price.2
Think of investing in two ways: safe investments and wealth-building investments. A safe investment is something you want for the short term, like a certificate of deposit (CD) lasting a few years. Wealth-building investments should be more about the long term, like a retirement IRA that you invest in until you’re old.3
There are a lot of ways to invest. Here’s a quick overview of a few:
- Bonds – Loans to organizations or governments in exchange for payments of interest over time4
- Stocks – Shares of a large company, meaning you own part of that company until you choose to sell, ideally at a higher price
- Investment Funds – A professionally managed program funded by shareholders that trades in diversified holdings
- Annuities – A set up between you and an insurance company, in which the company pays you periodically
- College Savings – Special savings plans or accounts specifically for college that are ideally tax-free and earn interest
- Retirement – Tax-advantaged accounts that save specifically for retrieval upon retirement, like an IRA or 401(k)
- Real Estate – An owned (or mortgaged) home, for example, typically increases in value over time until you’re ready to sell
- Small Business – A stake in ownership, where you provide money upfront in exchange for a percentage of the profits
Getting started can be more overwhelming than trying to read every tweet in your feed. Here are some general guidelines that may help ease the process:
- Start saving. For instance, it’s recommended by some to invest around 10-15% of your income for retirement starting in your 20s.
- Consider the costs. Investments like real estate require money beyond the purchase price. You also have to consider property taxes and maintenance costs.
- Diversify. You want investments in different markets. That way, even if one suffers, the others might not be as greatly affected.
- Be patient. Short term investments can still take years, and long term investments can take decades before you’re able to cash out on them.
DOS AND DON’TS
Some other things to remember:
Utilize tax-deductible options. For instance, you can often contribute to 401(k) accounts directly from your paycheck before taxes are taken out.
Carve out time to manage your money. Your efforts will likely be time consuming.
Consider professional financial guidance. There are people who do this for a living. Just make sure they’re credible, and ask how they’ll be held accountable should something go wrong.
Still with us? It’s okay to be overwhelmed at first. Remember to breathe. Relax and commit to learning more, because this is your future we’re talking about. And you’re worth it.
KEYS TO INVESTING
- Try investing 10-15% of your income for retirement
- Contribute to your 401(k)
- Diversify investments to help manage risks
- Investments appreciate over time, so be patient
This post originally appeared as part of CENTURY 21's Adulting 101 campaign.