She paid the bills and saved the usual amount in her savings account, and she still has money left over. Although it would be easy to add that cash to your savings for short-term goals, now may be the time to consider investing for longer-term goals gold ira company, buying individual stocks or bonds, mutual fund stocks, or other investments.
Although saving is important, adding investments to your financial strategy (in addition to your retirement accounts) could help you reach an important future goal like buying a home, paying for your children’s education, or taking time to travel. Investing can help you achieve your longer-term goals, yet many people hesitate before getting started.
It’s okay to start small
Maybe you think you need a lot of money to invest, and you have other important financial priorities like maintaining retirement contributions and building an emergency fund that will cover at least three months of basic expenses. Other needs include a plan to pay off credit card balances and purchase life insurance, especially if you are the major breadwinner in your family.
Still, it might be counterproductive to wait to invest in longer-term goals until these needs are fully met. “If you delay longer-term goals until you fill out your emergency fund or pay off all high-interest debt, you could miss out on huge opportunities for potential growth,” says Chris Vale, Merrill’s senior vice president of products and solutions.
Most people have the ability to accomplish several goals at once, which means you don’t have to choose between saving and investing. Know the differences between these and use them appropriately according to your needs. If progress toward your short-term goals allows, you may be able to invest a small amount, as low as $25 to $50 per month.
A chance to grow your money
A key investment goal is to have the ability to keep up with the cost of living. If you overprotect your money, you could stop earning enough to keep up with inflation, or as prices rise over time.
Let’s say, for example, that you accumulated $1,000 in a savings account. After 10 years, and with an interest rate of 1 percent, you will have almost $1,105. However, if annual inflation is 2.5 percent on average, as it has been recently, you would need a minimum of $1,280 after 10 years just to keep up with rising prices.
On the other hand, investing your $1,000 might give you better results. It is important to know that different types of investments carry different risks. For example, stocks are generally considered to be riskier than bonds, but have traditionally earned higher returns (although past performance is not a guarantee of future results). Investing for 10 years or more gives you some time to perhaps recover from any downturn so you can feel comfortable with a stock invested fund. If you invest your $1,000 in a fund that seeks to track the performance of the stock market, and hypothetically earn a 7 percent annual return, you would have the potential to nearly double your money in a decade, ending up with $1,967.
Of course, there can be no guarantee that you will earn this or any other return on your investments. This is a hypothetical example. Although most savings accounts are insured by the FDIC (Federal Deposit Insurance Corporation) up to a certain amount, there is no such insurance for investments. You need to consider all the possibilities before making the decision to invest.
What stops it?
“Many prefer not to invest because they overestimate the amount of money they think they need to get started,” says Vale. “They may also be concerned about market risk.”
Investing can be intimidating, and there are certain risks. Many conditions can negatively affect the value of your stocks or bonds, such as an unpredictable economy and financial markets. You should also consider your own reaction when investments rise or fall in value. You may be able to manage risk by mixing or diversifying types of investments in your portfolio, but there is no guarantee against loss. That’s why it’s important to know your risk tolerance, time horizon and liquidity needs before making investment decisions.
How to start
Once you’re ready to invest, the next step is choosing how to invest. Now more than ever there are many more ways to invest, and you can be as involved or as little involved in the process as you want. Consider the following approaches:
- Make your own trades. This may be the most direct approach with the lowest fees, but it requires more time to research, track, and rebalance your investments. Many brokerages offer you free trades if you make your own investments, but make sure you understand if there are any fees or commissions before you trade. Some brokerages offer free trades if you maintain a certain balance, but usually charge a specific fee or commission for each transaction. For convenience’s sake, making your own investing decisions can be confusing, especially when you’re just starting out.
- Take advantage of online guidance. If you would like more help finding the right investment mix for you, you may want to consider an online investment program designed to tailor your investments to your needs and personal situation. Here, too, you can find a variety of proposals that simplify things much more. In most cases, you provide information such as your age, how much money you have to invest, when you need it, and how much risk you can tolerate. Then, usually for a fee, a portfolio is tailored to your goals by computer algorithms (also known as automated managers) or by human portfolio managers. In addition to choosing your initial investments,
- Consult an adviser. Some investors choose to consult personal financial advisors who help them select the investments that fit their needs. However, many advisors require a higher asset level than you might have when you start out and typically charge more in fees than an online program, so this may be an option for later when your portfolio grows.
Whichever approach you choose, what really matters is understanding how investing could possibly help you put some of your money to work toward bigger, longer-term goals. If you have a clear idea of your goals, your schedule, and your ability to tolerate risk, you can decide whether investing could be a central part of your overall financial strategy.