How to Start Investing Your Money

Originally Published on LearnVest| Investing can help you reach financial goals that you may have — and the sooner you get started, the more time your money will have to grow.


Wouldn’t it be nice if life came with step-by-step instructions? Now it does! We break down how to master pretty much any money-related task right here in our “How to Do Everything” series. Whatever the goal, we’ll cover the steps to take and things to know to reach your next financial milestone, all in one place.
Here, we offer an introduction to how you can get started investing.
If you’re like a lot of people, the idea of investing can sound appealing and intimidating at the same time. On the one hand, you’ve heard that it can be a good way to grow your money. On the other, the ups and downs of the markets may make you nervous about losing money. On top of all that, how do you even start, even if you wanted to invest?
This can all feel overwhelming, so we’re here to help. While there are risks, investing can also help you reach financial goals that you may have — and the sooner you get started, the more time your money will have to grow.
Ready to get started? Here’s what you should know.

1. Understand the Risks

Investing may help your money grow faster than if you put it in a checking or savings account, but there is always a degree of risk. The value of stocks, bonds, mutual funds and other types of investments can fluctuate from day to day based on events you can neither predict nor control. So, when you do start to invest, it’s important to think about how much you can stomach the ups and downs, also known as your risk tolerance.

2. Know Your Goals and Timeline

What do you want to do with your money, and when? Create a list of the financial goals you’re trying to reach, whether it’s a home you want to buy in five years or the retirement you want to live in forty years. Knowing how long you have until you’ll need your money (known as your time horizon), along with your risk tolerance, can help you determine how much risk (or not) to take in your portfolio when choosing investments. Generally, the longer your time horizon, the more risk you may be willing to take. As you get closer to the time when you actually need your money, you may want to make some adjustments and dial back your risk (more on that later). That’s because the further away your goal, the better your chance of recovering from any losses you might experience along the way. For that reason, it may be better to invest for a goal that’s at least five years away.

3. Get Familiar With the Asset Classes

Investing isn’t just about buying stocks from companies. There are many types of investments you can choose from, but the three most common are stocks, bonds, and cash or cash alternatives.
  • Stocks are also known as equities or shares. When you buy a stock you become a shareholder in the company and actually own a portion of it. As the value of the company increases or decreases, so does the value of your stock.
  • Bonds are investments in debt that are issued by governments or businesses. When you buy a bond, you’re essentially lending the bond issuer money and getting paid back periodically in interest at a fixed rate. You can get back the loaned amount if you decide to hold the bond until what’s known as it’s maturity date, but you can also sell it before the maturity date. Bond prices tend to move in the opposite direction of interest rates — that is, when interest rates rise, bond prices typically fall, and vice versa.
  • Cash or cash alternatives include not only the cash you hold, but also short-term investments that you can easily convert to cash, like a certificate of deposit or money-market account.
Each type of asset has its own pros and cons. Stocks, for instance, are considered riskier than bonds because they tend to be more volatile, but they also offer potential for a higher return. Bonds aren’t without risks either. For instance, the issuer of a bond could default and not be able to pay back its obligations, or a bond’s interest rate may not be high enough to keep up with inflation. Generally speaking though, bonds tend to have lower risk than stocks, but also a lower return. These factors should figure into your decision when choosing investments.
Now that you know the asset classes, you don’t necessarily have to go find individual stocks and bonds to buy. You can also invest in them via funds, which are investments that hold a collection of various stocks and bonds. For instance, index funds hold investments that often mirror what’s in a stock market index like the S&P 500 or Dow Jones industrial average. Target-date funds automatically adjust their ratio of stocks and bonds based on a target date on which you’re trying to access your money (such as the year you plan to retire). There are many types of funds to choose from.

4. Decide What Type of Account to Use

There are a number of accounts you can use to hold your investments. Because investment accounts can vary in terms of fees, tax implications and contribution limits, it’s important to choose the right type of account for your specific investment goal.
There are typically two types of investment accounts: qualified and non-qualified. Qualified accounts qualify for special tax treatment and are typically for retirement. Because these accounts come with special tax treatment, there are restrictions on how you can use them. Non-qualified accounts get no special tax treatment and therefore have fewer restrictions.
  • 401(k)s are qualified retirement accounts offered through your employer, which means you can only contribute to one if your workplace offers them. Your employer may also match part of your contribution, which means free money toward retirement for you. The most you can contribute to a 401(k) in 2018 is $18,500 (that’s your limit; the amount your employer puts in doesn’t count toward this). You typically can’t take money out of the account without paying a penalty until you’re 59½.
  • IRAs are similar to 401(k)s, except you open them on your own, so there’s no company match. IRAs have a much lower contribution limit at $5,500. They have similar rules about when you can take money out.
  • Roth or traditional? Both 401(k)s and IRAs can come in two “flavors,” traditional and Roth. With traditional accounts, you don’t pay any tax on your contributions today, which lowers your taxable income. Your money will grow tax-deferred, which means you won’t pay taxes on it until you withdraw money in retirement. With Roth accounts, you contribute money that you’ve already paid taxes on, which means you won’t have to pay taxes when you withdraw in retirement. One thing to be aware of: Roth accounts have income restrictions for who can contribute that are determined by the IRS.
If you’re investing for a goal other than retirement, you’ll likely want to open a non-qualified brokerage account, a type of account that you hold with a financial institution that lets you trade investments. Here are some things to know about brokerages:
  • A full-service brokerage provides a variety of services other than just buying and selling investments, such as market research, tax advice or retirement planning. Because of these extras, full-service brokerages often charge investors higher fees or commissions than discount brokerages, which only execute trades.
  • Tax implications for brokerage accounts are different from retirement accounts. If you sell any investments at a gain, you’ll have to pay a capital gains tax that will be based on your tax bracket and how long you’ve held the investments. Short-term gains on investments you’ve held a year or less are taxed at your ordinary income level, but long-term gains are taxed between 15% and 20%, depending on your tax bracket. If you lose money when you sell an investment it’s called a capital loss, and you may be able to take a tax deduction on that.
  • Many brokerages require you to open the account with a minimum amount and may charge different types of fees. For instance, some may charge you per trade on top of whatever administrative fees you’d have to pay to maintain your account.

5. Choose Your Investments

The financial-services company that you’re investing through will offer you a bunch of different options for stocks, bonds or funds to invest in. This is where you’ll take your risk tolerance, time horizon and goals into account to choose the investments that make sense for your situation. For instance, if your goal is many years away and you’re comfortable with risk, you may want to assign more of your dollars to more-aggressive stocks or funds that hold stocks. If you’re not comfortable with risk or your goal is just a few years away, you might consider assigning more dollars to less-aggressive bonds.
How you choose to divvy up your assets between stocks, bonds, cash or cash alternatives, and other types of investments is called asset allocation; an example is 60% stocks, 30% bonds and 10% cash. Your allocation can change over time based on your goal. For example, if you’re saving for retirement you may decide to shift some money from stocks to bonds over time as you get closer to retirement age. One thing to keep in mind is that diversification — or investing in many different types of assets — can help spread out your risk. So it’s a good idea not to put all your money into one type of investment.
Your asset allocation may also shift because of what’s happening in the markets that can affect the value of your investments. So that 60/30/10 ratio may become 70/20/10 if, say, there were a big run-up on stock prices. If you want to maintain your original ratio, that may mean selling some stocks off and buying more bonds. This is called rebalancing your portfolio and requires checking in on your investments once or twice a year to make sure they are still in line with your preferences.
The bottom line: Although there are risks that come with investing your money, there is also the potential for rewards — namely, helping you grow your money so you can meet your financial goals faster than if you had, say, stashed money away in a basic savings account. So don’t be afraid to get started, even if it’s just putting away 1% of your income into a 401(k) — your future self will thank you.
No investment strategy can guarantee a profit or protect against loss. All investing carries some risk, including loss of principal invested.
Past performance is no guarantee of future results. Examples are for illustrative purposes only and not indicative of any investment.
Originally Published on LearnVest| Investing can help you reach financial goals that you may have — and the sooner you get started, the more time your money will have to grow.