How to Invest Money Wisely – Where to invest money? just like it is important to saving money, one must know where to invest your hard-earned money. Even though the world now has lot many companies that now just want to deal with business entities, there are still few companies that gives the small people a chance to invest their money in.
If you are not sure of places you can invest your money, here are the best ways you can invest your money today so as not to regret.
Table of Contents
Your style – How much time do you want to put into investing your money?
The investing world has two major camps when it comes to the ways to invest money: active investing and passive investing. We believe both styles have merit, as long as you focus on the long term and aren’t just looking for short-term gains. But your lifestyle, budget, risk tolerance, and interests might give you a preference for one type.
Active investing means taking time to research investments yourself and constructing and maintaining your portfolio on your own. If you plan to buy and sell individual stocks through an online broker, you’re planning to be an active investor. To successfully be an active investor, you’ll need three things:
- Time: Active investing requires lots of homework. You’ll need to research investment opportunities, conduct some basic analysis, and keep up with your investments after you buy them.
- Knowledge: All the time in the world won’t help if you don’t know how to analyze investments and properly research stocks. You should at least be familiar with some of the basics of how to analyze stocks before you invest in them.
- Desire: Many people simply don’t want to spend hours on their investments. And since passive investments have historically produced strong returns, there’s absolutely nothing wrong with this approach. Active investing certainly has the potential for superior returns, but you have to want to spend the time to get it right.
On the other hand, passive investing is the equivalent of putting an airplane on autopilot versus flying it manually. You’ll still get good results over the long run, and the effort required is far less. In a nutshell, passive investing involves putting your money to work in investment vehicles where someone else is doing the hard work — mutual fund investing is an example of this strategy. Or you could use a hybrid approach. For example, you could hire a financial or investment advisor — or use a robo-advisor to construct and implement an investment strategy on your behalf.
Passive investing
More simplicity, more stability, more predictability
- Hands-off approach
- Moderate returns
- Tax advantages
Active investing
More work, more risk, more potential reward
- You do the investing yourself (or through a portfolio manager)
- Lots of research
- Potential for huge, life-changing returns
Start investing as soon as you begin earning.
One of the most important factors in how much wealth you can accumulate depends on when you start investing. There’s no better example of how the proverbial early bird gets them worm than with investing.
Starting early allows your money to compound and grow exponentially over time — even if you don’t have much to invest.
Compare these 2 investors, Jessica and Brad, who set aside the same amount of money each month and get the same average annual return on their investments:
Jessica
- Begins investing at age 35 and stops at age 65
- Invests $200 a month
- Gets an average return of 8%
- Ends up with just under $300,000
Brad
- Begins investing at age 25 and stops at age 65
- Invests $200 a month
- Gets an average return of 8%
- Ends up with just under $700,000
Because Brad got a 10-year head start, he has $400,000 more to spend in retirement than Jessica! But the difference in the amount Brad contributed was only $24,000 ($200 x 12 months x 10 years).
So never forget to start investing as early as possible. It’s a huge mistake to believe that you don’t earn enough to invest now and will catch up later. If you wait for a someday raise, bonus, or windfall, you’re burning precious time.
Neglecting to invest even small amounts today will cost you in the long run. The earlier you start saving and investing, the more financial security and wealth you’ll have. Please remember that you’re never too young to begin planning for your future.
But what if you didn’t get a head start on investing and now you’re worried about running out of time? You’ve got to just dive in and get started. Most retirement accounts allow for additional catch-up contributions to help you save more in the years leading up to retirement, which I’ll cover in a moment.
Your budget – How much money do you have to invest?
You may think you need a large sum of money to start a portfolio, but you can begin investing with $100. We also have great ideas for investing $1,000. The amount of money you’re starting with isn’t the most important thing — it’s making sure you’re financially ready to invest and that you’re investing money frequently over time.
One important step to take before investing is to establish an emergency fund. This is cash set aside in a form that makes it available for quick withdrawal. All investments, whether stocks, mutual funds, or real estate, have some level of risk, and you never want to find yourself forced to divest (or sell) these investments in a time of need. The emergency fund is your safety net to avoid this.
Most financial planners suggest an ideal amount for an emergency fund is enough to cover six months’ worth of expenses. While this is certainly a good target, you don’t need this much set aside before you can invest — the point is that you just don’t want to have to sell your investments every time you get a flat tire or have some other unforeseen expense pop up.
It’s also a smart idea to get rid of any high-interest debt (like credit cards) before starting to invest. Think of it this way — the stock market has historically produced returns of 9%-10% annually over long periods. If you invest your money at these types of returns and simultaneously pay 16%, 18%, or higher APRs to your creditors, you’re putting yourself in a position to lose money over the long run.
The Cookie Jar Method
Often used only in the context of blue-collar workers, the cookie jar method is an effective method for financial planning. In essence, it is a method of investing that allows you to save and invest in multiple buckets that are earmarked for different purposes.
Think of it from the perspective of a child saving up enough pennies in a jar from their pocket money to buy their favorite chocolate. An adult version of this would mean using high yielding online savings accounts or fixed deposits that are reserved for specific expenses. This seemingly child-like method is surprisingly effective as a first step towards allocation of funds and the management of expenses.
Use automation to stay disciplined.
Because it’s so easy to procrastinate saving and investing, the best strategy is to automate it. This is a simple, but tried and tested, way to build wealth. It’s why workplace plans like a 401k work; the contributions come from automatic payroll deductions.
Automation works because it anticipates that you could easily go off the financial rails and be tempted to spend money that you shouldn’t. To be successful, you must be realistic about ways you could slip up and then create solutions that force you to maintain good habits.
Have money automatically transferred from your paycheck or bank account into a savings or investment account every single month. When you set up consistent, automatic deposits, you put money aside before you see it or get tempted to spend it. It’s a barrier you set up that allows you to outsmart yourself so you manage money wisely.
Putting your financial future on autopilot is truly the best way to simplify your life and slowly get rich.
Your risk tolerance – How much financial risk are you willing to take?
Not all investments are successful. Each type of investment has its own level of risk — but this risk is often correlated with returns. It’s important to find a balance between maximizing the returns on your money and finding a risk level you are comfortable with. For example, bonds offer predictable returns with very low risk, but they also yield relatively low returns of around 2-3%. By contrast, stock returns can vary widely depending on the company and time frame, but the whole stock market on average returns almost 10% per year.
Even within the broad categories of stocks and bonds, there can be huge differences in risk. For example, a Treasury bond or AAA-rated corporate bond is a very low -risk investment, but these will likely have relatively low interest rates. Savings accounts represent an even lower risk, but offer a lower reward. On the other hand, a high-yield bond can produce greater income but will come with a greater risk of default. In the world of stocks, the difference in risk between blue-chip stocks like Apple (NASDAQ: AAPL) and penny stocks is enormous.
One good solution for beginners is using a robo-advisor to formulate an investment plan that meets your risk tolerance and financial goals. In a nutshell, a robo-advisor is a service offered by a brokerage that will construct and maintain a portfolio of stock- and bond-based index funds designed to maximize your return potential while keeping your risk level appropriate for your needs.
Consider Algorithm-based Advisors
Taking financial advice from algorithm-based apps and online platforms that are devoid of any human element may seem odd and unconvincing at first. However, robo-advisors use algorithms to draw-up detailed profiles of investors and then suggest personalized investment solutions. With the help of technologies such as artificial intelligence and deep learning, robo-advisors work to understand and eventually predict investor’s financial goals, preferences and determine risk.
Automated investment advice is a field that will gradually disrupt and improve the financial advisory space due to the high level of personalisation it offers. Also, they aren’t complicated to use and even novices can invest with the help of robo-advisors. They come in the form of inexpensive and user-friendly apps, and require slightly lower investment minimums than traditional investment firms. It is advisable to invest your money in a highly-diversified and low-cost portfolio consisting of good stocks and bonds.
Consider Algorithm-based Advisors
Taking financial advice from algorithm-based apps and online platforms that are devoid of any human element may seem odd and unconvincing at first. However, robo-advisors use algorithms to draw-up detailed profiles of investors and then suggest personalized investment solutions. With the help of technologies such as artificial intelligence and deep learning, robo-advisors work to understand and eventually predict investor’s financial goals, preferences and determine risk.
Automated investment advice is a field that will gradually disrupt and improve the financial advisory space due to the high level of personalisation it offers. Also, they aren’t complicated to use and even novices can invest with the help of robo-advisors. They come in the form of inexpensive and user-friendly apps, and require slightly lower investment minimums than traditional investment firms. It is advisable to invest your money in a highly-diversified and low-cost portfolio consisting of good stocks and bonds.
Understand Which Type of Investor You Are
Before you begin investing, you need to know how you want to invest. You can hire a hedge fund manager or get your feet wet by passively investing in index funds through a robo advisor.
There are generally three types of investing styles.
DIY Investing
DIY or “Do-It-Yourself” investing is a more hands-on approach. It requires you to do all of the research yourself. You will also have to keep track of your stocks regularly, which can be time-consuming. On the other hand, it means you have total control over what is in your portfolio.
If you prefer to invest yourself, then find a stock broker and open a brokerage account. Once you have an account open, you can begin buying and selling individual stocks on your own. You can also invest in an index fund, which tracks a stock index like the S&P 500. Looking for a broker? Here we’ve gathered the best investment apps for 2021.
Passive Investing
This “set-it-and-forget-it” approach to investing is for people who don’t have the time or interest to do all the heavy lifting themselves. There are a lot of options out there if you want to hire someone to invest for you. You can invest in mutual funds or invest in exchange-traded funds (ETFs) through a robo advisor.
If you’d rather not be too involved in the investing process, then you’ll probably prefer using a robo advisor. These platforms do all the work for you, once you’ve answered a few questions about your investing goals and how much risk you want to take. Betterment is the biggest robo-investing platform in the industry, and it’s a good starting point for beginning investors and a useful platform for more experienced investors.
Using a Stock Advisor
The third style is a cross between DIY and passive investing. Hiring a stock advisor or signing up for stock picking services such as Morningstar or the Motley Fool can be a way to pick and choose stock on your own while getting the insight of an expert. You will still need to have your own broker account, but you can leave the time-consuming research to others.
Conclusion
For anyone beginning their investment journey, and wanting to know how and where to invest money wisely, it can be a confusing and overwhelming task. People tend to focus on the big names such as Apple, Amazon, Facebook, and Google when it comes to investing in particular companies. Although these companies do pay dividends, it is important that you realize your capital is at risk.