First Investments for Beginners and Everyone Else

This post originally appeared on Arrest Your Debt and has been republished with permission.

Finances are a personal topic that very few want to really talk about. Many hold their finances as much in secret as their intimate relationships. However, learning how to invest your money can make a big difference in your financial future.

Let’s take a look at the first investments for beginners you should be doing. We’ll go over each investment step-by-step to ensure that you walk away from reading this with new-found knowledge and viable approaches to get you where you want to go financially.

Start with Your Emergency Savings

You’ve probably heard the term ‘emergency fund‘ so much that you may want to skip right over this section. However, it can be essential to your overall financial well-being.

An emergency savings is the first investment you should consider, no matter what your financial position is.

Let’s face it; life is hard. Having an emergency savings account for you when life throws you a curveball can do wonders for your mental and financial well-being.

Before you start investing in other avenues, be sure you invest in yourself with an emergency fund.

Why Do You Need an Emergency Savings?

Think about it like this for a minute. If your car breaks down and you end up needing $200 in repairs to get it back on the road, you only have a couple of options. You can use your emergency savings fund and get your car back on the road.

Or, you can put it on your credit card and be left spending the next few months or even a year paying back the $200 plus interest fees. It is a no-brainer why having an emergency fund is ideal for any individual, regardless of their age.

Making your emergency savings your beginning investment is a solid plan that makes sense based on the impact debt has on your life. 

How to Set It up Properly

When first setting up this emergency savings account, there are a couple of things you should consider. You’ll want easy access to the money since you’ll be using it for an emergency situation.

However, you don’t want it to be too easy where you end up transferring the money over into your checking account for impulsive spending. An online savings account where you can easily transfer money from your checking account to your savings account is ideal.

How Much Should Be in My Emergency Fund?

Before you start transferring money to your emergency savings, decide on how much is right for you. This is going to change depending on the individual and their living status.

For a young adult just starting, $500 is a good place to start. For a married couple getting ready to grow their family, starting with $2,000 may be perfect. Either way, pick a number that is feasible and realistic for you.

How Do I Quickly Fund the Account?

First, decide how you’re going to fund the account. You may commit to a set number from each paycheck or each month. You may have a lump sum of money from a tax return or birthday that you want to just put into the account to fund it.

Different strategies work for different people. You know yourself the best, so set up a funding method that works best for you. And don’t be afraid to change it if you find yourself struggling to commit to the process.

How Do I Start My First Investment?

Once you get your emergency savings account funded to the number you decided on, it’s time to think about investing. Simple right?

Once you actually sit down to figure out how to invest, you may end up with a blank stare like I had when I first started. Fortunately, investing can be done with many different vehicles.

A few of these include CDS, stocks, and real estate investing.

It’s important to realize that there is no one right vehicle for investing. People have made fortunes with all different types of investment accounts. Some of the richest people on the planet have their money spread out through many different investment plans.

You should be thinking about understanding the various vehicles out there and how each one can potentially benefit you.

You Must Decide on a Funding Strategy

You want to invest, but where is the money coming from? Be sure you know how you’re going to come up with the extra money to invest.

Hopefully, you’ve developed a funding strategy that worked for you when you built up your emergency fund. It would be best if you put together a strategy that works for you since you’ll be saving more money to put into your investments.

While you may be able to invest with as little as $5 or $10, other investments require $100s to $1,000s to get started.

When you have a strategy that works for you, you’ll be better prepared to save money for the initial investment and retirement. It’s a good rule of thumb to save up anywhere from $500 to $1,000 to get started investing.

This way, you can open up your options on which investment plan you would like to utilize when making your first investment.

What Should I Invest $1,000 In?

Assuming you have a lump sum or a stream of money coming in, it’s time to start investing. However, where should you invest your startup money?

The answer is it really depends on what you personally want to do.

Let’s take a look at some basic first investments to decide where you want to start your investing career to obtain financial freedom.

Stocks

When the concept of investing in the stock market is introduced, most people are thinking about stocks. These individual stocks are essentially small pieces of ownership in a company.

Stocks on the public market include companies like Apple and Walmart. You essentially buy a piece of the company and reap a reward when the stock’s value increases.

To be painfully clear, as a beginning investor – you should not buy individual stocks. Individual stocks are much riskier than index funds.

Bonds

The easiest way to describe a bond is to describe it as a form of debt. When you invest in a bond, the money is given to a borrower, and their repayment of that money is given to you, plus interest.

Bonds usually don’t have a large return on investment and range from about two to three percent per year. However, they’re considered a very safe investment.

You will only lose your money if the underlying entity that is borrowing your money defaults.

Mutual Funds

Mutual funds are a group of assets that you essentially purchase with other investors. Each fund has varying investments that help to diversify the overall investment.

Because you’ll be pulling your investment funds together with other investors, you’ll have access to more diverse assets. However, do realize that mutual funds tend to be managed by a fund manager.

This can lead to high account maintenance costs and hidden fees.

Exchange-Traded Funds (ETFs)

ETFs are very similar to mutual funds. You’ll be pulling your investment money together with other investors to purchase an array of assets. The only difference with this type of investment vehicle is that they’re not actively managed.

This means there are no high maintenance costs to pay a fund manager.

Real Estate Investments

Real estate investments are a trendy area of investing. For those just starting with their first investments, opting for a REIT or real estate investment trust can be a great first step.

With this type of trust, you’re essentially pooling your money with other individuals to invest in the operation, ownership, or financing of an income-producing property.

With this type of investment, you can own a piece of real estate and enjoy dividend-based income from the property.

Employer-Sponsored Retirement Plan

We’ve all been told that we should invest in a retirement account so we have money to live on once we retire. Making investments through your retirement plan is probably the option to create that retirement account.

Most employer-sponsored retirement plans allow you to invest in either a Roth IRA or a 401k. A Roth IRA uses after-tax money, while a 401k uses pre-tax money to fund the accounts.

With an employer retirement plan, you essentially set aside a set percentage or flat amount from your paycheck for your retirement. Some employer-sponsored retirement plans will provide contributions that match your investment up to a certain number.

This way, your employer is also helping to fund your retirement account. Making investments through your retirement plan is usually one of the most tax-advantaged ways to invest.

What Should I Invest in to Make Money?

It would be best to have an introductory understanding of the investment vehicles that we went over above. Now, determine which ones you’ll want to employ.

The truth is that your investment strategy is going to highly depend on what you would like to achieve. Do you want to have a large retirement account so that you can travel the world once you retire?

Do you want to make money in the next five to ten years to buy a newly constructed home of your dreams?

Determine What Your Goals Are

Determining your financial goals is the first step in deciding on the investing strategy you want to participate in. While we all would love to be millionaires overnight, that’s simply not going to happen to the majority of us.

Rather, you must be realistic with your goals so you can actively invest in the right types of vehicles to get yourself there.

Decide on Your Level of Risk

To put it simply, investing involves risk. The level of risk your money is exposed to depends on your asset allocation and if you intend to invest long term or only for a short period of time.

On average, the least risky investments will provide you with the lowest returns.

The riskiest investments have the potential to provide you with a fast and higher rate of return.

However, the more risk, the more likely you are to lose your investment money. So, you need to determine just how much risk you really want to take on.

Become a Student and Develop into a Master Investor

When you begin investing, it’s best to stick to one or two investment plans. This way, you can become familiar with them.

As you get more familiar with these initial investment vehicles, you may want to branch out to other types. Keep it simple to start so that you can master each investment vehicle with ease.

Throwing money at investments you don’t understand is a great way to ensure that you don’t get any of your hard-earned money back.

Can You Get Rich by Just Investing?

The answer to this question really depends on your definition of rich.

You can earn a ton of money with investments if you choose the right ones at the right moment. As you learned above, different first investments will provide you with varying profit levels.

Less Risky Investments with Modest Gains

Your investments, such as bonds, will provide you with a steady return rate of about two to three percent per year with minimal risk.

If you’re interested in gaining wealth over your working life, then you may want to actively invest your money into varying bonds. This will provide you with a known return on each investment as you’ll be given the return percentage you can expect to receive before you purchase the bond.

However, realize that a two to three percent gain per year on an extra $1,000 is not going to make you rich overnight.

Risky Investments with Potential for Massive Gains

If you want to take on some more risk, then you can opt for investment vehicles that can provide much higher rates of return.

Individual stocks tend to be one of the more volatile investment forms that can allow owners to profit tremendously when the stock price rises. For example, let’s say you invested in Apple before they introduced the Apple Watch. You bought 100 shares at $10 each.

As soon as the Apple Watch was released, their stock skyrocketed to $100 each. Overnight, you essentially made $90 per stock.

This equivalates to $9,000 in profits from one stock. As you can see, the potential for gains is high with individual companies. However, realize that this isn’t always the case. Apple’s stock actually went down after they introduced the iPod.

Choosing what company to invest in to gain high returns is a talent within itself.

How Do Beginners Invest in Stocks with Little Money?

You don’t need to have thousands of dollars to begin investing. You can actually begin with $5 to $10, depending on where you go. There are many discount brokerage firms online that you can create an account with to invest.

These types of accounts require you to fund your investment account, search for the stock you want to invest in, and then purchase it, all in real-time.

A few examples of these online brokers include TD Ameritrade, Robinhood, and Fidelity Investments.

If you’re not really sure what stocks you should be investing in, then a robo advisor can be a good tool to use.

Also referred to as a robo investor, this type of strategy has a behind-the-scenes financial advisor or software that makes purchasing decisions for you.

These decisions are based on your criteria, such as your risk tolerant level and your maximum limit per investment. These can be a way to slowly wade into the investing world where you can set limitations but let a more knowledgeable advisor take over.

Can You Lose All Your Money in Stocks?

The short answer to this question is that you certainly can lose most of it. It really comes down to the specific details of your investment strategy.

For simplicity, let’s say your first investment is $1,000 in stock XYZ. You buy 100 shares at $10 apiece. Overnight, the company gets bad press, and the stock plummets to $1 per share.

Essentially, you just lost $9 per share or 900 dollars of your investment.

Until you’re done paying the fee to sell the stock at the price point of $1, you’re likely not going to have any money left over. Therefore, you can lose pretty much all of your money in the stock market.

While there are notable volatile fluctuations in the stock market, many can hedge these risks by diversifying their investment portfolio. This way, if you lose money with stock XYZ, you still have companies ABC, EFG, and HIJ.

How Can I Double My Money?

Doubling your money isn’t too difficult to do. Rather, it simply comes down to picking the right investments and determining how long it will take you to double it. There is a simple rule of 72 that you can follow when determining how long it will take you to double your investments.

The Rule of 72

To figure out how many years it will take to double your investments, you’ll need to know the average annual interest rate of what you’re investing in. This is easier to determine for bonds and real estate.

For stocks, you’ll need to look at the stock’s average fluctuations over recent years and develop an educated guess.

To find out how long it will take to double your money, take 72 and divide it by your investment’s annual interest rate. This will give you the number of years it will take you to double your money.

For example, let’s say you invest $1,000 today in an investment that provides an annual return of 10 percent. You’ll take 72 divided by 10. This will give you an expected time frame of about 7.2 years to double that $1,000 to $2,000.

The rule of 72 is a fairly accurate tool for assessing the target date for doubling your money when it comes to lower rates of return. When you sit down and decide on your first investments, you can create an accurate time horizon for when you can expect various returns.

It’s always advisable to have a time horizon set out to have a date in the future that you can expect to have your funds available.

The rule of 72 clearly shows the power of compound interest and how even a small amount of money can help you with your retirement planning and financial goals.

How Can I Make My Money Grow Faster?

Whether you decide to invest in an online saving account at an FDIC insured credit union or digital bank, or you have developed your own portfolio, most of us would like to see our money grow faster.

While financial planning is a necessary part of the financial freedom process for a first-time investor, it can be discouraging.

After you realize how long it will take to double your investment, you may be wondering how you can get to your place of financial independence faster.

At the heart of growing your money is personal finance. When you track your spending, stick to a budget, and pay your investments first, then you’ll be on track for a successful financial future. There are various tactics you can utilize which can help you to grow your money faster.

Many involve close management and paying attention to the various types of retirement planning.

Assess Investment Vehicles with Various Vendors

As a first-time investor, you’re likely going to be dealing with a select few investment vehicles when you start out.

Take the opportunity to do your own investment management to learn more about the investment opportunities in that specific vehicle sector. You may discover that your local credit unions can offer you a better interest rate on your savings account than online vendors can.

By transferring your money to the higher-paying account, you can grow your money faster.

Obtain More Money for Investing

When you sit down to do financial planning, you should be looking over your budget. Look for areas where you can free up some money to put towards investing. This could be as easy as downgrading your cable service or skipping your morning latte.

Little habit changes over time can result in lots of extra money to invest and grow.

If you’ve decided to take control of your personal finance, you’ve likely considered investing. While this may be something completely new to you to start with, you’ll find that there are many resources available to help you grow your wealth.

It’s vital that you start with understanding the various types of investments that are out there for you to choose from. Never invest in something you don’t fully understand.

When you better understand the basic first investments you can make, you can better determine what investment strategy will fit the bill to get you where you want to go financially, both now and in the future.

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