Saving and investing are two of the best ways to build wealth. For many people, though, the leap from saving to investing is a big one. In fact, a recent survey commissioned by Ally Financial reported that 70% of Americans age 18 to 39 know they need to become more financially secure, but don’t know how to go about getting there.
If you’re saving, you’ve already taken the first and most important step. But, we know that investing can be intimidating, especially if you don’t know where to start. Keep in mind that accumulating wealth is a gradual process and not something that happens overnight.
It can be, however, virtually painless and help create additional funds for retirement, recreation, education, or whatever other investment goals you have. It can help you start a business, send your kids to college, buy a beach house, travel around the world, or spend more quality time with your grandchildren.
Need more concrete encouragement? $1,000 invested at the stock market’s historical return rate for 20 years would grow to almost $6,000. Apply that to 30 years, and it would leap to $15,000. Now, with every investment, you assume some level of risk, and past performance doesn’t guarantee future performance, but you can see the possibilities.
If you’re ready to start investing, here are some steps that will help you identify the most appropriate products and investments to help you reach your financial goals.
Determine your investment goal
What financial goals do you want to achieve by investing? It may be to simply start accumulating wealth, or you may have a specific goal in mind. It could be to buy a home, pay for a wedding, go on a vacation, or fund your child’s education. Goal-based investing is a process that helps ensure that you have enough money when you plan to spend it in the future. It impacts the type of investments you might choose and whether their strategy is growth, income or stability focused.
Determine your investment budget
Regular and systematic investing is the easiest way to invest your hard earned dollars. That means that a percentage of your income is automatically invested into an account every month. It effectively allows you to leverage the long-term benefits of dollar-cost averaging (DCA) and helps to better manage short-term investment volatility.
Creating a monthly budget and earmarking funds for investment helps separate them from your spending dollars. When you “pay yourself first” by treating your investment account as an expense, you’re more likely to make smarter financial decisions with your remaining monthly funds. And, it helps ensure you stay on track with your investment plan.
Determine your risk tolerance
Every investment comes with some level of risk and generally, the more risk, the greater the potential return. It’s pretty safe to say that most people want to make money as quickly as possible, but if your risk tolerance isn’t up for the challenge, the anxiety it brings will never be worth the chance of realizing the reward.
Be honest about the amount of risk you’re comfortable assuming. Most investment plans are designed for long-term growth. If you’re checking your account balance on a daily basis and you’re riding a rollercoaster of emotional highs and lows as a result, your investments are not in line with your risk tolerance. Investing doesn’t have to be scary. There are options for every type of investor.
Determine your time horizon
Your time horizon is the amount of time you have until you need to withdraw your funds. With a long time horizon, you can afford the privilege of slow and steady gains that limit your risk. For example, if you begin saving for retirement at age 20, you have 45 years to weather the ups and downs of the market. If you begin at age 35, you’ve lost 15 years of compounding growth and need to earn more money in less time, which, to accumulate the same amount, might entail more risk. If you begin saving for your child’s college education when they’re born, you have a lot more time than starting when they turn 10. To offset a short time horizon, you can consider increasing your investment dollar amount or possibly assuming more risk for the chance of a higher potential reward.
Get started
Most investors begin with a company-sponsored retirement plan or an IRA. There are typically a limited number of investment options and the plans generally lean toward conservative investing, although there are exceptions.
If you’re new to investing, don’t rule out the help of a financial advisor. You don’t have to be a financial guru, especially when you’re smart enough to leverage the expertise around you. They can help you sort through some of the ideas above and work with you to establish a solid financial plan for your future.
