Our income might be enough to cover our immediate expenses, but they may not be able to cover some bigger plans like buying a house or going on a luxurious vacation. While saving is a great way to keep funds, investing your money will help it grow. This way, your money will be making more money for you.
Investing money for beginners can be overwhelming, and the risk involved in investing can be frightening. Yet, it is worth the risk, and having a winning investment strategy will also help you invest wisely.
Saving your money is a safe way to keep some funds for the future. But, money loses value over time because of inflation. If you plan to save up for future expenses, say, your retirement, you will find out that the money accumulated would have lost value by the time you need it.
On the other hand, investment adds to the value of your money. Here are a few reasons you should invest.
It Helps You Beat Inflation:
The value of money could depreciate over time. When there is inflation, $1 will buy you fewer goods than it used to. However, you can beat inflation by investing in assets that yield returns greater than the inflation rate.
Grow Your Money:
With investments, your money works for you. Instead of just saving up, investing grows your money.
Compounding Interests:
Most asset classes yield interest, which will compound over the years. You can reinvest your earnings from investing to earn more.
For example, investing $20,000 in an asset with a 10% interest rate yields $2000 interest. When you reinvest the capital and the interest ($22000), you earn $2200 interest.
Meeting Long- and Short-Term Goals:
Another benefit of investing is that it helps you meet your goals. Saving money for a vacation or retirement can take a long time, and you will have to save as much as you need. On the other hand, investments grow your money, so it will be easier to meet goals and even set more.
What to Consider Before Investing
Investing can be scary, especially when you don’t know how it works. Investing money for beginners will be easier when they have a good strategy. As a beginner, you shouldn’t rush into investing without a strategy. If you do, you will end up with sad tales.
Investment strategies are rules that guide your decisions when building your portfolio. There are several factors that you need to consider before creating your strategy:
How Much You Plan to Invest
The first thing to consider is how much you plan to invest. Your income level will influence this. You don’t need thousands to start investing. There are assets that you can invest in with a small amount.
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Risk Tolerance Level
You don’t have to be a big risk taker to invest. There are low-risk assets, but they yield low returns, unlike high-risk ones. Regardless, what is most important is choosing assets that fit into your risk tolerance level. If you can’t take big risks, go for assets with lower risks.
Investment Goals
Your investment goals are your reason for investing. Workers could invest toward retirement; parents could invest to fund their children’s education or a vacation. Whatever your goals are, you should consider them before building your portfolio. For example, if you are investing toward your retirement, you might want to go for a retirement saving plan.
Time Frame
The time frame of your goals matters when choosing an investment strategy. Goals can be short-term or long-term. If your goal is short-term, you will want to invest in assets with quick returns, like Certificate Of Deposit (COD) or Treasury bills that you can easily convert.
Asset Classes for Investing Money for Beginners
Investments are grouped into different classes based on their characteristics. Investments fall under four main asset classes. When building your portfolio, choosing from more than one class is best. Putting your eggs in one basket isn’t a great idea, which also applies to investment.
These different classes have different characteristics so diversifying your portfolio helps you spread the risk. If you put your money in one investment or one asset class, the risk is higher because if the investment crashes, you will lose everything.
Therefore, as a smart beginner, you shouldn’t take unwise risks but rather diversify your portfolio. These are the different asset classes you can choose from:
Equities (Stocks):
Equities, also known as stocks, are shares of ownership of a company or corporation. Stocks allow you to buy units of the ownership of a company called shares. You can buy as little as a single unit of share.
You are entitled to dividends as a shareholder. Dividends are a fraction of a company’s profit regularly paid per share to shareholders. You can also sell your shares when the price is higher. Not all stock shares have dividends so make sure you know if they do if that is what you are looking for.
Fixed Income (Bonds):
Bonds are investments in the form of loans to a company or a government entity over a given period. The issuer (the debtor) pays interest periodically to the lender until they repay the loan.
Cash and Cash Equivalents:
They usually have a three-month (90 days) maturity duration. Cash and cash equivalents are the most liquid assets because you can convert them to cash easily. They include certificates of Deposit, treasury bills, commercial papers, money market funds, and other securities that mature within three months.
Alternative Assets:
These include tangible assets like real estate, gold, and other collectibles. It also includes cryptocurrencies.
Tips on Investing Money for Beginners
Have an emergency fund saved up, so you don’t have to liquidate your investments during emergencies.
Get rid of high-interest debts before you start investing.
Don’t make reckless decisions when investing. It is best to risk what you can afford to lose.
If you don’t think you are knowledgeable enough to create a good investment strategy, you should seek the help of a financial advisor. Robo Advisors are a cheaper alternative.
Do your research before investing in any asset, and keep up with financial trends.
Conclusion
Investing money for beginners can be difficult, and deciding what to invest in and how best to invest can be confusing. The most important step to ensure you invest wisely is to have an investment strategy. Your investment strategy is the rule that will guide you when building your portfolio.
However, you need to consider your income, goals, the time frame of your goals, and your risk tolerance level before deciding on the best strategy for choosing assets.
Disclaimer
Information provided on InflationCents.com is for informational/entertainment purposes only. This information should not be considered as professional advice. Please seek a certified professional financial advisor if you need assistance. Rates and offers provided by advertisers can change frequently and without notice. We attempt to provide up to date information, but it could differ from actual numbers. Inflationcents.com may be compensated by 3rd party companies that are mentioned either through advertising, reviews, affiliate programs, or otherwise. All reviews and articles are based on objective analysis and no compensation will tilt our opinion.
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