Investing for Beginners
Subtract your liabilities from your assets. If your assets are larger than your liabilities, you have a “positive” net worth. If your liabilities are greater than your assets, you have a “negative” net worth.
Update your statement every year to see how you’re doing. Have a negative net worth? Don’t worry! Keep saving and, eventually, your net worth will be positive. If you’re having trouble finding any money to save, see our article, How to Make a Budget, for advice on how much money you should be spending and how to cut back on unnecessary spending. Most financial experts recommend saving only 10 percent of your after-tax monthly income. Unless you have high interest-debt (credit cards or personal loans), you should not be putting all your extra money toward bills. Do not invest until you have these accounts paid off in full. Go to our article,How to Pull Yourself Out of Debt, to make it happen sooner than you thought possible.
Step Three: Invest!
Now you’re ready to start investing! Before you dive in, be sure you understand the difference between savings and investment. Saving money in a bank account means putting it away in a safe account where it will earn interest. The problem is that the interest rate may not keep up with the rate of inflation, meaning your $100 in 2006 may only be worth $75 in 2016, even if it accumulates interest. This is why many people choose to only put enough in their savings to cover emergencies while they invest the rest. Investing is riskier, but also gives you the chance to make more money.
Here are some terms you may hear as you make your investment decisions:
- Principle: The money you put into the investment.
- Stocks: A share of ownership in a public company, such as IBM or Coca-Cola.
- Bonds: Lending your money to the government or a company; gives you the chance to receive interest back as well as your principle.
- Mutual Funds: A group of investors who are pooling their money together with a certain objective. They’re very cost efficient because all the investing decisions are made by one manager who decides which stocks and bonds to invest in.
- Diversification: This is an investing technique that spreads money over different investments so that the risk is reduced. Your money is spread out over a wider playing field.
In the long run, the stock market has historically provided about 10% annual returns, although this is really only 6-7% after you account for inflation. Therefore, there is a good chance that investing will make you more money in the end.
Some investments are riskier than others, depending on how well the company is doing financially. If you are investing long-term, perhaps for your retirement in 30- 40 years, you will probably fare better with riskier stocks as you can ebb and flow with market changes without stressing about where your money will be next month. Shorter-term investments, like a car or house you want to buy in the next decade, should be less risky (unless you love living on the edge). You also stand to lose money to taxes if you are invested in mutual funds that trade quickly in and out of stocks. Every time a profit is made, you will have to pay taxes on the earnings. For the investor’s benefit, all mutual funds are required to show both their before and after tax returns.
Know what you’re doing and investing can help you live the life you’ve always dreamed of.
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