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Six Steps to Start Investing

Six Steps to Start Investing

Friday, June 24, 2022/Categories: Community News, Saving & Planning

Investing is one of the best ways to make money. While other forms of money-making require long hours and effort, investing is generally passive -- you can make money while sitting on the couch. Investing is also a necessary preparation for retirement. However, the question for anyone new to investing is: how do I get started? From the outside, investing can seem impossibly complicated. Here are six steps to help get you started.

1. Start saving. You have to have savings to start investing. If you've fallen into the habit of spending your entire paycheck as you go, you may need to add a few steps to begin. First, reign in your spending. Cut out unnecessary and wasteful expenses. Making a budget will help, as it will allow you to easily identify areas of waste. You will likely find you are spending on things you neither need nor even particularly want. 

2. Set aside an emergency fund. Before you begin investing, you need to make sure you can handle any sudden, unexpected major expense. Medical issues and job loss are among the emergencies you must be prepared for. While investing will generally lead to gain, things can certainly go the other way -- having something to fall back on is vital. Once you've set up your emergency fund, everything you make past immediate expenses and leisure spending can be directed toward your investments.

3. Take advantage of employer retirement plans. Many businesses offer their employees help with retirement investing. A variety of types of plans are available, so check the details of what your company offers. An important thing to know is that many employers will match some of the money you put into the account, which is an incredible deal -- it's like getting free money. You should always make use of these plans. Other investment plans may offer defined benefits, which help minimize the risks of investing but are not necessarily a better choice than investing on your own.

4. Consider investing in stocks. Owning a stock means you hold a tiny share in the ownership of that company. Profits are made via dividends paid out from the company or through the price itself of the stock rising. Prices, however, will not always go up -- stocks are one of the more volatile forms of investing. However, over time stocks have shown themselves to be one of the best forms of investment there is.

For stock market investing beginners, index funds are one of the top options for investors. An index fund is a fund tied to a market as a whole. The fund's performance will match that of the entire market. Index funds have lower fees than other popular options and involve much less active decision-making -- and thus much less headache. If you don’t have extensive knowledge of how the stock market works, Andover Bank has a team and some available tools to help you get started.

5. Consider investing in bonds. Bonds tend to be more reliable than stocks, albeit with slower growth. Bonds are thus strong where stocks are weak, making them a good way to balance out your investment portfolio. With a bond, you are essentially loaning out your money for a certain period of time. Bonds pay out interest at set rates. At the end of the life of the bond, the entire original investment is returned to you. Bonds are issued by government entities and corporations.

For beginner investors, it makes the most sense to put only a small amount of money into bonds, as a hedge against a stock market crash. Since investing is all about the long term, bonds hold relatively little advantage for young people. They become more valuable for people who are close to retirement and have a greater need to avoid short-term volatility.

6. Consider investing in real estate. Historically, real estate investment has had the highest rate of return. However, real estate can require a lot more work than other investment options. Investing in real estate on a large scale can be essentially a full-time endeavor and is thus not practical for most people. What is reasonable, however, is buying a home.

Home buying is one of the best financial decisions a person can make. Money put into a home is an investment. While funds directed toward renting are simply lost, money applied to a mortgage pays off over the long run, as real estate appreciates with time (sometimes by huge amounts). Purchasing a home can be time-consuming and costly, besides incurring a loss of flexibility, so it makes the most sense for people who have established careers and a solid financial situation.

Investing probably won't make you super-rich. In fact, hoping that it will can lead to risky decision-making. It is, however, an easy way to make more money and is crucial to ensuring you have enough to live on after retirement. Having your money work for you is the pathway to a secure future. The rule with starting investing is the sooner, the better -- so get going as quickly as you can. Learn more on the Andover Bank Learning Center site.

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