Investing money is an excellent method to grow wealth gradually. Over the previous 50 years, the stock exchange has actually provided a typical yearly 10% return (prior to inflation), based upon the efficiency of the S&P 500 index. This indicates that if you were to invest $5,000 today, kick back over the next thirty years, and permit your money to grow at a rate of 10% each year, you’d wind up with over $87,000.
But excited as you might be to start investing, there are a couple of essential products you’ll require to deal with initially. So be sure to check these off of your list.
1. Make sure your emergency fund is complete
It’s really important to make sure your savings account has enough money to cover a full three months of essential bills. That could be your ticket to getting through a period of unemployment. Or, it might enable you to cover an unexpected home or car repair without having to resort to borrowing money.
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If you don’t have a complete emergency fund, hold off on investing your money until you have one. The value of your stock portfolio could fluctuate from week to week (or even day to day). And you don’t want to land in a position where you have to cash out stocks at a loss to scrounge up funds to cover an emergency. So first make sure to build adequate cash reserves and then put extra funds you have into an investment account.
2. Develop an investment strategy
You don’t want to open a brokerage account and start scooping up stocks at random. Rather, you should have a strategy.
First, decide what you’re investing for. Is it retirement? Another objective?
Next, decide how much work you’re willing and able to do. Buying stocks individually means having to research each and every one. A more efficient way to build a portfolio might be to load up on broad market ETFs, or exchange-traded funds. These make it possible to own many stocks with a single investment.
Of course, stocks aren’t the only investment vehicle you can consider. There are also bonds, which tend to deliver lower returns than stocks but also tend to be less volatile.
Think about your tolerance for risk as well as your goals. That should help you put together a portfolio that works well for you.
3. Find the right account to invest in
You may be inclined to invest in a taxable brokerage account so you’re not restricted in the amount of money you can put in yearly or your ability to take withdrawals as you please. But if you’re investing for the express purpose of being able to cover expenses in retirement, then you may want to invest in an IRA — either a traditional one or a Roth.
IRAs offer tax benefits that regular brokerage accounts do not. With a traditional IRA, your contributions go in tax-free, which means they exempt a portion of your income from taxes. With a Roth IRA, investment gains in your account are tax-free, and so are withdrawals.
Of course, IRAs limit the amount of money you can put in each year, and tapping one before age 59 1/2 could result in a costly early withdrawal penalty. But if you’re committed to investing for your retirement, then it could pay to choose an IRA.
Investing for the first time can be an exciting milestone. Just make sure to make these necessary moves before you dive in.
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