Investing can help you earn more money without spending more time at work. While investing can be an exciting prospect, many people avoid it because they don’t know how it works. This guide can help newcomers learn how to invest so they can begin earning more income without putting in more work.
Setting Goals and Expectations
Before you begin investing, you need to understand what your goals are. An investor who doesn’t have a plan can make bad decisions that put them in hot water. All investors need to know how much they should make and have realistic expectations.
Chasing too much money can mean adding unnecessary risk, especially since you’ve never invested before. Instead, start slow and take the time to learn before investing. Wealth from investing is built over time.
Remember, the goal of investing is to be financially independent and comfortable so you can live off your investments. While making money without working seems like a pipedream, anyone can do it. The problem is that very few take the time to learn how to properly invest.
Before You Invest
Consider what your annual income is and make that your investment goal. This number is going to be how much you want to receive from dividends. You can get an additional income by buying dividend-paying stocks. To invest, you’ll need to start with enough money that your income alone can support you.
Essentially, you will need more than 25 times your annual income in your portfolio. While this sounds like a lot of money, it’s achievable. Consider this. The average person makes $50,000 per year and would need $1,250,000, 4% of which is in dividends, earning you a $50,000 income each year.
Now that you have a realistic goal in mind, you need to open an account to start investing. Here are the types of investments that you can start with:
401(k) Retirement Plan
Contribute as much as you can to your retirement plan, especially if you have a company match. Every retirement plan is different with a few options, so there’s no one right solution for everyone.
If you want to improve your returns on your investments, and your 401(k) doesn’t let you choose an investment option, then you can contribute up to the company max and max out an IRA.
Individual Retirement Arrangement (IRA)
You can open a traditional IRA or a Roth IRA; the only difference is when you’ll be taxed. With a traditional IRA, you are taxed when you withdraw money upon retirement. With a Roth IRA, you’ll be taxed now.
If you think you’ll be in a higher tax bracket when you retire, choose a Roth IRA. If you’re not sure if you will be, choose a traditional IRA.
There are max contributions for an IRA and Roth IRA. These numbers change every year, so make sure you do your research and know just how much you can contribute.
If you maxed out your 401(k) and IRA, then you should consider an investment account. There are no tax benefits associated with these accounts, which is why it should be your last option. The good news is there is no penalty for withdrawing money before your retirement.
Now that you’re armed with the knowledge of these three account options, you can act on it. Once you’ve opened and funded your account, you can start investing money. You can choose to invest with individual stocks, which is one of the most common first-time investments. However, you should educate yourself before you invest in anything. There are a ton of free resources online to help you learn how to invest in anything from stocks and bonds to cryptocurrency.
After You Invest
Once you’ve started investing, you’ll need to maintain your investments. Maintaining your investments involves checking on their statuses and paying attention to any changes in companies you have stock in. Beginners might feel overwhelmed because they don’t know how frequently to check on their investments.
Checking your account too often because you’re a beginner investor can be tempting. However, by doing this, you’ll feel anxious to sell your stocks when you see them drop. A rookie mistake is selling your stocks too soon because you made a decision based on emotions.
The stock market works like an auction, which means there will be fluctuations. Buyers and sellers can be individuals, corporations, and even governments. The price of stocks can go down when there are more sellers than buyers and up when there are more buyers than sellers.
Remember, investing is about the long term, so there’s no reason to constantly check your investments. Instead, consider checking them once a month to make sure you don’t make any wrong decisions.
As you check your portfolio, you’ll come to understand that there will be some months when you’re down and some months when you’re up. If you remind yourself the stock market is constantly changing, then you’ll be happy to collect dividends without making the mistake of selling too soon.
Final Thoughts on Investing
Investing can be scary for first-timers. Instead of investing without knowledge, do as much research as you can so you can learn the ins and outs of each of the different types of investing. If you’ve taken investing into your own hands and bought stocks, check up on those companies at least once a year, and make sure to read their annual reports to make sure they’re moving in an upward direction.
It’s important to note that a company’s performance doesn’t directly influence the price of stocks. Reactions to the performance of a company determine fluctuations in stock prices. More people will want to purchase a stock if a company is performing well, reaching its financial goals, and growing. The more individuals interested in buying stock, the higher the price of the stock will be, so make sure you understand what causes fluctuations before you buy or sell stock.
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. Matt is passionate about marketing and business strategy and enjoys San Diego life, traveling, and music.