If you’re like most people, you want to build wealth and financial security. But you may have yet to start investing because you think it’s too complicated or risky. This post will review eight tips every beginner investor should know to limit risk and slowly build wealth for a secure financial future.
1. Differentiate saving and investing
Although saving and investing are often used interchangeably, they are different. Saving is putting money into safe accounts, such as FDIC-insured bank savings, money markets or certificates of deposit (CDs). It’s best for short-term goals, such as buying a car or taking a vacation within a few years or emergency funds.
Investing is appropriate for long-term goals you want to achieve in at least three to five years, such as retiring or paying for a young child’s college. Investing means putting money into financial instruments, such as stocks, bonds or mutual funds, with the expectation of future growth. Investing is wrong for short-term goals because market values can fluctuate wildly within short periods.
Investing requires some risk, but without it, you aren’t likely to earn enough growth to achieve significant financial goals, such as a comfortable retirement. A good rule of thumb is to invest a minimum of 10% to 15% of your gross income for retirement annually.
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2. Build a safety net
While it’s wise to begin investing as soon as possible, everyone’s situation differs. If you don’t have a healthy cash reserve, make that your top financial priority. Emergency funds help you manage unexpected expenses and hardships, such as a job loss, home repair or medical bill.
A good savings target is three to six months’ worth of your living expenses (such as housing, food, utilities and debt payments). For example, if your monthly living expenses total $4,000, consider accumulating at least $12,000 in savings.
READ ALSO: 9 ways to build emergency funds using a high-yield saving account (HYSA)
3. Start sooner rather than later
Once you have a cash cushion, the sooner you start investing, the more wealth you can build. Consider two people who invest the same amount and receive the same return.
The first is Sammy, who begins investing at age 35 and stops at age 65. Over those 30 years, she invested $250 monthly and received an average 7% return. Her account balance is less than $300,000 at retirement.
The second investor is Taylor, who begins investing at age 25 and stops at age 65. He also invests $250 monthly, receiving a 7% return, but builds approximately $622,000 after 40 years.
By investing ten years earlier than Sammy, Taylor retires with over $300,000 more to spend, even though he only invested $30,000 more ($250 x 12 months x 10 years) than Sammy. Taylor has more because his money has more time to compound and grow.
So, even if you don’t have $250 a month to spare, start investing some amount as soon as possible. As you earn more, you can invest more. And when you have a windfall, such as a cash gift, bonus or tax refund, invest it, too. Waiting for the perfect time to invest causes you to miss significant earnings.
4. Research before buying
You should get familiar with various types and categories of investments before buying them. Frank Corva, Correspondent with Bitcoin Magazine, says, “When you start investing, think about your first purchase like a down payment on your education on the asset or sector in which you’re investing. For example, if you buy some bitcoin, research what it is, how volatile its price can be and why you would want to own it.”
Corva explains that understanding a potential investment helps you decide whether to own it. “If you understand bitcoin’s price is very volatile, you might be less inclined to panic and sell if its price drops quickly. Also, you might realize it’s a good idea to sell and take some profits if its price rises quickly.”
READ ALSO: Bitcoin (BTC) price, chart, coin profile and news
5. Diversify your portfolio
If you don’t have the time or desire to research individual securities (like bitcoin or stocks), consider owning diversified investments, such as index, mutual or exchange-traded funds (ETFs). These funds bundle hundreds or thousands of underlying assets like stocks, bonds and other securities.
Diversification is a powerful strategy because it helps you reduce risk by owning various investments that don’t all move in tandem when economic conditions change. Diversification allows you to earn higher average returns while cutting risk.
6. Use tax-advantaged retirement accounts
When you own investments in a tax-advantaged account, such as a workplace 401(k) or individual retirement account (IRA), you accumulate wealth and receive money-saving tax benefits. Most employers offer traditional and Roth retirement accounts with different rules and advantages.
Traditional accounts allow you to defer tax on contributions and earnings until you make withdrawals in retirement. Roth accounts, such as a Roth 401(k) or IRA, require you to pay tax upfront on contributions but allow tax-free withdrawals in retirement.
Workplace retirement accounts are even more valuable if your employer pays matching contributions. But even if you don’t get a match, maximizing your workplace retirement account is wise. For 2024, you can contribute up to $23,000 or $30,500 if you’re over 50 to most workplace retirement plans.
If you’re self-employed or work for a company without a retirement plan, almost everyone qualifies for a traditional IRA. For 2024, you can contribute up to $7,000 or $8,000 if you’re over 50.
7. Ignore the noise
What happens in the financial markets daily only matters if you must liquidate your investments during the same period. So, ignore media hype and stock tips from friends and never make rash decisions, such as selling your investments when their value drops. Your goal should be to get investment growth over decades, not month-to-month or even year-to-year.
8. Get professional advice
If you need help choosing investments or using tax-advantaged accounts, seek advice from your benefits department at work or a qualified financial advisor. And if you don’t understand their explanations or recommendations, keep asking questions until you do.
You’ll be glad you did, especially when you build a healthy nest egg that gives you peace of mind and future financial security.
About the author
Laura Adams is a money expert and spokesperson for Finder. She’s one of the nation’s leading personal finance and business authorities. As an award-winning author and host of the top-rated Money Girl podcast since 2008, millions of readers, listeners and loyal fans benefit from her practical advice. Laura is a trusted source for media and has been featured on most major news outlets, including ABC, Bloomberg, CBS, Consumer Reports, Forbes, Fortune, FOX, Money, MSN, NBC, NPR, NY Times, USA Today, US News, Wall Street Journal, Washington Post and more. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Her mission is to empower consumers to live healthy and rich lives by making the most of what they have, planning for the future and making smart money decisions every day.
This article originally appeared on Finder.com and was syndicated by MediaFeed.org.
