Investing your money means buying an asset that you expect will grow in value over time. It is a more involved way of growing your money than simply placing it in a savings account. A typical savings account will pay you a “risk-free” rate which in the past decade in the UK was as high as 3%. Recently those rates have plummeted down to near zero . This is a guaranteed return with no risk of losing any money while your money sits in the bank.
Investing on the other hand is associated with risk. The more risk you take, the higher the potential return. However, investing is not the same as gambling, and can be a very prudent way to manage your money when done correctly. Over the past 10 years, the FTSE100 which tracks the 100 largest UK companies in the stock market has returned 8% per year. This is roughly the same on average with the S&P 500 which tracks the 500 largest US companies in the stock market.
Generally you should aim to invest your money once you’ve first created an “emergency fund” that could immediately cover your monthly expenses in case of an emergency for a reasonable period of time, typically 3-6months. This amount of money you would preferably keep in an easy access savings account so you are guaranteed to have full access to it at any time. Beyond that, it’s reasonable to start investing the rest of your money, beyond whatever you’re saving for specific goals or purchases.
There are a few things to consider when you’re looking into investing, but if there’s one thing you keep from this guide is this:
The longer your investment horizon, the lower the risk.
If you seek quick gains you are taking on more risk, whereas investing over the long-run is more stable and reliable. Therefore, it’s important to have your emergency fund settled so you can invest with a more long term approach and not be forced to pull your money out. Because even if there is a “stock market crash” and you’re able to weather it, the market will recover and over time you will gain back what you lost and more.
Now it’s time to think about what type of investor you want to be. Some beginner investors like taking an active role in managing their investments, while others like to have certified professionals and tools do the work for them. There’s nothing wrong with either—just be sure to pick the option that you prefer.
You can invest in a number of ways, but below are the things you can invest in with varying levels of risk:
1. CDs (Certificate of Deposit) are more similar to a savings account, but allow you to lock up your money for a period of time so will pay a higher interest rate than a standard savings account.
2. Bonds are like a loan you give to the government or a company, who in return promise to pay you back at an agreed time with an agreed interest rate.
3. Pension plan: use your company pension plan with employer matching that comes straight out of your salary and you have very little to do with how the money is invested.
4. Mutual funds are a lower cost option for professionally-managed investments and can be a good option for diversified investments across stocks and bonds.
5. ETFs (Exchange traded funds) are similar to mutual funds, but are not actively managed after they’ve been set up. They can be traded just like stocks, but they usually represent an entire sector (ie Renewable Energy) or an index (S&P 500).
6. Index funds are like ETFs except they are only used to track a full index, like Nasdaq, S&P 500 and might have a minimum investment amount, about $500.
7. Individual Stocks: Many like to pick and choose stocks of individual companies and there you are relying on the performance of that company. It’s a riskier style of investing that requires more research.
Some people take a lot of interest in investing in stocks, but it’s not for everyone and it certainly requires time and research. It’s not as important to become an expert in stocks and know exactly when to invest. It’s more important to get started and put your money in the market to work. The two key principles of investing is “time in the marketing beats timing in the market” and diversification. Mutual funds, ETFs, and Index funds are naturally diversified and allow you to mostly set-and-forget your investments. Getting started with these are the simplest and most straightforward way to start your investing journey.
When you’re ready to start investing, research different brokerages, find one you like to apply for, and fund it to start investing in your own portfolio!
Illustration by Julia Boldysheva
Join the 30,000+ people in our community and start your journey to financial independence.