Saving is a good strategy to build positive money habits and is usually used for short-term goals, which include an emergency fund or a big purchase. Investing, on the other hand, is a long-term and passive way of putting your money to work. If you want to take your finances a step further, then consider investing.
We will discuss what investing is, things to do before investing, and where to invest your savings. Whether you are planning for your retirement or building wealth, having the right knowledge of how finance works will go a long way.
What is Investing?
Investing is a financial strategy that involves commiting money or capital into an assest which help you grow your money overtime. Think of it as a passive way of making money by making your money work for you. While saving and investing are geared towards financial wellness, they perform different functions. With savings, you can have easy access to your money with minimal financial risk. Investing, on the other hand, is much more risky than savings, and it often requires long-term patience in exchange for greater benefits.
Things You Should Know Before Investing Your Savings
Investing is one of the smartest ways to grow your money over time, but it’s not something you should do blindly. Before you commit to investing your savings, it’s important that you know the basics of investing. The best way to invest savings starts with understanding, as it will help you make better financial decisions.
Here are things you should know before investing your savings:
1. Do Your Research
You can’t leave out research when it comes to committing to an investment. As an investor, you should have a clear understanding of what you’re putting your money into. Before taking that bold step of investing your money, do your homework on different investment options.
Research on stocks, bonds, mutual funds, ETFs, debit notes, and even cryptocurrencies. It’s vital to research companies, industries, and funds you’re interested in; that way, you have a clear view of what you’re getting into.
For instance, if you’re interested in buying stocks, it’s important to look into the financial health of the company you’re considering, as well as its past performance. Doing this will help you make smart investment decisions.
2. Have a Clear Goal
Investing without a goal is like traveling a new city without directions, you might not reach your destination, cause you clearly don’t have one. When diving into investing, it’s important to be certain about why you’re investing. Is it for retirement goals, for your children’s education, or to accumulate wealth?
Your investing goal determines what investment you should go for. For instance, if your goal is short-term, let’s say a couple of years, you might want to lean towards safer investments that are easy to liquidate. Long-term goals, however, can handle a much riskier but high-yielding approach. Overall, having clear goals guides your decision, helps you stay disciplined, and tracks your progress.
3. Know Your Risk Tolerance
As someone exploring investment options, it is important to know that every investment comes with risks. Your willingness to handle that investment risk is what is called your risk tolerance. Risk tolerance varies with individuals. While some can handle high-risk investments, some cannot, which makes understanding your risk tolerance important to your investment goals.
If you’re a young professional with lots of decades ahead of your retirement and you have a high risk tolerance, you might want to throw in the towel and take in higher-risk investments like stocks. This is because with that length of time, you can recover from downturns.
For people with low risk tolerance, going for safer options like bonds and fixed income might be just right. In essence, matching your investment to your comfort level helps you make strategic decisions.
4. Have an Emergency Fund
The investing market is not straightforward, and you can barely predict what will happen next. To this effect, it’s important that you plan before going all in on investing. Ensure you have enough money for your day-to-day living as well as a buoyant emergency fund.
You must have at least three to six months’ worth of living expenses as your emergency fund. Pulling out of an investment too early can result in losses and even missed opportunities. Having an emergency fund will serve as a cushion to fall back on so you don’t have to pull out your investment when you need money, thus giving your money time to grow.
5. Understand Tax Implications
When investing, your returns should not be the only thing you should worry about; you know about what you get to keep after taxes. Now it would interest you to know that different investments are taxed differently, and not knowing the rules can cost you your money.
For instance, a retirement investment account may allow for tax reduction or deferment. A frequent trading account, however, might push you into the higher tax bracket. Once you understand the tax implications of your investment, you can plan smarter and maximize your net return.
6. Talk to a Financial Advisor
Having a one-on-one with a financial advisor will go a long way in your investment journey and in achieving your financial goals. While research is valid, speaking with a financial advisor affords you investment advice tailored to your personal financial situation. They consider your income, expenses, and your risk tolerance before offering financial advice that suits you.
Where to Invest: Top 10 Investment Vehicles
Where to invest is a common question among new investors, and this is not surprising due to the different investment options. Now that you’re sure of your goals and risk tolerance, knowing where to invest is also important. Whether you want a one-type investment or a diversified investment portfolio, everything boils down to what is right for your financial goals.
Here are common investment options, also known as investment vehicles, that you can explore based on your goals:
1. Stocks/Shares
One of the best ways to invest savings for long-term goals is by investing in the stock market. This involves buying shares in a company. Stock means a share of ownership in a company. With stocks, you, as an investor, can be entitled to dividend distributions generated from the company’s net profit. Likewise, you can get your returns from price appreciation on your capital.
By legal structure, there are primarily two types of stocks, which are:
- Common Stock
This type of stock represents ownership in a company, and it gives you, as a shareholder, the right to vote on company matters and earn profits from price appreciation and dividends. Although dividend is not guaranteed with a common stock, it’s advisable to buy them if you’re thinking long-term, since they are higher risk but with higher rewards.
- Preferred Stock
If you value stability and you want to invest in stock, then you should go for preferred stocks. Preferred stocks are lower risk and the dividend is stable, unlike common stocks. Another way preferred stock differs from common stock is that with preferred stock, investors don’t have a voting right in the affairs of the company, and in the case where the company has issues, they get paid first before investors with common stock.
2. Real Estate
Looking for ways to put your savings to work through rental income, then investing in real estate is an excellent way to do so. Investing in real estate helps you build tangible wealth by purchasing property and renting it out. Real estate investments may include site purchase, developing it for a specific use, or buying a ready-to-use property.
Although investing in real estate requires a high upfront cost and ongoing maintenance, it’s still one of the best ways to invest your savings. Holding your property for long offers financial security, steady growth, and compound earnings.
3. Bonds or Fixed Income Securities
Another of the best ways to invest savings, especially when you want something stable, is by investing in bonds. Investing in bonds involves lending money to governments or corporations in exchange for fixed interest payments.
Unlike stocks, bonds are less risky and provide a predictable return, making them a great option for investors with a low risk tolerance. They generate steady income over time, and they are good for medium to long-term investment. Bonds could be high-yield, green, convertible, mortgage, municipal, or corporate bonds.
4. Investment Trust
As an investor, if you’re interested in diversification and professional management of your assets, buying shares in investment trusts might be a good idea. Investment trusts are closed-ended public companies with a fixed number of shares, which are usually mixed, and are managed by a professional asset or fund manager.
It works by pooling money from many investors to purchase a wide range of assets, which include stocks and properties. By doing this, the risk of investment is spread across different holdings, and it’s perfect for long-term goals like retirement plans.
5. Commodities
Investing in raw materials, energy, agriculture, owning gold bars, and other commodities are good ways to get your money up. It’s an excellent idea if you want to diversify your portfolio as an investor.
Unlike stock and bonds, commodities are physical goods, and their value is tied to global supply and demand. For instance, the value of a gold bar rises during economic uncertainties, making it a great asset to own.
On the flip side, you should know that commodities have a high market volatility and this is because their value is heavily dependent on unpredictable events like global crises, politics, and even weather.
6. Treasury Bills
Treasury bills are a safe bet for short-term goals, and buying them is no doubt one of the best ways to invest savings. They are short-term government-issued debt securities and are used to raise funds for infrastructure projects and budget deficits.
This investment vehicle is sold at a discounted rate and is repaid in full at maturity alongside your profit. Treasury bills are low risk, and they’re a great way of preserving your capital. If you prefer a short-term financial goal with minimal risk, this might be for you.
7. Index Funds
Here’s another investment vehicle for long-term holders and hands-off investors. Index funds can easily be bought and sold through an asset manager, and the Net Asset Value (NAV) is calculated at the end of the trading day.
This investment vehicle are low-cost and highly diversified, and the best part is, it does not require constant monitoring. They could be ETFs or mutual funds that track a specific market index, such as the S&P 500 index funds. Index funds grow steadily over time and are great for investors looking to accumulate wealth without excessive risk.
8. Exchange-traded Funds (ETFs)
This is quite similar to an investment trust, but it differs in that ETFs are open-ended, unlike an investment trust. Investing in ETFs is another way to diversify your investment portfolio and one of the best ways to invest savings.
ETFs also work like an index fund, with the differences being that ETFs can be traded on the stock exchange throughout the trading day, unlike index funds, where you have to wait till the end of the trading day. The ability to trade throughout the day makes ETFs useful for both short-term investment strategies and long-term goals.
9. Mutual Funds
If you don’t want to focus on just one stock or bond, then investing in mutual funds might be the best place to put your savings. A mutual fund is a pooled investment vehicle whereby many investors buy a diversified portfolio of securities such as bonds, stocks, and other assets. They are professionally managed, and the diversification lowers risk compared to holding one stock or bond. Also, mutual funds are perfect for beginners in investment and investors who prefer a hands-free investment approach.
10. Cryptocurrencies
You’ve definitely heard about cryptocurrency, heard of BTC, and Ethereum? They are one of the most talked-about ways of investing your savings in this digital age. Cryptocurrencies are digital assets that use blockchain technology for secure transactions. While many investors are invested in them because of their high returns and decentralization, it’s important to know that they are highly volatile. They can rise and fall within just a day, resulting in high returns and at the same time massive downturns.
Final Thoughts
Investing your savings is one of the smartest financial decisions you can make, and it takes preparation and patience. Before investing, it’s paramount to understand your risk tolerance and build a safety net, irrespective of the investment goals you’re pursuing. When it comes to where to invest your savings, balance is key, as no single option is perfect. The best investment strategy is to build a diversified portfolio that aligns with your investment goals.
