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With the start of a new year, now is the time for many people to make financial resolutions. And maybe one of yours is to finally start investing. Investing your money is a great way to build your wealth, but if you are a total beginner the process can seem overwhelming. Here’s how to deal with it in the coming year.
1. Find out how much you can afford to invest
It’s a good idea to commit to investing a specific amount each month based on your budget, so to that end, take a look at your existing expenses and see how much money you can realistically afford to part with. This way, you can have your money invested automatically so that you won’t be tempted to spend it on other things.
If, for example, you earn $ 4,000 a month, of which $ 3,000 is spent on essentials like food and rent, you will have $ 1,000 left to work. Of that amount, you will likely want money for leisure and discretionary spending, so you can decide to invest $ 500 and keep the remaining $ 500 for yourself.
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2. Choose the right account to invest in
When it comes to investing your money, you have choices. You can invest in a retirement plan like an IRA or 401 (k), or you can open a traditional brokerage account and use it to buy stocks.
Investing in a retirement plan has tax advantages. With a traditional or 401 (k) IRA, your contributions will be tax-free and your earnings in that account will be tax-exempt (meaning you won’t pay tax on them until you make withdrawals) . With a Roth IRA or 401 (k), you won’t get tax relief on your contributions, but any earnings on your account will be yours to take advantage of tax-free, and withdrawals will also be tax-exempt.
A traditional brokerage account, on the other hand, will not give you any tax savings, but it does will gives you more flexibility. With a retirement plan, you usually have to leave your money alone until you are 59.5 years old or face costly penalties. With a brokerage account, you can access your money at any time. You can decide to split your investments between a retirement plan and a brokerage account, but the key is to understand the pros and cons of each choice.
3. Develop a strategy
Your goal as an investor should be to generate the highest possible returns while keeping your risk to a minimum. To this end, your age should play a role in your decision. If you’re young enough, it’s generally beneficial to go for stocks, which have historically offered much higher returns than bonds, but which are also much riskier. If this is your first time investing in your 60s, on the other hand, a heavily bond portfolio may be a safer bet.
4. Choose the right investments
The stocks you add to your portfolio don’t have to be random. Instead, you should choose stocks that offer high value and lend themselves to strong long-term growth. Of course, identifying these stocks will take time and research, and while there are guides that can teach you how to pick the right stocks, you may want to start with index funds instead.
Index funds are passively managed and aim to match the performance of the market indices to which they are associated. When you buy index funds, you are effectively buying a set of stocks, and the value of your portfolio will generally rise and fall in line with the performance of the market as a whole. While you don’t beat the market with index funds, you may well have them in your portfolio.
If you haven’t started investing yet, don’t wait another minute to get started. The sooner you do this, the sooner you can put your money to work. And if you follow these steps, you should have an easier time getting things started.
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