Investing is a lot more than just a hot topic these days — it’s a wise strategy to boost your personal finances, prepare for retirement and ensure your hard-earned money goes further for longer.
But this future payoff requires current action.
The sooner you start investing, the more your money will be worth in the long run. But where exactly is the starting point? And where do you go from there? Tally has you covered.
Note: This guide is for informational purposes only and should not be misconstrued as specific investment advice. Consult with a financial professional before making any investment decision.
What is investing?
Investing is when you devote resources to a certain entity in hopes of earning a return on your investment — you put something in to get more out. You can invest your time, your energy and, most commonly, your money.
Typical investment types include:
- Stocks, bonds and options
- Mutual funds
- Exchange-traded funds (ETFs)
- Real estate
We’ll talk details on all five of these popular investment options later on.
How does investing work?
Investments are a means of making money, but by their very nature, they’re also a gamble. That’s because you have to spend money to make money, as the saying goes. When you invest in a company, for example, it can use the money that you’ve invested to increase its operations and hopefully increase its revenue. Theoretically, then, the value of the company and its stocks rise.
That’s how you, as the investor, make money, too.
Making money from investing
There are a couple of ways that investments can yield profits:
- You receive regular payouts – Known as interest payments for bonds and dividends for stocks, you can think of these regular payments as a “thank you” or an incentive. To reward investors for keeping their money invested, companies will allocate a portion of their profits to their shareholders — for example, a dividend of $1 for every share, where the total value of each share is $30.
- You sell at a higher price than you bought – When you buy an asset or product, the hope is that the value increases steadily over time. This happens because other people recognize the value of your investment (in part because of the sizable dividends or interest payments). They then want to buy in themselves, effectively increasing the value of each share. If you invested at $5 per share then decide to sell at $25 per share, you’ve made a sizable profit.
The same concepts also apply to investing in real estate properties, though in a slightly different way:
- You receive monthly income if you’re renting your investment property to a tenant.
- You might receive a larger return on your investment if you eventually sell the property at a higher price than you paid for it.
Naturally, investing only benefits you when the value of your investment — whether that’s in stocks, bonds, bitcoin, or your house — goes up over time.
What are the benefits of investing?
The obvious benefit of investing is that you make money (and without any extensive labor, to boot). But there’s more to it than just a pay day.
Investing helps you:
- Beat inflation – Every year, prices inevitably rise while the power of the dollar decreases. If you don’t invest the money you have now, you’re effectively losing money. By growing your savings at a rate equal to or higher than the rate of inflation, you’ll stay ahead of the curve.
- Prepare for retirement – Many investments yield the best results after long periods of time — from now until the day you decide to retire, for example. By investing now, you’ll give your assets plenty of time to appreciate in value and earn compound interest (interest on your interest). If you invest well, you may be able to live off of your returns during retirement.
- Save money on taxes – By investing in a tax-deferred retirement fund like a 401(k) or IRA, you don’t have to pay tax on the money you deposit during that year. Instead, you’ll pay tax when you withdraw the funds. Most people are in a much higher tax bracket when they’re depositing money than when they’re withdrawing, which can potentially save money on income tax owed.
- Manage your money – Chronic spenders may benefit from investing their money and leaving it invested. This reduces the temptation to spend and provides an opportunity to build a substantial nest egg.
- Maintain and build long-term wealth – Investing wisely can finally put an end to the paycheck-to-paycheck cycle. If you can commit to putting small, incremental payments toward building future wealth, you may create enough financial stability to amass increased savings. This allows you to put more money into your investments, creating a different, much better cycle.
What’s a good return on investment?
The expected return on investment (ROI) will vary depending on the risk level of your portfolio:
- On relatively safe investments, like low-risk stocks and government bonds, the average annual return over the past 100 years has been between 6.1% and 7.7%.
- On balanced investments, the average return has been about 8.7%.
- On risky investments (also called a “growth portfolio”), the average annual return has been 9.4% to 10.3%.
Despite these generalizations, it’s all relative. An ROI of 7% is generally pretty good for an individual investment, unless that’s dropped from 9%, 10% and 11% over the past three years.
Can you lose money from investing?
When you invest your money, there’s always a chance that you could lose some or all of it. Investing is inherently risky, but there are ways to mitigate your overall risk:
- Invest in low-risk assets, like certificates of deposit, government bonds or certain dividend-paying stocks.
- Diversify your investment portfolio. While some stocks or bonds may lose value, your overall portfolio should still earn you a solid return.
- Stay invested through volatile phases, as most low- to medium-risk investments will rise again after a low point. If you withdraw your money when the share value is low, you’re solidifying a loss.
- Buy low, sell high. This age-old investing adage is repeated and repeated for a reason. Investing wisely when the market is at a low point will increase the likelihood that the share’s value will rise — as they say, there’s nowhere to go but up.
How do I begin investing?
By seeking out this information, you’re already on the right track. Whether you decide to invest in stocks, ETFs or cryptocurrency, there are a few things every beginner investor should do:
- Create a realistic savings plan – You can’t invest money you don’t have. That means the first step is saving enough money that you can comfortably put towards investments without worrying about making rent or buying groceries. Experts recommend saving 20% of your monthly income, but for young adults, 10% is probably more attainable. A goal may be to increase that percentage to the recommended amount as your income rises and debts, such as student loans, are paid down.
- Identify your financial goals – Decide why you’re investing to determine what you should invest in. If your goal is to maintain steady interest income, you may want to choose relatively safe investments with stable long-term growth prospects, but if you’re looking for more growth from your investments, you may want something with a little more risk and, therefore, potential reward.
- Consult a financial advisor – Some people may choose to invest on their own through an app. However, if you’re serious about generating wealth through smart investment choices, a financial advisor can help you make decisions that align with your goals and even manage your portfolio on your behalf.
Investing in stocks
Stocks are a great starting point because of their variety — from low- to high-risk, across virtually all industries, with either short- or long-term growth opportunities.
Here’s how to start investing in stocks:
- Open your account – There are several investment account types that will allow you to invest in stocks, either independently or with the help of a professional. Choose the account that makes the most sense for you:
- A brokerage account – This DIY option allows investors to buy and sell stocks and other investments. Choose your online broker based on their commission costs, investment options and reputation. With them, you can open a retirement account (e.g., an IRA) or a taxable account and start investing.
- A robo-advisor account – Like a brokerage account without the hassle, a robo-advisor invests on your behalf in either an IRA or taxable account. They charge a small fee for managing your portfolio.
- An employer-sponsored 401(k) – Another relatively low-maintenance option, 401(k)s allow you to invest in stock mutual fund options, but not usually individual stock options. This hands-off approach should yield long-term growth.
- Create an investment strategy – Most experts recommend investing only a small portion of your overall portfolio in individual stocks. The rest, they suggest, should go towards stock funds and bond funds, which are less volatile and better for long-term wealth accumulation.
- Manage your money – Check your investment returns every quarter, at least, by reviewing your account statements to assess the growth of each stock or fund. Focus on long-term growth rather than short-term fluctuations, as the overarching trends provide much more accurate insight.
Many of these integral steps are the same for other asset types, as well.
Investing in mutual funds
The first step toward making money from mutual funds is, once again, to open an account. As with stock investing, you could open an IRA, 401(k) or brokerage account, as well as an education savings account, which invests your money to put towards your child’s post-secondary education later on.
From there, you’ll want to consider:
- Purchase shares of mutual funds – Many mutual funds have minimum investment amounts. Vanguard’s, for example, is $3,000 for actively managed funds, so you’ll have to save up to meet the minimum before investing in your chosen fund. Keep in mind that you can only trade mutual funds once per day, after the stock market has closed. One benefit of mutual funds is that they allow you to purchase fractional shares, meaning you can invest any dollar amount, not just the exact price of one or more shares.
As with stocks, you should regularly check your asset growth and reallocate as necessary. You may also want to set up recurring deposits to continue building your wealth over time.
Investing in ETFs
Exchange-traded funds share common characteristics with both stocks and mutual funds:
- Like stocks, they’re traded on stock exchanges at any point during the day and have no minimum investment amount.
- Like mutual funds, they’re made up of a variety of assets that leave you with an inherently diverse portfolio.
Once you have an account — brokerage or robo-advisor — you can begin investing. If you’re managing your brokerage account yourself, you’ll want to select ETFs to purchase based on these important factors:
- Expense ratios – These are administrative expenses that cut into your overall profit — naturally, lower is better.
- Passive vs. active – Passive ETFs tend to match the performance of a certain stock index, such as the S&P 500 index. Active ETFs, on the other hand, are actively managed by an investment manager and provide an opportunity to outperform the index by taking advantage of short-term movements.
- Volume – The amount of shares that were bought and sold over a given time frame indicate the ETFs popularity, but not necessarily its performance.
- Past performance – While not a direct predictor of future results, past performance provides insight into long-term growth (or lack thereof).
- Bid/ask spread – ETF prices are broken down into two categories:
- A bid refers to the price to buy a share, usually the highest someone will pay for a particular fund.
- An ask refers to the price to sell, usually the lowest someone will accept in exchange for their share.
The difference between these two (the spread) is the cost of one round-trip transaction. Essentially, it’s how much you’ll lose by buying, then later selling this fund. The more you trade ETFs, the more you have to concern yourself with the bid/ask spread.
Investing in cryptocurrency
Cryptocurrency is like the digital version of buying stocks or trading ETFs — instead of purchasing market shares, you’re purchasing virtual currency that derives its value from the current popularity of said currency.
Here’s how to invest money in cryptocurrency:
- Pick an exchange – This is the crypto version of a broker. Usually, it’s an app that allows you to use your U.S. dollars to buy the currency of your choice.
- Purchase cryptocurrency – Choose which cryptocurrency to purchase — Bitcoin is a popular option, but there’s also Ethereum, Litecoin and more — and how many coins (or fractions of coins) you want to buy.
- Keep it in your “wallet” – Your digital wallet is either a software app that holds and allows you to trade your crypto (usually through your exchange) or a hardware device that’s considered more secure for heavy duty crypto traders.
Investing in real estate
Purchasing any property is a type of real estate investing, as most real property appreciates in value in the long term. However, there are many other ways to get your foot in the door of real estate investment — literally and figuratively — including passive and active options:
- Real Estate Investment Trusts (REITs) are professionally managed trusts that use investors’ money to buy, manage, rent and sell property, then divide the profits among the shareholders.
- Real estate mutual funds are similarly passive investment options that earn you money from the real estate market without having to deal with the nitty gritty of buying and selling homes.
- Real Estate Limited Partnerships (RELPs) are managed by real estate managers or firms to finance large-scale developments, like shopping malls or luxury resorts. These passive investment opportunities generate ongoing income and a big payoff at the end, but can be riskier than other options.
- Pre-vetted rental properties are perfect for interested investors who aren’t experienced real estate investors. Instead, you can purchase rental-ready properties that others have deemed worthwhile. There’s less risk than choosing the property yourself, but it’s a more active pursuit than mutual funds and trusts.
- Fixer-uppers are the most active type of real estate investments. However, you have full autonomy over the property, the remodel and the eventual sale down the line. You can choose to turn a fixer-upper into a rental property or simply flip it for a profit, though this is the riskiest type of rental investment.
The bottom line
For beginner investors, many financial professionals recommend creating diverse portfolios of low- to low-medium-risk assets with potential for long-term growth.
A few examples of this include:
- Retirement funds – 401(k), IRA and Roth IRA are all low-maintenance investing strategies that will likely yield significant returns by the time you’re withdrawing from them.
- Robo-advisor-managed stocks and funds – You may decide to invest on your own later on, but starting with a robo-advisor (or human advisor) will help you build your portfolio, build some wealth and build your understanding of the market.
- Exchange-traded and index funds – Both index funds and passive ETFs track a market index with relatively little risk to the investor. The fees and commissions are often low with no minimum investment amount, making these highly accessible to beginners with small budgets.
It’s never too early to start investing (or at least thinking about investing). That way, you’ll have money saved for short-term goals, retirement and the little things along the way.
Tally can help you work towards paying off debt so you’ll be able to start your investment journey and grow your wealth.