Start Investing Now and Never Look Back

The following is a guest post from Rachel Anna on investing. 

If you’ve decided to start investing, congratulations. It’s one of the smartest ways to guarantee your comfort later in life. Stocks, bonds, money market accounts, 401(k)s, IRAs—there’s a wide range of options that you can use to incubate your nest egg while you wait for it to hatch.[1] Investing is popular and profitable, but it’s essential that you have a plan of attack before you start.

Investing Strategy Basics

1. Repay Your Debts First

The annual interest rate on credit card debt can be up to 15%, so the longer you wait to repay that money, the more it will cost you. Pay down your debt ASAP to avoid owing the bank any more money than necessary.[2]

2. Start as Soon as You Can

The earlier you start investing, the longer your money has to grow. Compound interest is handy investment function that generates money based on your reinvested earnings.[3] For example, if you invest $5,000 at 10% interest, that initial amount will grow to $5,500 by the end of the year. If you make no deductions from that account, you’ll have $6,050 by the end of the second year and $6,655 by the end of the third year.

Even if you start with a small initial investment, compound interest will help your wealth grow. Even better news: If you continue to make contributions to that account, your money will compound at an even higher rate.

3. Don’t Invest Money that You’re Going to Need Soon

Take a good hard look at your finances before you invest. Examine your near-future plans to figure out how much money you’ll be able to dedicate to investments. [2]Are you planning on buying a house or a car soon? Only invest money that you won’t need for the next three to five years. If you’d still like to keep your money safe and help it earn interest, consider a shorter-term option, like a money market account.

4. Take Advantage of Your 401(k)

Your 401(k) is one of the most valuable resources when it comes to investing in your retirement. Unless you’re faced with an emergency situation, be sure to max out your 401(k) contribution from your paycheck, especially if your employer will match your contribution. Just remember: The more you put away now, the more you’ll have when you retire.[2]

5. Stick to Your Guns

It can tempting to sell your stocks when you see their value begin to drop, but don’t automatically give up — fluctuation is normal. A diverse selection of investments in different parts of the economy will help keep your money secure.[2] If one sector falters, you’ll be able to rely on your other investments to keep your portfolio healthy.

Trading in and out of the market can also mean constantly paying fees and missing out on the perks of being a long-term stock holder.[2]

What Strategy Will Work Best For You ?

First off, talk with your banker or financial advisor about personalized investment strategies. Should you invest in stocks? In the long term, stocks can be a great investment. Over the short term, stocks frequently fluctuate and may not provide a solid source of income or financial security.

US Treasury bonds, on the other hand, are one of the safest investments you can make, but definitely not the most profitable.[1]

How Much Should You Invest

Before you get started, you’ll also need to figure out how much you can’t initially invest. The more you start out with, the more profitable your portfolio will be down the road. For example, if you put $2000 in the stock market, 30 years later, at 10% growth (the historical average), you’ll have $34,898.[2] Of course, not everybody any can afford to invest $2000 all at once.

If you’re in your early 20s, investing just $10 every month can still help you build sizable investments by the time you’re ready to retire.

That’s not to say that older, more financially stable investors can’t also use the stock market to their advantage. Assuming an average 10% return, an investment of $160 in a particular stock every month for 20 years could potentially grow into a very valuable nest egg.[2] Remember, the best investments are those that you and your financial advisor have carefully considered.

Start early and build a balanced portfolio that will help your money grow for years to come. It may mean that you need to cut back a little now, but you’ll thank yourself in the future.

Rachel Anna writes articles for Allied Cash on responsible borrowing, investment, and budgeting.
References

[1] “Investing your money basics.” CNNMoney. 05 12 11: n. page. Web. 7 May. 2012.
[2] “Why Should I Invest?.” Motley Fool. n.d. n. page. Web. 7 May. 2012.
[3] “Investing 101: Introduction.” Investopia. n.d. n. page. Web. 7 May. 2012.