Making Smart Investments: A Beginner’s Guide
Are you a saver or spender?
If you went with the former, then you’re in the majority. According to a 2019 Charles Schwab survey, around 59% of Americans said they considered themselves savers. Compare that to more recent findings, however, and you’ll see that 63% of respondents in a similar demographic are currently living paycheck to paycheck.
Clearly, there’s a disconnect between the financial goals we are setting and the steps we are taking to realize them.
Many of us are taught from a young age that saving is the most direct path to building wealth and achieving financial freedom. But this is a myth. While saving is key in the pursuit of both goals, making smart investments with your money makes them much more attainable.
The fear that stops most people from investing is a reasonable one: financial loss as opposed to financial gain. When we work hard and are disciplined enough to forgo consumption and save, the idea of losing our hard-earned dollars understandably makes us uncomfortable. As a result, we tuck our money away in an FDIC-insured bank account.
Here’s the problem: The money we put into our accounts is almost guaranteed to lose value. The low interest rates that savings accounts offer can’t even keep pace with inflation, meaning our money’s purchasing power decreases the longer we save.
There is some good news, though. If you make smart decisions and invest in the right places, you can reduce the risk factor, increase the reward factor, and generate meaningful returns without feeling like you’d be better off in Vegas.
Here are a few questions to consider as you get started.
Why should you invest?
Saving versus investing is an oft-heard debate in financial circles. But they’re two sides of the same coin.
When building wealth, saving is an indispensable part of the financial toolbox — not because it produces wealth on its own, but because it provides the capital necessary to invest. At a minimum, investing allows you to keep pace with cost-of-living increases created by inflation.
At a maximum, the major benefit of a long-term investment strategy is the possibility of compounding interest, or growth earned on growth.
How much should you save vs. invest?
Given that each investor enters the market because of unique circumstances, the best answer to how much you should save is “as much as possible.” As a guideline, saving 20% of your income is the right starting place. More is always better, but I believe that 20% allows you to accumulate a meaningful amount of capital throughout your career.
Initially, you’ll want to allocate these savings to building an emergency fund equal to roughly three to six months’ worth of ordinary expenses. Once you’ve socked away these emergency savings, invest additional funds that aren’t being put toward specific near-term expenses.
Invested wisely — and over a long period — this capital can multiply.
How do investments work?
Understanding the market: In the finance world, the market is a term used to describe the place where you can buy and sell shares of stocks, bonds, and other assets. To enter the market, don’t use your bank account.
You need to open an investment account, like a brokerage account, which you fund with cash that you can then use to buy stocks, bonds, and other investable assets. Big-name firms like Schwab or Fidelity will let you do this similarly to how you’d open a bank account.
Stocks vs. bonds: Publicly traded companies use the market to raise money for their operations, growth, or expansion by issuing stocks (small pieces of ownership of the company) or bonds (debt).
When a company issues bonds on the market, they are basically asking investors for loans to raise money for their organization. Investors buy the bonds, then the company pays them back, plus a percentage of interest, over time.
Stocks, on the other hand, are small pieces of equity in a company. When a company goes from private to public, its stock can be publicly bought and sold on the market — meaning it is no longer privately owned. A stock price is generally reflective of the value of the company, but the actual price is determined by what market participants are willing to pay or accept on any given day.
Read More at https://hbr.org/2021/08/how-to-make-smart-investments-a-beginners-guide