A lot of us grow up without learning the ins and outs of the investing world. And since our K-12 educational system doesn’t mandate financial education of any sort, many of us reach adulthood without a clue as to how to budget, let alone invest our money.
So we have to play catch up. The first step to building wealth through investing is learning the basics and understanding what works for your financial goals and what doesn’t.
Here are six tips and rules of thumb to help you build your knowledge and confidence about the world of investing.
1) You can start investing with a small budget.
Despite having a tight budget, you can still set up a systematic investment program with as little as $50 a month and can invest in a number of different investment vehicles. The investment choice will be determined after speaking with an investment professional, or after doing your own research and deciding what is suitable for your individual situation. This amount can be increased, paused or discontinued as the account holder’s ability to contribute changes and applies to both retirement and non-retirement accounts.
2) You can afford to take risks in your 20s and 30s.
If you are investing and in your 20s and 30s, you are in the position to embrace higher risk investments. This is because you have the time to make up losses and usually have less investment capital to negatively impact your long-term financial well-being. As you age, your portfolio balance most likely will be larger due to the growth of your investments and contributions made over time. So, as you get closer to retirement, the amount of time you have to make up losses decreases.
3) Consider speaking to a financial advisor to help you build wealth.
A financial advisor is an investment professional that matches the correct investment strategy with a client’s needs, goals and time frame for investing. Both can make recommendations on how to allocate your investments to reach your goals as well as manage tax efficiency. When looking for a financial advisor, you should look for someone who you feel puts your interests first and that you feel comfortable with while fully understanding what the investments are that he or she recommends. This begins many times with a questionnaire that is filled out by the prospective client to determine the risks they are willing to assume to get the desired return on their assets.
4) No risks, no reward.
Anything that has a possibility of losing money is a little scary, but then again walking out of our homes each day can be scary. However, we must take the risk to go places like school or work that have the potential to better ourselves and our lives. In other words, “No risk no reward.” You must be aware and comfortable with the possibility of the loss of principal, as well as the probability of benefits each investment can bring.
5) Choose your financial advisor carefully.
Trust and understanding are the only things that can take away some of fears that come from investing. That’s why it is important to have open, transparent communication with your financial advisor. If an advisor just wants to push you into a product without asking about your risk tolerance, goals, the returns you want to achieve, and your time frame for investing, you should move on to find someone else. If you know of someone who has had a great experience with their advisor, ask to be referred to them for a consultation.
6) Save your money for the short term. Invest your money for the long term.
If you have a short time frame, very little, if any, risks should be taken. If it turns out that there aren’t any short-term needs for the money earmarked for savings, then something should be done to keep your money growing—at a minimum— in pace with the inflation rate (the amount prices of goods and services increase year over year). The inflation rate historically has been three percent per year, which means that if you have $1 now, by next year, because of the cost of living inflationary increase, your dollar will be worth $0.97. This means that if you aren’t getting a three percent return on your money, its value or buying power is actually eroding each year.
There’s a saying, “What you don’t know, won’t hurt you.” This is not true when it comes to growing wealth through investing. Make investing a part of your wealth-building strategy once you become comfortable with the basics.