Are you investing your money? If not, you should be. And if you are, are you investing your money wisely? In this beginner’s guide to investing I’ll show you the basic principles for investing money and how do to it wisely. I’ll also show you the basics of getting started with investments, and some of the most popular assets you can invest in to get an exponential return on your money.
What Is Investing?
The first thing you should know is, what is the definition of investing?
In it’s simplest form, investing is the act of putting assets (usually money) to work, in order to grow the value of the asset.
Money is used to purchase an asset such as stocks, real estate, gold, art, classic cars, coins, loans, businesses, or anything else of value, expecting to get a return that is greater than what you put in.
Why Should You Invest Your Money?
Unfortunately, money loses value over time due to inflation. So, if you’re like your weird, paranoid Uncle Steve and put all the money you save under your mattress, it will have less and less buying power as the years progress.
However, when you invest your money and grow it at a rate greater than inflation, you end up with exponentially more money than you originally put into the investment. This is how you build wealth, and eventually financial freedom for you and your family!
Basic Principles for Investing Wisely
Before you invest any money, you should understand that you need to know a few basic principles for how to invest wisely. Growing your money only happens when you do the right things, and avoid the traps that can scuttle your investments over the long term.
Below, you’ll find some of the basic principles of wise investing you can use to keep your investments moving in the right direction.
Keep Your Investments Simple
There are tons of complicated investment strategies out there. Many of them are promoted by people who tell you if you just use their unique, complicated strategy, you will make millions. They are usually promoted by someone trying to sell you a service or a newsletter.
Complicated strategies almost never work.
And if they do, they don’t work over the long term.
Believe it or not, the best investment strategies are usually the most boring. The simplest, easiest way to invest in stocks is to buy shares of index funds that match the returns of the market as a whole.
Another simple strategy is to invest equal amounts in mutual funds covering 4 different categories:
- Growth and Income
- Aggressive Growth
The more complicated your strategy, the more likely it is you don’t completely understand how it works, and that’s a recipe for disaster.
Always Understand Your Investments
If you can’t clearly explain your investment to someone so they can understand it, then you don’t need to invest in it.
Stay Out of Debt
This is the number one concept I preach about the most. When you stay out of debt, you can invest more money. When you have more to invest, your nest egg grows faster, and you become a millionaire years (or even decades!) earlier than if you are constantly battling the bondage of debt.
If you need to get out of debt, the first step is to get total control over your finances. My top-rated online course is a great way to make that happen. For a modest sum, it will save you literally tens of thousands of dollars over your lifetime! You can find it here: The Divine Art of Money- 21 Days to Manage Your Money Like a Pro!
Invest 15% of Your Income
Your goal should be to consistently invest 15% of your take-home pay every single month. The easiest way is to have it automatically deducted from your paycheck and deposited straight into your investment accounts.
Being consistent and disciplined is the key. Automatically investing 15% is best way to be consistent and have discipline when it comes to saving and investing. All you have to do is set it and forget it!
Keep Your Emotions Out of Your Investments
The media like you to think investing as an exciting, game of hot stock tips and constant buying and selling. But the reality is, investing is really boring if you do it the right way.
It’s about as exciting as watching paint dry.
The ups and downs in the market will happen no matter what. Some days you make money, and some days you lose. But you can’t let the ups and downs play on your emotions. When you do, your returns will suffer massively over the long term. You will buy and sell at the worst possible times, and miss out on gains because your acting out of fear instead of knowledge.
Don’t check your investments every day. For that matter, don’t check them every week or every month. Check them once every quarter.
Constantly checking your investments makes it far too easy to become emotionally involved. You end up making terrible decisions based on an emotional response. Believe me, I know this from personal experience!
Don’t Be Too Conservative
Be careful about being too conservative with your investments. Keeping most of your money in CD’s (Certificates of Deposit) or a money market account or is a terrible way to invest your money! Yet millions of people do it all the time, thinking it’s a good way to invest because there is no chance of losing money.
Yes, these investments are very safe, and you won’t lose the money you put in. Unfortunately though, they have an extremely low return on investment. In fact, the returns don’t even keep up with inflation, so you actually do lose money, because your money loses buying power over time.
After over 25 years of investing, I’ve finally learned to be a patient investor. It’s tempting to try to make money quickly. But a short-term mentality almost always means more risk, which means you end up losing money.
Remember, investing is a marathon, not a sprint. It's totally normal for the value of your investments to go up and down over time. But as time stretches on, your portfolio will always go up in value. So be patient if your investments are not performing very well right now.
Don’t think about your investments in terms of how they are doing today, or the last 6 months, or the last year. Think about your investments in time spans of 20-30 years or more. Taking a long-term view helps you keep things in perspective.
Seek Wise Counsel
It’s always good to seek wise counsel. Especially when it comes to investing. The best counsel comes from a professional such as a financial advisor or financial planner. Seek out pros who charge a flat fee or an hourly fee.
Hiring a financial pro that takes a percentage of the money you invest as compensation will put a huge dent in your investment returns. 1% may not sound like much, but it costs you tens of thousands of dollars (or more) over your investing lifetime.
A great financial planner has the heart of a teacher. They will make sure you understand everything about your investments, and not take a huge chunk of your money in the process.
Watch the Fees
Investment fees will really eat into your returns over time. High fees will literally cost you tens of thousands of dollars over time due to the fees themselves, as well as diminished investment returns. Some common fees you should to be aware of:
- Annual Fees- This is charged every year you own shares of a mutual fund. They range from as little as .2% up to as high as 5-6%.
- Front End Loads- for some mutual funds, you have to pay a load of up to 5-6% of your total investment just for the privilege of purchasing their funds.
- Transaction Fees- These fees are usually pretty low, and are charged every time you buy or sell shares of an investment.
The thing about fees is that they can be really sneaky. It’s wise to know when and how fees are charged when you invest in anything. Every time you pay an investment fee, the money you pay in fees never has a chance to grow.
Always Invest Tax-Free and Invest Pre-Tax Money First
Tax Free Money- The money you invest into Roth IRA and Roth 401k accounts is taxed just like regular income. However, when you retire and start taking money out of the account, you don’t pay taxes on the withdrawal.
Pre-Tax money- The money you invest in an IRA, 401k, 403b, is not taxed as income, so you will save money on taxes in the same year you invest the money. However, when you start withdrawing money at retirement, you will pay taxes on the withdrawals.
Free Money- There’s nothing better than free money!If your employer matches your contributions to your retirement accounts, take advantage of it.
How to Set Up an Investment Account
Setting up an investment account is really very easy. In fact, it’s not much different than setting up a bank account. To start, all you need to do is provide your basic information, such as:
- Date of Birth
- Social Security #
You will be asked for additional information such as:
- What kind of account do you want to open?- traditional investment account, IRA, Roth IRA, or any number of others.
- Beneficiary info- who do you want to inherit the account in case you die.
- Bank account info- so you can transfer money from your bank into your investment account.
Signing up for an account is easy, and typically only takes a few minutes. You can start investing as soon as you put money into the account!
Where Can I Open an Investment Account?
There are a huge number of brokerages where you can open an investment account. The most popular ones are the online brokerages such as Vanguard, TD Ameritrade, Charles Schwab, and Etrade. I keep my investment accounts at Vanguard because they have the lowest overall fees and excellent customer service.
You can also open an investment account with most banks, especially the larger ones.
How Does an Investment Account Work?
Once you open an investment account, you will actually have two accounts within your investment account.
- Settlement account– also called a holding account, this is where the money goes when you transfer money in from your bank. You can use it to purchase stocks, bonds, mutual funds, ETF’s and anything else your brokerage offers. When you sell investments, this is where the money goes after the sale is finalized.
- Investment account- When you buy an investment, it’s held in the investment account. This is where you will see what investments you own, how many shares you have, and how much those shares are worth.
What are the Different Types of Investment Accounts?
There are many types of investment accounts. Too many to list here or this post would be much longer than it already is. Here’s a list of some of the most popular types of investment accounts below.
Anybody can open an IRA as long as they have earned income. Some brokerages let you open an IRA account with no money, and some require you to make a modest deposit to the account when you open it. You can put pre-tax money into an IRA, which means your contribution is not taxed when you put it into the account, but you will pay taxes when you withdraw money at retirement.
A Roth IRA works the same as a traditional IRA, except that your contributions are taxed as regular income, and you don’t pay taxes when you withdraw money at retirement. Click here for a handy comparison chart from the IRS comparing IRA’s vs. Roth IRA’s.
A 401k is an investment account usually offered by your employer. The contribution limits are much higher than with IRA’s, and you can take your 401k with you when you leave your employer. Some employers may offer a Roth 401k option as well. Here’s a great article from Investopedia explaining all the ins and outs of investing in a 401k.
Similar to a 401k, a 403b plan is offered to employees of tax-exempt organizations such as nonprofits, hospitals, churches, and public education institutions. A Roth 403b option may be offered as well. Here’s a rundown of 403b plans from The Balance.
Self-Directed IRA’s and 401k’s
Self-directed IRA’s and 401k’s are special in that they are set up to allow you to invest in alternative investments (more about those below). You are required to set up an LLC inside your investment account, and the LLC owns the investments. There are a lot of fees and legal hoops to jump through to set up a self-directed account, but it’s worth it if you want to invest in more than just the stock market.
I own a rental home with my Self-Directed IRA, which you can read about here.
How to Start Investing in the Stock Market
Most people who have investments have at least a portion of their money in the stock market. Whether you buy individual stocks, mutual funds, or ETF’s, stock market investing is by far the most popular way to invest your money and make it grow exponentially.
You can buy any of these investments through an investment account or one of the retirement accounts covered above.
When you buy individual stocks, you are actually become a part owner of the company whose stock you’re buying. The value of your stock rises and falls (sometimes very quickly) as the company makes or loses money. Individual stocks are generally more risky, as you have the potential to lose all your money if a company goes out of business.
Mutual funds tend to be less risky than stocks. A mutual fund is a basket of different stocks of individual companies grouped together into one investment. Mutual funds usually have a theme, such as health care, retail, growth, income, and so forth. Unlike a stock, the price of a mutual fund is settled at the end of each day instead of being traded throughout the day.
ETF’s (Exchange Traded Funds) are like a mutual fund, in that they are a basket of stocks grouped together into one package. The difference is, they are traded throughout the day like a stock. Fees are generally lower than with mutual funds, and there are tons of options depending on how you want to invest. Some ETF’s can be very conservative, while others are extremely risky but have the potential for huge returns.
Of course, there are literally hundreds of alternative ways to invest money outside of the stock market. Each one has its own set of rules and risks involved. In general, you can’t invest in alternative assets unless you have a self-directed IRA or 401k, or you invest money that’s not in a retirement account. Below I’ll show you some of the more popular alternative investments people use to build wealth.
Should You Invest in Real Estate?
Real estate is an awesome way to invest your money! There are a lot of ways to do it, and any of them can be extremely profitable when done right. Here’s a quick list of some of the ways you can invest money in real estate as an alternative investment:
- Rental houses
- Fixing up and flipping houses
- Multi-unit rentals
- Tax liens
- Raw land
- Real estate crowdfunding
- Vacation rentals
- House hacking
These are just a few of the ways you can make money investing in real estate. Each one requires a specific set of knowledge and skills, but none of them are rocket science. Anyone can do well investing in real estate if you’re willing to put in the time to learn.
Real estate is one of my favorite ways to invest. I currently own a rental house that I’ve had for several years now, and plan on buying several more in the future. Before that, I fixed and flipped a property. Here’s a couple of links showing you every detail about how those deals went down:
Should You Invest in Bitcoin or Other Cryptocurrency?
Cryptocurrency is a relative new kid on the block. The two most popular cryptocurrencies are Bitcoin and Ethereum, but there are literally hundreds more available. Investing in crypto is extremely risky, and the prices can fluctuate wildly on a daily basis.
Although there is huge potential upside, there is also the risk that you can lose your entire investment in short order. If you invest in crypto, it’s wise to make it only a small portion of your portfolio, understanding that it may not work out as an investment.
Should You Invest in Gold?
At the other end of the spectrum, investing in gold is a much less risky proposition. Gold prices are typically fairly steady, which is why people use gold as a store of wealth, not expecting a large return. Gold prices typically increase during bad economic times, so it can be used as a hedge to protect some of your money when stock prices are tanking.
The Beginner Investor
Of course, this post is only the tip of the iceberg when it comes to learning about investing. It’s a massively broad subject. But the more you learn about how to invest your hard-earned money- and do it wisely- the better you will be able to build massive wealth over your lifetime.
Below, you’ll find some of my most trusted resources on investing.
Bigger Pockets (real estate investing)