Investing Tips For Beginners (How To Invest Money Wisely)

If you want a shot at becoming wealthy, you need to do more than simply earning and saving money. You need to invest your money.

I know what you’re thinking - Is the topic of investing really relevant to me? Isn’t investing something that is reserved for the wealthy? 

If that is you, think again! 

Investing is not mission impossible for everyday people like you and me. According to Statista, 55% of Americans are invested in the stock market. 

If you would like to build your wealth, you will need to grow your money. And the best way to grow your money is by investing. What's more is that these days, you can start with as little as $100!

So let's dive in and talk about some key investing tips for new investors. 

How to Invest Wisely For Your Financial Future

  1. Maximize your tax-advantaged accounts
  2. Have a long-term mindset
  3. Pay off high-cost debt
  4. Set up an emergency fund
  5. Think about your risk tolerance 
  6. Understand the Fees 
  7. Invest regularly - Automate where possible
  8. Invest in yourself 

1. Maximize your retirement accounts

A National Study of Millionaires found that 80% of net-worth millionaires in the study said that investing in their employer-sponsored retirement plan was the main way they reached millionaire status. 

You can let that simmer for a moment - I know I had to. 

Retirement accounts are made to incentivize us to invest in them. As such, they have benefits such 401(k) employer match (which is basically free money by the way) and major tax breaks that you should absolutely be taking advantage of.

For example, 401(k) plans allow you to defer paying income taxes on the money you save for retirement, allowing you to have more money in the account, and consequently, more growth as a result of compounding interest.

Tax-efficient investing can allow you to minimize your tax burden and maximize your returns. Investments that lose more of their returns to taxes - aggressive investments with higher return potentials - are better suited for tax-advantaged retirement accounts. 

Related: What is tax-efficient investing? How to reduce or avoid taxes 

The Schwab Center for Financial Research evaluated the long-term impact of taxes and other expenses on investment returns, and while investment selection and asset allocation are the most important factors that affect returns, the study found that minimizing taxes also has a significant effect.

Tax breaks and employer match are just a few of the strategies to consider when using your retirement accounts for retirement. 

Related: How compound interest can work for you 

2. Have a long-term mindset

Time in the market is better than timing the market. That's thanks to compound interest, which allows your balance to snowball over time.

Investing is a long-term strategy to build wealth. You should not try to time the market by buying low and selling high. Not even the most advanced investors can consistently beat the market.

Focus on the long-term gains. There will be ups and downs in the stock market, of course, but investing with a long-term mindset means you have years to ride out the fluctuations. Start now, even if you have to start small.

3. Pay off high-cost debt

If you have a debt, you're not alone. The average debt balance in the U.S. in 2020 was a whopping $92,727! 

Simply put, debt can be a major liability for your finances. If you are in debt, a budget can help you plan a debt payoff strategy, without which you might find yourself in constant financial struggle. 

Even if you are thinking about saving and investing, you need to ensure that you are in good shape before you start. If you have a credit card debt, with the average credit card interest currently at 16.12%, the debt will likely drain your resources because no investment will consistently outperform such a high APR. 

4. Set up an emergency fund

Personal finance experts disagree on a lot of things, but an emergency fund is one thing that they all get behind. And for good reason. Having an emergency fund is the backbone of any financial plan.

It can be especially crucial to have a financial buffer if you are already in debt to avoid relying on high-cost solutions such as credit cards. 

What’s more, financial emergencies come up all the time. In fact, within the last year, 28% of American households experienced a financial emergency. 

Despite this fact, nearly 4 in 10 American households would not be able to cover a $1,000 emergency. 

Ideally, the goal is to have about 3 - 6 months of your essential expenses in your emergency fund, but a good place to start is $1000, which can cover basic emergencies.

That said, with the average cost of an emergency in 2020 at $3,518, it is evident that $1000 should only be the beginning. Before you start investing, you need to protect yourself by setting aside some money to bail you out of life's unplanned circumstances. Only then can comfortably focus on growth. 

Related: Emergency Funds: What you need to know

5. Think about your risk tolerance

You might have heard it been said that investing involves risk. This is as true as it is important to think about your risk tolerance prior to investing. Risk tolerance is just a fancy way of saying how much of your investment you can really afford to lose. 

For example, if you're young, you're likely to have higher risk tolerance because should your investment have dips, you are likely to weather the market because time is on your side. The higher the risk tolerance, the more aggressive you can be, and the expected rate of return will be higher. But this also means that there will be more ups and downs in your investment over the short term and that you face a higher chance of losing your investment. 

Different investments come with different levels of risk. In order to minimize risk, you can utilize asset allocation - the allotment of your capital assets to various investments - in a way that balances the risks and rewards. 

6. Understand the Fees 

Investments have fees that are charged to your account. Commissions, management fees, transaction costs, annual costs, expense ratios - oh so many fees, and you need to stay on top of them. 

Annual costs are fees for keeping your account open. Commissions are charged by brokers in exchange for them placing trades on your behalf. Transaction costs are charged when buying or selling a security. Management expenses are for managing your positions. 

These charges can add up and offset returns. Research fees and minimize them wherever possible.

Pay particular attention to expense ratios. This is an annual fee expressed as a percentage of your investment and can range from as low as 0.015 (hello Fidelity total index fund) to over 2%. They're associated with mutual funds, ETFs, and index funds and can substantially lower your portfolio returns.

These few percentage points might not seem like much but they can make a huge dent in your portfolio's growth - a high expense ratio of 2% could add up to tens, even hundreds, of thousands of dollars over time.

7. Invest regularly - Automate where possible

“Successful investors typically build wealth systematically through regular investments, such as payroll deductions at work or automatic deductions from a checking or savings account,” says Jess Emery, a spokesperson for Vanguard Funds.

The National Study of Millionaires found that 75% of net-worth millionaires mentioned the habit of investing money regularly was the main way they reached millionaire status. 

Regularly and consistently investing over a period of time allows you to take advantage of natural market fluctuations. You enter into the market at low prices, and at high prices at other times. Over time, this averages out to a more average dollar amount, a concept known as dollar-cost-averaging. 

8. Invest in yourself 

Good investing begins by investing in yourself. Build financial confidence gradually by using online resources to learn about money mindset, saving, investing among relevant topics.

Invest in habits that can set you up for financial success such as reading self-help books.

I know, I know...

You might be thinking, how am I supposed to set aside time to reading books when I can barely get through my list of things to do towards financial success?

I get it, but here's the thing, the right books will motivate and inspire you daily, influencing and challenging you with new perspectives and ideas to reprogram the way you think.

Self-help books often promote the power of positive affirmations which studies have found to motivate you and boost your self-esteem. Among wealthy people, 88 percent read 30 minutes or more for self-improvement every day. This is according to Thomas Corley, author of ‘Rich Habits’ which is based on a 5-year study of self-made millionaires.

Related: Rich vs Poor Mindset: 5 Habits Of The Wealthy

Final Thoughts

The best way to invest money wisely and build wealth through investing is to start investing as soon as possible. Even if you are just starting with $100, just do it! Slowly but surely, you will start to reap the benefits of your hard work. 

Investing tips for beginners

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