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Investing 101: 5 Steps to Get Started

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Managing your money is a job in and of itself: paying bills, saving for retirement and putting away extra for emergencies. But you should add another line item to your list: investments. Learning how to start investing is like starting any project — at the beginning. Here’s the best way to start investing and why you should start as soon as you can.

1. Understand the risks and benefits of investing

If you’re unsure about where to start investing, it can seem intimidating. Understanding the stock market, shares, and buying and selling assets can be confusing.

It’s important to note that investing your money always carries some level of risk. Some investments have major risks and some have minor risks — it’s all about what you’re comfortable with. If you’re not up to speed on the best practices of the market, you might not get the same level of reward.

But in general, there are major benefits to learning how to start investing. Putting your money in long-term investments can help you build wealth and save enough for retirement; you can harness the power of compounding interest. Stashing your spare cash in a standard savings account is great for emergency savings, but for money you don’t need in the short-term, you could earn much more through investments than you can from a bank account’s minuscule interest payments.

Don’t shun investing until you know all the different ways your money can earn you even more.

2. Decide what to invest in

Funding your retirement is a major reason to start investing. Many employers offer access to a 401(k) retirement plan, which usually invests your contributions in stocks, bonds and mutual funds, depending on the portfolio your employer chooses for you. This makes it pretty simple to figure out how to start investing.

Individual retirement accounts (IRAs) are retirement accounts that you can get without an employer. There are two types of IRAs:

  • Traditional. If you’re under 50, you can contribute a total of $6,000 to a traditional or Roth IRA in 2019. You might be able to deduct some of your contributions from your taxes. You can make contributions until you’re 70 and a half years old, but you also have to start withdrawing at that age. Any early withdrawals can cost you penalty fees.
  • Roth. If you’re under 50, you can contribute a total of $6,000 to a traditional or Roth IRA in 2019 — but it’s not tax-deductible. You can take money out at any time without facing a penalty. Your income may determine your eligibility.

There are several other ways to invest that aren’t through IRAs or 401(k)s, including:

  • Stocks. Publicly traded companies sell stock shares to investors, which makes you a part owner of that company when you purchase one. Some companies pay dividends (a small percentage of the company’s recent earnings) to shareholders.
  • Bonds. Buying a bond is like giving a company a loan. The company agrees to pay you back within a specified time, plus interest. Unlike stocks, you don’t have any ownership rights through bonds.
  • Funds. Mutual funds, exchange-traded funds, and other similar products represent a shared investment between you and other investors to buy a collection of stocks, bonds and other investment types. These types of investments help diversify your portfolio without buying separate entities.

It’s OK to invest in more than one place. In fact, diversifying your portfolio can help minimize risk. If you’ve invested in multiple areas, you won’t lose all your cash if one investment takes a dive.

3. Open a brokerage account

If you’re starting to invest from scratch, consider which product is best for your needs.

Online investment brokers

If you’re planning to micromanage your investments, an online brokerage may be right for you. You get to pick the investments you’d like, including stocks, bonds and mutual funds. Some may have minimum requirements — although many don’t — so it’s important to review fees and requirements before signing on.

Robo-advisors

If you want to learn how to start investing but don’t have enough time to devote to poring over your portfolio, you may want to look into robo-advisors. Robo-advisors manage your money for you. Once you pick your company, you’ll answer a few questions about your investment preferences, such as how risky or conservative you are.

Fees and minimum requirements vary depending on the company you choose. Some offer a hybrid account where you can mostly leave your investments alone but still have the chance to talk to a human when you have questions.

401(k)s and other retirement plans

If you’re investing in a 401(k) through your job, you already have an investment account, and you may already have an advisor set up to handle your account. If so, take advantage of employer matches. If you have this option, it means your company will match your contributions up to a certain percentage. That’s even more money you can put into your investing — and more money to cash out later on when you retire.

Retirement plans like 401(k)s and IRAs are the easiest to manage since your investments are handled for you. Robo-advisors are also minimalistic. Choose the best method that matches your preferences.

4. Fund your account

You don’t have to sell your car or your soul to get fund your investments. You just need a few bucks.

For instance, Acorns allows you to start your portfolio with $5. This is a great way to throw your spare change into something that can grow over time. There’s a monthly fee of $1 to $3, depending on the level you choose. If you’re in college, you can qualify for the $1 per month level for free.

Robo-advisors such as Betterment and Wealthfront may also offer affordable options. Both companies have an annual fee of 0.25% of whatever you invest. Betterment doesn’t require a minimum amount to invest but for Wealthfront, you’ll need at least $500 to start.

5. Continue growing your investment

While starting out is easy with a few dollars, consider increasing your investment amounts as you’re able.

To make regular contributions easier, you may find it useful to set up automatic contributions to add to your account every month. That way you know your account is always growing, even if it’s in small amounts — a little bit can go a long way. You can also set a calendar reminder, just like you would with any of your other bills or payments.

Regardless of which investment company you select, choose one that’s in line with your needs. If you prefer handing off your investment money to a robo-advisor with minimal fees, that’s great! If you think you may want to talk to a human at some point, maybe try a hybrid advisor. Do whatever is right for you.

Don’t be afraid to change and evolve along with your money and lifestyle. It’s all right to move your investments if you don’t like how a company is working out. It’s your money — it should be doing what you think is best for it.

Fees mentioned are accurate as of the date of publishing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Dori Zinn
Dori Zinn |

Dori Zinn is a writer at MagnifyMoney. You can email Dori here

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Should You Pay Off Debt or Save Your Money?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You have a regular source of income, you’re paying your bills on time and you have some extra dollars left over each month. What should you do with that extra cash?

If you don’t have debt (lucky you!), then the choice is simple — save or invest as much as possible. If you have debt, however, the choice can be a bit murkier: Should you pay off your debt first or save? Here are some things to consider when asking yourself that question.

Three times that saving your money might be smarter

1. If you don’t have an emergency savings fund

Just when you’re cruising along, life can throw some unexpected and expensive curves your way. A sudden job loss, medical bills or car repairs can pop up out of the blue, and if you don’t have the funds to pay for them, you can end up seriously in the red. To cover unexpected costs, some may resort to high-interest credit cards and loans. Those kinds of moves can dig you into a financial hole that can take years to pay your way out of.

Saving up a healthy emergency fund can protect you in instances like these. How much should you save? Experts generally suggest that you should save an amount equal to between three and six months of living expenses. Depending on your individual circumstances, however, you may need more than that. (Check out this article to figure out how much to save and where to keep it.)

2. Your employer offers matching retirement contributions

If you’re fortunate enough to work for a company that offers a retirement plan with matching contributions, then consider making that method of saving a priority.

For example, if your employer offers to match your contributions dollar-for-dollar up to 6% of your salary in a 401(k) plan, then contribute at least that much, if possible. The money can then grow in a tax-free or tax-deferred 401(k) until you withdraw it in retirement — all that compound interest can really add up over the years. If you don’t contribute up to that amount, you’re leaving free money on the table.

Note, however, that If you need to withdraw these funds early (before the age of 59 and a half and before the account is five years old) there will be penalties to pay. That makes this a better tool for long-term savings rather than for the short-term or as an emergency savings fund.

3. Your debt has a very low interest rate

Debt gets a bad rap — often for good reason — but in some cases, carrying your low-interest debt and investing or saving your funds instead may be more beneficial. For example, the current fixed interest rate for direct subsidized and unsubsidized student loans is 5.05%, and the average 30-year fixed mortgage rate is about 4.3%. The stock market, on the other hand, has gone up an average of 10% a year since 1926.

Beyond comparing interest rates, however, you also need to assess how much risk you’re willing to take and how much access to your savings that you’ll need. Of course, there are no guarantees that your investments will perform well, and paying down debt comes with zero risk. Savings accounts are a less risky saving option, but the average interest rate is often less than 1 or 2%. Other options, such as individual retirement accounts (IRAs), have restrictions on how the funds can be used outside of retirement.

Four times debt repayment may be more beneficial

1. You have high-interest debt

It’s hard to get ahead of high-interest debt, because compound interest is working against you. Credit card interest rates, for example, average between 15 and 20% — an amount which adds up quickly. If you make the minimum payment, you may not even be making a dent in the principal amount owed, and you can spend years just paying interest. Calculators like this one can help you figure out just how much interest you’ll pay and how long it will take to pay off.

If you have high-interest debt, make sure you explore all the options for paying it down, including consolidating your debt and researching balance transfer cards.

2. Your debt doesn’t offer any benefits

Though your debt is costing you in interest, you might find that some loans may offer useful perks. For example, federal student loans may offer tax benefits and even loan forgiveness programs for eligible borrowers. Similarly, there are tax write-offs for mortgages and in many cases, the money you invest in a home will pay off down the line when you sell your property.

On the other hand, the debt on the credit card you maxed out to pay for that trip to Cabo comes with no benefits — just a bunch of interest. High-interest debt with no benefits should be at the top of your pay-off priority list.

3. You want to raise your credit score

While there are many factors that go into determining your credit score, the amount of debt you carry is an important component. If you plan to buy a home or secure a loan in the near future, take a look at your debt-to-income ratio (DTI), which many lenders consider before approving you for a loan. If your DTI is high, you may want to consider paying off some debt before applying for that new loan, which may result in lower interest rates for you later.

4. Your debt stresses you out

Debt can take an emotional and physical toll on people, ranging from depression to insomnia and more. When it feels like a black cloud hanging over your head and it’s affecting your life in negative ways, it may be in your best interest to prioritize paying debt off first.

Should you pay off debt or save?

Of course, saving vs. paying off debt early doesn’t have to be an either/or situation — ideally, you can do both at the same time. If, however, a choice must be made between the two, there are many factors to consider. As with most financial moves, there are no cut-and-dry rules, and the best one for you will depend on your individual circumstances.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Julie Ryan Evans
Julie Ryan Evans |

Julie Ryan Evans is a writer at MagnifyMoney. You can email Julie here

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How to Make Money in Stocks

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Putting money in the market is well-worn financial advice for a reason: Investing in stocks is one of the best steps you can take toward building wealth.But how, exactly, is that wealth built? How is money earned by purchasing stock market holdings, and what can you do to maximize the gains you make from your own portfolio?

How to make money in stocks: 5 best practices

The way the stock market works — and works for you — is as simple as a high school economics class. It’s all about supply and demand, and the way those factors affect value.

Investors purchase market assets like stocks (shares of companies), which increase in value when the company does well. As the company in question makes financial progress, more investors want a piece of the action, and they’re willing to pay more for an individual share.

That means that the share you paid for has now increased in price, thanks to higher demand — which in turn means you can earn something when it comes time to sell it. (Of course, it’s also possible for stocks and other market holdings to decrease in value, which is why there’s no such thing as a risk-free investment.)

Along with the profit you can make by selling stocks, you can also earn shareholder dividends, or portions of the company’s earnings. Cash dividends are usually paid on a quarterly basis, but you might also earn dividends in the form of additional shares of stock.

Micro-mechanics of how stocks earn money aside, you likely won’t see serious growth without heeding some basic market principles and best practices. Here’s how to ensure your portfolio will do as much work for you as possible.

1. Take advantage of time

Although it’s possible to make money on the stock market in the short term, the real earning potential comes from the compound interest you earn on long-term holdings. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains. That’s how stock market earnings increase over time exponentially.

But in order to best take advantage of that exponential growth, you need to start building your portfolio as early as possible. Ideally, you’ll want to start investing as soon as you’re earning an income — perhaps by taking advantage of a company-sponsored 401(k) plan.

To see exactly how much time can affect your nest egg, let’s look at an example. Say you stashed $1,000 in your retirement account at age 20, with plans to hang up your working hat at age 70. Even if you put nothing else into the account, you’d have over $18,000 to look forward to after 50 years of growth, assuming a relatively modest 6% interest rate. But if you waited until you were 60 to make that initial deposit, you’d earn less than $800 through compound interest — which is why it’s so much harder to save for retirement if you don’t start early. Plus, all that extra cash comes at no additional effort on your part. It just requires time — so go ahead and get started!

2. Continue to invest regularly

Time is an important component of your overall portfolio growth. But even decades of compounding returns can only do so much if you don’t continue to save.

Let’s go back to our retirement example above. Only this time, instead of making a $1,000 deposit and forgetting about it, let’s say you contributed $1,000 a year — which comes out to less than $20 per week.

If you started making those annual contributions at age 20, you’d have saved about $325,000 by the time you celebrated your 70th birthday. Even if you waited until 60 to start saving, you’d wind up with about $15,000 — a far cry from the measly $1,800 you’d take out if you only made the initial deposit.

Making regular contributions doesn’t have to take much effort; you can easily automate the process through your 401(k) or brokerage account, depositing a set amount each week or pay period.

3. Set it and forget it — mostly

If you’re looking to see healthy returns on your stock market investments, just remember — you’re playing the long game.

For one thing, short-term trading lacks the tax benefits you can glean from holding onto your investments for longer. If you sell a stock before owning it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains — that is, stocks you’ve held for more than a year.

While there are certain situations that do call for taking a look at your holdings, for the most part, even serious market dips reverse themselves in time. In fact, these bearish blips are regular, expected events, according to Malik S. Lee, CFP® and founder of Atlanta-based Felton & Peel Wealth Management.

So-called market corrections are healthy, he said. “It shows that the market is alive and well.” And even taking major recessions into account, the market’s performance has had an overall upward trend over the past hundred years.

4. Maintain a diverse portfolio

All investing carries risk; it’s possible for some of the companies you invest in to underperform or even fold entirely. But if you diversify your portfolio, you’ll be safeguarded against losing all of your assets when investments don’t go as planned.

By ensuring you’re invested in many different types of securities, you’ll be better prepared to weather stock market corrections. It’s unlikely that all industries and companies will suffer equally or succeed at the same level, so you can hedge your bets by buying some of everything.

5. Consider hiring professional help

Although the internet makes it relatively easy to create a well-researched DIY stock portfolio, if you’re still hesitant to put your money in the market, hiring an investment advisor can help. Even though the use of a professional can’t mitigate all risk of losses, you might feel more comfortable knowing you have an expert in your corner.

How the stock market can grow your wealth

Given the right combination of time, contribution regularity and a little bit of luck, the stock market has the potential to turn even a modest savings into an appreciable nest egg.

Ready to get started investing for yourself? Check out the following MagnifyMoney articles:

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here

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