You ever hear the story of the janitor who retired with almost $8 million in savings?
It’s a real story.
It demonstrates the power of investing and the kind of wealth it can bring you.
Ronald Read grew up in a poor farming household where he was forced to walk 4 miles to school every day.
He went on to work as a gas station attendant for 25 years and then as a janitor at JCPenney for another 17 years.
Here’s a picture of him in high school.
So how was he able to amass such wealth when he was likely only making around $26,000 a year?
In this post on how to invest money for beginners, you’re going to learn how to get started investing using the same strategies that Ronald Read used.
If you take the time to read through this guide, you will learn the ins and outs of how to invest and will be one step closer to creating lasting wealth for the rest of your life.
Here is how to invest money for beginners in 2020.
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How to Invest Money for Beginners in 2020: Ultimate Guide to Start Investing (And Get Good Returns)
Learn how to invest money for beginners in 2020 by following these 6 easy steps:
1. Define your investing goals
Why are you investing?
Before you can brag to your friends and family about your brilliant diversified portfolio, you first must answer this question—why am I investing?
Answering this question will help with the following:
- Deciding what you should invest in
- Deciding how you should invest
Like with any goal in life, it’s always best to work backwards.
Your investing goals are no different.
Working backwards ensures you aren’t taking unnecessary steps to get to your final destination.
For example—say your reason for investing was that you wanted to buy a house in a few years.
The right thing to do is to work backwards. Working backwards will help you to decide what you should invest in and how you should invest to save enough money to buy a house.
In this scenario, let’s say you decided to open a Roth IRA. You start putting money into it because you heard that Roth IRAs were great for tax-free growth and savings.
This would be a huge mistake.
Roth IRAs are retirement accounts meant for… well, retirement.
Now comes the time to take the money out of your Roth IRA to buy your house…
While it’s true that you will have received excellent tax-free growth on your original contributions—you will also be struck with a nasty 10% early withdrawal fee and will likely have to pay taxes on your withdrawal.
This would defeat the whole purpose of you investing to buy your house.
Between paying the 10% fee and taxes, you will likely lose thousands, possibly tens of thousands of dollars.
If you would have done a tiny bit of due diligence and asked yourself the question, why am I investing? Then you would have been able to figure out what and how you should invest and avoided losing years’ worth of gains.
If you are unsure of the reason you are investing money, next, we will discuss a few examples that may help give you ideas.
Having more than one reason is perfectly fine.
Courtney and I probably have more than five reasons we invest our money.
There is no right or wrong reason.
As long as you define your reason so that you can make the right moves.
Invest to generate income
Plenty of people invest their money to generate income.
Do you ever see those guys and gals on the golf course in the mid-mornings around 11 AM?
I don’t want to generalize, but I would assume most of them are living off of income-generating investments.
Why else would they be free at 11 AM to play golf instead of going to work?
Of course, they’ve likely spent years buying income-generating investments to get to the point where they can live comfortably.
But remember, the more money you save now, the sooner you can get financial freedom and live a life full of wealth and abundance.
If your purpose for investing money is to generate income, here are a few examples of income-generating investments:
- Dividend-yielding stocks
- Real estate rental properties
- Real estate investment trusts (REITs)
- Peer-to-peer lending
- Creating your own product
You will learn about these investments in section 3 of this post on how to invest money for beginners.
Invest for retirement
Investing for retirement is a long-term game.
If you are investing for retirement, it is in your best interest to utilize retirement accounts such as Roth IRAs and 401(k)s.
A retirement account acts as a container that holds your investments and allows you to receive tax-free gains.
They offer massive tax advantages that you would not receive if you just kept your investments in a bank or brokerage account.
When investing for retirement, you can still choose what you want to invest in—stocks, bonds, real estate, you name it. The only difference is that you are using money from your retirement account to fund these investments.
In a post I wrote about how to save money like a millionaire, I told the story of former presidential candidate Mitt Romney and how he was able to make over $100 million in his Roth IRA from a few smart investments.
If he made those same investments but instead used money from a bank or brokerage account, then that $100 million would have been taxed heavily.
We’re talking almost $40 million in taxes.
Investing money for retirement means you will not use that money anytime soon for anything other than buying more investments.
If you are contributing money into a Roth IRA or 401(k), understand that you will be parting ways with that money for a long time.
But don’t despair! Any contributions you make to your retirement account now will pay off massively when it’s time for you to retire.
The more time your money sits (and works for you) inside of a retirement account, the more time the power of compounding interest has to work.
If you started making the maximum $6,000 per year contributions into your Roth IRA at the age of 30, by the time you retired at age 65, with a 10% average rate of return, your Roth IRA account would be worth about $1.8 million!
If you want to see how much your Roth IRA would be worth at retirement based on your current age and contributions, check out this Roth IRA calculator.
Invest to grow wealth
Investing your money to build wealth might sound a bit obvious. I mean, isn’t that the point of investing?
Not necessarily. Take, for example, investing for income.
The purpose of investing for income (as you just learned) is to have your investments pay you enough money to live comfortably on.
If you are spending all of your dividends, payouts, and capital gains, then your wealth will never be able to grow substantially.
Growing wealth is all about not spending. Instead, you reinvest all dividends, payouts, and capital gains back into your portfolio.
This reinvesting creates a massive compounding effect where your money grows exponentially.
Invest to preserve capital
If you are investing to preserve capital, then your not after big returns.
That’s because the point of capital preservation is to preserve your capital, AKA, your cash money.
Capital preservation is different from other investment paths in that instead of buying riskier assets such as stocks and real estate, you are only buying “safe” investments.
I purposely put quotes around the word safe because frankly, no matter how conservative the investment, there will always be risks.
However, some investments are much safer than others. Here’s a list of investments that are considered conservative, or, “safe”:
- Government bonds
- Treasury bills
- Certificate of deposits (CDs)
- Blue-chip or large-cap stocks
- Putting money under your mattress (I’m kidding)
Now, none of these investments will give you glorious returns.
But that’s not the point of them.
The only purpose of capital preservation is to preserve your money from loss.
One example of loss would be inflation—no one can escape it (unless you are investing and growing your money).
The average rate of inflation in the United States is about 2.5%. That means every year, your money becomes about 2.5% less valuable.
Imagine if you had $10,000 sitting in your zero-interest checking account. After one year of sitting, that $10,000 would actually only be worth $9,750 (assuming you didn’t spend any of it).
If you are investing for retirement, wealth, or income, then the returns you are getting on your investments will be so good that you will, in effect, already be preserving your capital. That is, of course, if you are getting good returns.
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Decide on short-term or long-term investing
The next step in how to invest money for beginners is to decide whether you will be investing short-term or long-term—or both.
I always like examples, so let me give you a few scenarios that will help you understand which group you will fall under.
Short-term investments are typically investments that you intend on holding for less than a year. Sometimes even just a few months. And sometimes, even only a few minutes.
An example of someone you would commonly find investing short-term would be day traders.
Day traders buy stocks and sell them by the end of the day.
Believe it or not, some day traders will buy stocks and sell them within seconds.
Short-term investing is usually a lot more aggressive—you are seeking to capitalize on volatility in the market.
Let’s say ,for example, you had $1,000 that you wanted to invest short-term. Perhaps you want to grow that $1,000 to $3,000 for a down payment on a new car.
Some common short-term investments that you might consider to grow that $1,000 would include:
- Exchange-traded funds (ETFs)
Keep in mind, any investments that can be used for short-term investing can also be used for long-term investing, and vise versa.
The length of your investment solely depends on your specific timeframe as to when you’ll need the money.
I do also want to mention one crucial point, and that is—short-term investing can be extremely risky.
Take it from me. Two years ago, I jumped into the stock market with $25,000 and decided to start day trading.
I had big wins, but I also had big losses.
Needless to say, after several months of actively trading the markets every day, I decided to stop.
On the last day of my trading, I lost just about $3,000 in a matter of seconds. That’s right, SECONDS.
Short-term investing requires a significant amount of experience and practice.
If you are going to dabble in short-term investing, then stick with ETFs. They are much safer than buying individual stocks, which is what I was doing.
There are many types of ETFs—my favorite are market ETFs.
Market ETFs are designed to track a particular index like the S&P 500, which contains hundreds of stocks (500 to be exact).
Buying this type of ETF removes much of the risk associated with buying individual stocks. More on this later in section 3, when you learn about picking your investments.
Long-term investments are any investments that you hold for longer than a year. Most long-term investments are held for several years, or even decades.
Billionaire and investing legend Warren Buffett, for example, has held onto Coca Cola shares since 1988 when he first bought them at $2.45 per share.
The cost per share has since risen to about $44 as of early 2020.
His original investment was about $1 billion—that investment has since increased to about $21.6 billion.
That’s long-term investing at its finest.
Many long-term investments, such as the ones that you have in your Roth IRA or 401(k), are used to build a nest egg for retirement or to build wealth.
Long-term investing is different from short-term investing in that it is not as dangerous.
The historical average stock market return is about 10%. That means if you keep your money invested in the stock market for a few decades, your original investment will have increased by about 10%.
However, during those few decades, there will be ups and downs.
This volatility is where many investors, especially short-term investors, get into trouble.
During the market crash of 2008-2009, the market dropped by over 50%.
Many investors lost everything because they sold their investments at rock bottom.
But if you look at the chart in the present, you will see that if those same investors would have instead held onto their investments, eventually it would have all panned out and they would have made millions.
This is the advantage that long-term investing has over short-term investing.
When you are investing for the long haul, you aren’t worried about fluctuations in the market and possible economic recessions. You know that in the long run, your average return will still be high.
2. Understand your personality and risk tolerance
Let’s face it—your money is at risk anytime you invest it.
The longer your money is exposed to the market, the more it is exposed to risk. This is known as risk exposure.
However, your money also has the most potential to grow anytime you invest it, or expose it to the market.
If your money is not exposed to the market but instead is just sitting in your bank, it will never grow.
The riskier the investment, the more potential your money has to grow.
Generally speaking, there are three types of investment portfolios:
Deciding which portfolio type to go with can be tricky.
This is why knowing your risk tolerance is critical.
Everyone has a risk tolerance, including you.
Some people are more risk-averse, meaning they want to avoid risk. And others are risk-tolerant, meaning they have a high risk tolerance and aren’t afraid of stepping out on the tightrope.
Your risk tolerance will all depend on your personality.
If you are the kind of person that enjoys stability and assurance, then you are likely more risk-averse. If you are the kind of person that likes excitement and thrill, you are probably more risk-tolerant.
Understanding your risk tolerance is an essential step in how to invest money for beginners because it helps you identify the type of investments you will take and how your portfolio will look.
More risk-tolerant people are likely to have an aggressive investment portfolio, whereas risk-averse people will have a moderate or conservative investment portfolio.
An aggressive portfolio is more appropriate for people who have:
- A high risk tolerance
- More time to hold onto investments (more than three years, but longer is better)
- A desire for higher returns
Aggressive portfolio’s take on greater risk, but as a result, will have greater returns.
Aggressive portfolios are usually heavy in stocks, options, real estate investment trusts (REITs), and physical real estate.
It’s important to mention that your investing style should change with your age.
If you are close to retirement, it wouldn’t be in your best interest to have an aggressive investment portfolio and risk losing your retirement nest egg.
Aggressive investing works better when it’s mixed with time.
Let’s say, for example, you put 100% of your retirement account into the stock market at age 60.
And what if, hypothetically, the stock market dropped 50% as it did in the 2008–2009 crash.
This would be a massive loss to your retirement account. And it would be even worse because you have to begin taking money out for retirement which means you wouldn’t be able to wait for the market to recover.
Historically, the stock market has proven that it can recover from even the nastiest market crashes.
But for someone who doesn’t have much time, they may not be able to wait for the market to recover to then recover their gains.
However, if you take the same scenario but instead apply it to someone who is 35 years old, the situation would look a lot different.
The 35-year-old doesn’t have to take money out of his retirement account anytime soon which means his portfolio would have more time to recover from the losses.
A moderate portfolio is more appropriate for people who have:
- An acceptable risk tolerance
- A decent amount of time to hold onto investments
- A desire for good returns without taking too much risk
A moderate portfolio is a combination of aggressive and conservative investing and is typically the preferred style of most.
This type of portfolio will include a mix of aggressive investments such as stocks and options, but will also include conservative investments such as government bonds and corporate bonds.
A conservative portfolio is more appropriate for people who have:
- A lower risk tolerance
- Not much time at all (less than three years, but sometimes shorter depending on the goal)
- A preference for steadier gains with an emphasis on preserving capital (see section 1 of this post on capital preservation).
People who choose a conservative portfolio are more interested in preserving their money than they are in gaining considerable profits.
This type of portfolio is usually the go-to for people who are nearing retirement because they cannot afford to risk losing their nest egg to aggressive investments.
Ultimately, you have to decide for yourself which investing portfolio you prefer. Your preference will be based on your risk tolerance and the amount of time you have before retirement.
3. Pick your investments
This is where the fun begins. Deciding what you want to invest in.
If you’ve read through the entire post up to this point, fantastic job! You are taking the time to learn how to invest money for beginners—this will benefit you for the rest of your life (and possibly your kids, and your kid’s kids, and so forth).
So far, you’ve learned about:
- Defining your investing goals and why it’s essential to have an investment strategy
- Understanding the various reasons you should invest money
- Risk tolerance and why you need to know yours
In this section, you will learn about every kind of investment. By the end, you should have a solid understanding of each investment and an idea of which you should add to your portfolio.
There are five primary categories of investments.
- Ownership investments
- Lending investments
- Fund investments
- Cash equivalent investments
- Alternative investments
Let’s talk about each category and the specific investments you will find in them.
Ownership investments are a type of investment that you own. Seems obvious, right?
When the term investment is tossed around, typically, it’s in reference to ownership investments.
Ownership investments have the most potential to generate wealth, and quite frankly, to make you rich.
But with great power comes great responsibility.
Since ownership investments have the biggest rewards, they also come with the most risks.
Let’s go over each type of ownership investment, the pros and cons of them, and the risks involved.
Stocks are one of those most popular investment vehicles in the last 100 years.
Even if you’ve never learned a single thing about stocks in your life, you’ve likely heard words associated with them, such as S&P 500, Dow Jones, and of course, Wall Street.
There’s a reason stocks are so popular amongst investors—they build wealth.
And with the invention of investment vehicles like ETFs and index funds (more on those soon), stocks have become more accessible and easy to invest in.
Here’s a great list of the best stocks to invest in for beginners.
Let’s discuss the pros and cons of how to invest money for beginners using stocks:
- Very high returns
- Income from dividends
- Can be easily diversified
- Highly liquid
- Very volatile, especially short term
- Very risky
- Requires significant knowledge
If stocks are the most popular investment vehicles in the last 100 years, real estate is the most popular investment vehicle ever to exist.
Real estate has created more millionaires than any other investment ever.
The term real estate investing, as you’ve likely heard before, is a broad term that describes many individual facets of real estate.
For example, you could invest in real estate by buying a property, fixing it up, and selling it at a higher price. This is known as flipping.
You could buy a property and rent it out to tenants and make a monthly income from the rent payments. This is known as buy and hold real estate.
You could find distressed properties that need a lot of work, get them under contract, and flip them to another real estate investor for a profit. This is called wholesaling.
These are just a few examples of the more popular ways that real estate investors make money, but there are many different strategies out there.
Pros and cons of how to invest money for beginners using real estate:
- Very high returns
- Steady stream of income
- Offers capital appreciation
- Helps diversify your portfolio
- Can be bought with leverage (money that isn’t yours)
- Is not liquid, at all
- May require active management
- May require a large initial investment
Precious objects include things like gold and silver (precious metals), precious gems, artwork, signed memorabilia, and anything else that is purchased with the intent of selling for a profit.
Precious objects are often considered alternative investments as well (which you will learn later).
Many investors will specifically purchase precious metals such as gold and silver to hedge against inflation and to protect themselves in the highly unlikely scenario that the world’s market’s collapse.
Precious metals will never lose value. Even if the value fluctuates, there will always be a need for them; therefore, they will always have value.
In fact, the US dollar was backed by the gold standard up until 1971 when the link between the dollar and gold was completely severed.
Pros and cons of how to invest money for beginners using precious objects:
- Good hedge against inflation
- Can remain relatively stable during a down market
- Unpredictable returns
- Only earns your money when you sell it
- Needs to be safely stored
- Is not liquid
- At risk of theft
The last type of ownership investment, and the riskiest of them all, are businesses.
Typically this means a business that you own. However, it can also mean a company that you have invested in for an ownership stake.
Although starting a business is the riskiest of any other investment, it is also the most lucrative if successful.
Jeff Bezos, for example, has a personal net worth of $117 billion thanks to his small part in Amazon.com. ?
He did this in about 25 years.
Amassing this kind of fortune in such a short period would be nearly impossible if you were instead investing your money in a mutual fund or some other investment vehicle.
Take Warren Buffett, for example. It’s taken him over 75 years to build a $70 billion net worth by investing in stocks.
Starting a successful business has the power to expedite the amount of time it takes to accumulate wealth.
Pros and cons of how to invest money for beginners using businesses:
- You have full control
- Can leverage other people’s money
- Can leverage other people’s time
- Potential for unlimited revenue
- Many tax advantages
- Very difficult to make work
- High failure rate
- Long hours of work (if it’s your own business)
- Have to manage people
Lending investments are another category of investing.
Lending investments are generally very low risk. As a result, the returns you get are relatively modest.
Earlier in this post, you learned about the various investment portfolios ranging from aggressive to conservative, conservative being the least risky.
Conservative portfolios tend to carry a large number of lending investments because of the low-risk nature of the investments.
Next, you will learn about the various lending investments, the pros and cons of them, and the possible risks involved.
Bonds are the most common type of lending investment.
There are many different types of bonds. The most common are U.S. Treasury bonds, savings bonds, and corporate bonds.
Bonds are essentially loans made to large organizations. These can include large corporations, cities, and governments.
Since these organizations are so large, the loans they require are also large. And since they cannot borrow money from one source, they usually have to borrow from multiple sources.
This is where the bond comes in.
Anyone can buy bonds. And they’re relatively safe compared to other investments.
For example, U.S. Treasury bonds are backed by the federal government.
This means you are virtually guaranteed to have your initial investment returned to you with interest unless, of course, the federal government collapses. In which case, you probably have worse problems on your plate than losing your investment.
Corporate bonds are also relatively safe, but not as secure as government bonds.
When a corporation needs to raise money, they can do it one of two ways: raising equity (stocks) or debt.
Debt can either be a loan from the bank or issuing bonds to investors.
Just like the bank makes money on a loan by charging interest, investors make money on bonds by getting paid interest, which is predetermined before the investor buys the bond.
Pros and cons of how to invest money for beginners using bonds:
- Highly predictable returns
- Not risky
- Not volatile
- Small returns
- Larger sums of investment needed
- Not liquid
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Certificate of deposit (CD)
Certificate of deposits or CDs are another type of loan-based investment, similar to bonds, except CDs are only issued by banks.
CDs tend to be safer than bonds and most other investments. As a result, they give the smallest return.
When you open a CD, you agree that you will not withdraw your money until the maturity date or the date the CD is finished.
The maturity date on a CD can be several months up to several years.
Pros and cons of how to invest money for beginners using CDs:
- Very safe
- Highly predictable returns
- Federally insured with FDIC banks or NCUA credit unions
- Not liquid
- Very small returns
Treasury-inflation protected securities (TIPS)
It’s unlikely you’ve ever heard of TIPS. No, not the tips that you leave your waitress. I’m talking about Treasury-inflation protected securities.
As the name suggests—TIPS are Treasury securities that are protected from inflation.
Inflation is the increase in price for general goods and services. This means that $100 today will not be worth $100 next year, but instead, about $98.
TIPS are another type of Treasury bond (as discussed earlier). TIPS are different from regular Treasury bonds in that the value of TIPS adjusts up and down based on inflation.
Pros and cons of how to invest money for beginners using TIPS:
- Protected from inflation
- Backed by the federal government
- Small returns
Traditionally, fund investments have not been recognized as one of the main categories of investing.
But over the past few decades, fund investments have increased significantly in popularity. So much so, that even high-profile investors like Warren Buffett recommend them.
Let’s discuss each type of fund investment, the pros and cons, and the risks involved.
Imagine getting together with a group of friends and family, combining your money, and investing together.
This is what a mutual fund is… minus the friends and family part.
But with a mutual fund, your money is collected and added to a pool of money with other investors to invest in things like stocks, bonds, and other assets.
The best part about mutual funds is that professional money managers manage them. These money managers use the fund’s money and attempt to produce capital gains or income.
There are many different categories of mutual funds.
There is just about a mutual fund for every type of investor and investment approach.
Pros and cons of how to invest money for beginners using mutual funds:
- Great diversification
- Minimal investment requirements
- Managed by professionals
- Large variety of offerings
- High fees and other expenses
- No FDIC coverage
- Lack of transparency in holdings
Index funds are actually a type of mutual fund.
They are often mistaken as being separate from mutual funds because they are so popular.
Index funds are mutual funds that track specific indexes such as the S&P 500 or Dow Jones.
Index funds are so popular amongst investors because they’re an easy, low maintenance, highly diversified, low-cost way to invest in the stock market.
Take the Vanguard S&P 500 index fund, for example. This is what both Courtney and myself added to our Roth IRAs recently. This index fund offers exposure to 500 of the largest U.S. companies, without the risk of owning stock from an individual company.
The Vanguard S&P 500 index fund has outperformed even many hedge funds, which are private mutual funds for wealthy investors with millions of dollars to invest.
As you just learned, index funds are great because they offer diversification. Having a diversified portfolio is essential for the long-term safety of your money.
Let’s say you have a majority of your money tied into shares of Tesla stock. The company has a bad quarter that will cause the price per share to drop. Since you have a lot of your money tied up in only Tesla, you stand to lose a lot of money.
This could be prevented by buying index funds. Because instead of having a lot of your money tied up in a single company’s stock, you have your money tied up in an index fund that happens to own some Tesla stock.
When Tesla has a bad quarter, you won’t lose as much because Tesla only makes up a small portion of the overall index fund.
Pros and cons of how to invest money for beginners using index funds:
- Absolute best diversification
- Low expense ratios and fees
- Very strong longterm returns
- Perfect for long-term investors
- Vulnerable to market swings
Exchange-traded funds (ETFs)
Exchange-traded funds or ETFs are also a type of mutual fund.
Similar to index funds, ETFs are often seen as individual investment vehicles instead of a specific type of mutual fund.
That’s because they are also highly popular among investors.
Over 1,750 ETFs are being traded in the US alone.
ETFs are traded on stock exchanges similarly to stocks. However, an ETF is not a stock. Instead, it’s aim is to track a specific market index.
You may be thinking to yourself, isn’t that what index funds are for? The answer is yes.
However, there are small differences between index funds and ETFs. The most significant difference is that ETFs can be bought and sold intraday on the stock market, whereas index funds cannot.
Pros and cons of how to invest money for beginners using ETFs:
- Access to many stocks across various industries
- Good risk management through diversification
- Can buy industry-focused ETFs
- Can have higher fees
- Industry-focus ETFs limit diversification
- Lack of liquidity hinders transactions
Hedge funds are basically mutual funds limited to high net worth individuals.
One distinguishing difference with a hedge fund is that they often use very high-risk methods of investing, coupled with complicated strategies.
Most hedge funds set a very high minimum investment requirement. It’s not uncommon to see a minimum investment requirement of $1,000,000 or more.
Pros and cons of how to invest money for beginners using hedge funds:
- Managed by top investment managers
- Profits in both rising and falling markets
- Very high fees
- Very high risk
- Highly exclusive
- Funds locked up for extended periods
- Funds use of leverage can increase your personal loss
Cash equivalent investments
Do you want to invest your money but pretty much guarantee that you won’t lose it?
Say hello to cash equivalent investments.
Cash equivalents are named as such because they are highly liquid investments, meaning they can easily be converted to cash.
The house that you live in would not be considered liquid, because it cannot be easily converted to cash. It would require months and months of negotiating back and forth with buyers, and mountains of paperwork.
Cash equivalents are extremely low risk, but also have the lowest return of any investment class.
In fact, some cash equivalents will have you losing money instead of making it, as you will soon learn.
Although there are many cash equivalent investments, you will only learn about the notable ones here.
Yes, your savings account is considered an investment.
Anytime you put money into your savings account (or even your checking account), your bank leverages your deposits to offer loans and other financial products to other customers.
They, in turn, pay you interest on your deposit.
However, the interest that most banks pay you for keeping money in a traditional savings account is offensively low.
The national average interest rate on most traditional savings accounts is 0.09%.
That means if you kept $100 in a savings account for one year, you would only earn $0.09. That’s right, less than a dime.
Do you remember earlier how you learned that some cash equivalent investments would have you losing money instead of making it?
A savings account is one of those investments.
The problem with the low-interest rates on savings accounts is that they don’t beat the average inflation every year.
The average inflation rate in the U.S. over the past 60 years is 3.7%. That’s 2.8% higher than the average interest rate on most traditional savings accounts.
That means if you keep your money in a traditional savings account (which most American’s do), you will be losing 2.8% each year.
Needless to say, there are much better options for investing your money.
Pros and cons of how to invest money for beginners using savings accounts:
- Money is safe
- Money is the most liquid
- FDIC insured
- Money is lost to inflation every year
- Extremely tiny returns
- Limited amount of withdrawals
Money market account
If you need to keep some of your money liquid, a money market account is a much better alternative to traditional savings accounts.
There are many great options available, for example, Marcus by Goldman Sachs currently offers a money market account with 1.70% APY. That means your money is earning 1.70% in interest versus only 0.09% with a traditional savings account.
Money market accounts should not be confused with money market mutual funds. The two are not related.
Money market accounts are highly liquid, meaning you can withdraw cash out at any point without having to jump through major loopholes.
Pros and cons of how to invest money for beginners using money mark accounts:
- Money is safe
- Money is highly liquid
- Higher interest rates
- Limited transactions
- Potential fees
- Minimum balance sometimes required
Earlier in this post in the section about lending investments, you learned about Treasury bonds.
There are three categories of securities that the federal government offers to investors: Treasury bonds, Treasury notes, and Treasury bills.
The only real difference between all three is their maturity lengths and interest rates.
Treasury bonds have the longest maturity length but also have the highest interest rates. Treasury bills, o T-bills, have the shortest maturity length, therefore, have the lowest interest rates.
The shortest maturity length on T-bills is four weeks.
Courtney and I dabbled with T-bills throughout 2019 when the interest rates on the bills were higher than the average interest rate on most money market accounts.
We only purchased 4-week T-bills so that we could keep our capital as liquid as possible.
Pros and cons of how to invest money for beginners using Treasury bills:
- U.S. government guarantee
- Low minimum investment
- Interest payments are exempt from state and local tax
- Small returns
- Not as liquid depending on maturity length
Alternative investments are the final category of investments.
Basically, anything other than what you’ve already learned will fall under this category.
Alternative investments are usually favored by institutional investors or high net worth individuals.
They tend to be complex investments that are not for the risk-averse investor.
Because of the lack of regulation around alternative investments, the nature of the investments in this category can be risky.
Most alternative investments are unregulated by the SEC and tend to be somewhat illiquid, meaning they are difficult to convert into cash quickly.
Earlier, you learned about precious objects in the section discussing ownership investments. Precious objects are often considered to be alternative investments as well.
Things like artwork, for example, are considered a type of alternative investment and can be very risky.
The subjectiveness of such an investment can change the value of it overnight.
Real estate investment trusts (REITs)
Real estate investment trusts or REITs are real estate stocks that are traded on the stock market.
REITs were created by Congress in 1960 to give all investors access to income-producing real estate.
REITs are a lot like mutual funds in that they use the combined investment of many individuals to purchase real estate.
REITs generate a consistent income for investors, making them great for those interested in income-producing investments.
Unlike regular stocks, REITs are required by law to pay out a minimum of 90% of income in dividends each year.
With regular stocks, this decision is up to the corporation, with many companies like Facebook deciding not to pay dividends but instead reinvest their profits back into the company.
Pros and cons of how to invest money for beginners using REITs:
- Good liquidity
- Good diversification
- Steady income from dividends
- Risk-adjusted returns
- Little capital appreciation
- No tax-advantage
- Subject to market risk like stocks
- High fees
A commodity is a raw material that is used to create finished goods which are then sold to consumers.
Examples of commodities include coffee beans, wheat, beef, oil, natural gas, lumber, and gold.
Commodities are most commonly traded on the market in the form of futures or options, which are just derivatives of the actual raw material.
With many recent advancements in technology, even things like cell phone minutes and bandwidth are now traded on the market.
Pros and cons of how to invest money for beginners using commodities:
- Very stable
- Only make money when sold
4. Determine how you will fund your investments
Deciding how you will fund your investments will depend on several different factors, such as your reason for investing, your current financial situation, and your future financial situation.
Income from job
If you are working a steady job with a predictable paycheck, then investing your income from your job can be an excellent way to begin building your wealth.
Before you begin investing, I would recommend that you first build up at least six months’ worth of living expenses in a high-yield savings account.
Set a savings goal and begin setting milestones for yourself to reach that savings goal.
If you are not good at saving your money, you need to take time to read about how Courtney and I saved $17,399 in less than 3 months.
This post will help you create an actionable plan for yourself to begin saving money.
Anyways, after you have your six-months’ worth of expenses saved up, you can then start investing.
The money that you were putting into your savings account can now be redirected to your brokerage account to be used for investments.
Don’t touch your six-month savings.
Instead, just use the money that you’ve budged to go into your savings account to now instead go into your brokerage account.
Depending on your purpose and goals for investing, I recommend that you open a Roth IRA so that you can get tax-free growth on your investments.
However, if your purpose for investing is for a more short-term goal, then do not put your investment capital into a Roth IRA.
Money from a savings account
Like in the last example, I recommend that you always maintain at least six months’ worth of living expenses in a high-yield savings account for emergencies.
Any savings that you have after six months is money that is being wasted.
This extra money can easily be invested.
Money that is sitting in a bank account is not growing. Instead, it’s losing value each year due to inflation.
If you have not already begun saving for retirement, open a Roth IRA and start making contributions to this account.
Then, with the contributions that you are making, purchase investments that will work for you and grow your Roth IRA exponentially over the years.
Roth IRA contributions
If you have a Roth IRA and are making yearly contributions, then you will want to fund your investments using the money in your retirement account.
If the money in your Roth IRA is just sitting there, it’s no better than the money sitting in your checking account at your bank.
You have to put the money in your Roth IRA to work by purchasing investments.
Depending on your personality, you will either have a more conservative investment portfolio or an aggressive one.
Purchase investments that make sense for your goals and your risk tolerance.
Other retirement accounts
Just like a Roth IRA, you can also buy investments in other retirement accounts such as a 401(k), SEP IRA, and traditional IRA.
The major disadvantage that these other retirement accounts have is that your investment gains are taxable upon withdrawal.
A Roth IRA gives you tax-free growth and withdrawals, but every other type of retirement account taxes your investment gains.
This means if you earn $1 million in your traditional IRA over 30 years, when it comes time to withdraw that money for retirement, that $1 million will be taxed heavily.
5. Choosing the best brokerage
If you ever want to see your money grow exponentially, you have to put it in a brokerage account.
Brokerage accounts are one of the easiest ways to begin investing your money because they give you easy access to the best investment options and tools.
Although some larger banks do offer investing tools, they are often riddled with unnecessary fees that can eat away your investment gains.
Also, most banks will not have as many investment options as a brokerage.
When it comes to choosing your brokerage, picking the right option comes down to your investing priorities.
For example, Courtney and I both opened brokerage accounts with Vanguard.
We chose Vanguard because they have some of the best long-term returns out of any other brokerage, and since we are investing for the long-term, this fit our priorities.
If you are more interested in short-term gains and taking a more active approach to your investing, then you may want to consider using another brokerage such as Fidelity or even Acorns.
There are so many brokerage firms to pick from.
It may be overwhelming to decide which one will work for you. Continue reading to learn how to choose the right brokerage for you.
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Determine how you will invest your money
Once you can decide how you will invest your money, choosing the right brokerage will be simple.
There are two primary ways to invest—actively and passively.
Active investing—as the name implies—is when you are actively managing your investment portfolio.
This can mean making frequent trades on the stock market to meet investment goals, researching the best investments to increase overall returns, and being involved with the day-to-day news surrounding the securities (stocks, bonds, etc.) you are trading.
The primary reason someone would actively invest is to beat the stock market’s average returns.
A day trader, for example, takes advantage of the daily price fluctuation of stocks. Day traders are considered active investors.
Active investing should be left to investors with extensive experience in the markets.
Having an understanding of stock charts, technical analysis, and market behavior are all prerequisites for actively investing—especially if you don’t want to lose all your money.
If you are a beginner, a passive investing approach will likely be more beneficial.
Passive investing, on the other hand, is when you are passively managing your investment portfolio.
Passive investors rarely buy and sell stocks, bonds, and other securities on a regular basis,
Instead, they buy and then hold their investments for long periods of time, sometimes decades. That’s because they have a more long-term approach.
Passive investors also have portfolios that primarily consist of index funds, ETFs, and mutual funds.
For example, Courtney and I recently added dozens of S&P 500 index funds to our portfolios. We plan on holding onto the index funds for a very long time.
Look at brokerage fees, commissions, and minimums
You must pay attention to the fine print when choosing your brokerage.
Depending on how you intend on investing—fees, high commissions, and minimums can hurt your returns in the long run.
Fees and commissions vary depending on the investment.
For example, buying and selling stocks may a different cost associated with it than trading ETFs. Below is a list of various investments and the fees that you need to look out for.
- Stocks – Some brokers will charge a commission to buy and sell stocks. They will either charge the commission per trade or charge it per share. For example, you buy ten shares of Apple stock and are charged a flat fee of $5 for initiating that trade. Or, you buy ten shares of Apple stock and are charged $0.10 per share. Some brokers will charge you for selling as well. Avoid those at all costs. It’s important to mention that nowadays, there are many brokers that charge now commission, you will learn about those shortly.
- Options – Options can be very costly to trade, depending on the brokerage. Options are kind of like stocks. The difference is that stocks give you a small piece of ownership of the company, and options are just contracts that give you the right to buy and sell the stock. Options trades typically come with a fee called a per-contract fee, which is usually between $0.15 to $1.50. Some brokers will charge commissions on top of the fee, but many only charge one or the other.
- Mutual funds – Some brokers will charge a fee to buy mutual funds. Mutual funds also carry fees called expense ratios. While fees to purchase mutual funds can be avoided, expense ratio fees are usually unavoidable since that fee comes from the fund itself and not the brokerage.
- ETFs – ETFs are traded like stocks. Therefore, they are often subject to the same commission that stocks are. However, just like there are brokers that offer commission-free stock trading, these same brokers usually offer the same deal for ETF trading.
A complete list of brokerages to consider
Below you will find two separate lists—one for active investors and the other for beginners and passive investors.
Based on your own personal investing priorities and plan, choose a brokerage from the appropriate list.
Best brokerages for active investors
Active investors need to use a brokerage that offers low or zero fees and commissions.
All of the brokerage accounts that are listed below offer $0 commissions. Commissions are fees that you pay each time you initiate a trade on the market.
Commissions can add up very quickly, especially if you are initiating several trades each day.
Best brokerages for beginners and passive investors
Beginners and passive investors need a brokerage that offers better low fees and low minimums for opening an account.
Below are three fantastic brokerages.
Acorns is perfect for those who want a completely hands-off brokerage account.
6. Diversify your portfolio
A poor farmer went out to his chicken coupe one frigid winter morning to collect eggs for his hungry family.
They weren’t able to eat the night prior, so they were starving.
The poor farmer bent down to pick up several fresh eggs the chickens laid that morning.
He very carefully placed each egg in his basket, sure not to crack any of them.
Considering this may be the only food his family would eat that day, he clenched his basket of eggs tightly with both hands and began walking back to the small house.
It was colder than usual that morning.
As he walked, he looked down at the eggs and began to imagine his family enjoying breakfast together.
Little three-year-old Timmy, five-year-old Joey, seven-year-old Elizabeth, and his wife Carol.
Suddenly, he slips on a patch of black ice and the precious eggs go flying through the air, splattering onto the ground like paint on a canvas.
Why diversity your portfolio?
Have you ever heard the phrase don’t put all your eggs in one basket?
If you drop the basket, all of your eggs will be destroyed.
But what if you put some eggs in one basket, a few more in a different basket, and the remaining few in another basket?
This time, if you drop one basket, only a few of your eggs will be destroyed instead of all of them. The likelihood of you dropping all of your baskets is slim.
I never liked the idea of putting all my hard-earned money into investments that had the potential to lose value.
I preferred to keep it safely tucked away, cozy and warm, in my FDIC insured bank account.
That was until I learned about diversification.
You’ve likely heard that term before.
In finance, diversification is the dividing of capital in such a way that exposure to risk is decreased.
Let’s say, for example, you invest your entire savings of $10,000 into the stock market. There are two scenarios—I want you to guess which scenario you think is better:
- You invest your entire $10,000 savings into Google stock
- Or, you invest $2,000 into Google stock, $5,000 into an index fund, $2,000 into a mixture of corporate and government bonds, and the other $1,000 into a money market account or Treasury bills.
Which scenario is a better example fo diversification?
If you said the second one, you are correct!
You see, the problem with the first scenario is that you are putting all of your eggs into one basket. Or, in this specific case, all of your money into one stock.
If Google’s stock decided to tank one day (which is not a far-fetched idea by any means), then your entire savings will be at risk of being lost.
However, if you diversified your savings, and your portfolio looked like that of the second scenario—even if Google’s stock did tank, you wouldn’t be at risk of losing your entire savings because you only have a small portion of your money invested.
How to diversify your portfolio
It’s not enough to just buy several different stocks from several different companies.
You’ve learned why it’s essential to diversify your portfolio. Keep reading, and you’ll learn how to diversify your portfolio.
The first step you need to take to diversify your portfolio is to add a variety of investments.
Adding a variety of investments does not mean buying a bunch of different stocks. Instead, you want to buy a variety of different types of investments, such as stocks, bonds, and even real estate or REITs.
There are a few tricks you can use to diversify your portfolio quickly.
Index funds are one of the easiest ways to diversify your portfolio because an index fund itself is a stock that mirrors a specific index.
Take the S&P 500 index, for example. The S&P 500 is an index that is comprised of 500 of the world’s best companies.
You could either buy a share of stock from all 500 companies in the S&P 500, or you could just buy an S&P 500 index fund that mirrors the performance of all 500 companies for a fraction of the cost.
Exchange-traded funds (ETFs)
ETFs are another fantastic way to diversify your portfolio quickly.
ETFs act as a basket for different stocks, commodities, or bonds, giving you instant diversification.
ETFs trade like stocks on the stock market, which makes them very liquid assets because they can be bought and sold intraday.
A properly diversified portfolio should include:
- Index funds
- Treasury bills
- Real estate
Diversification based on your portfolio risk level
One thing that you will not find in most articles about diversification is that your portfolio’s diversification may look different depending on your risk tolerance.
Next, I will show you four different portfolios and examples of how they may be diversified based on the risk level.
Conservative (slowest but safest growth)
Moderate (slow but safe growth)
Aggressive (fastest but riskiest growth)
How to Invest Money for Beginners in 2020 Final Takeaways
Wow! That was an extensive guide on how to invest money for beginners.
I hope that you found this extremely helpful.
Investing money can seem intimidating, but remember, as long as you have a basic understanding of what you’re getting into, you will be well off.
Let’s quickly go over what you learned in this post:
- Defining your investing goals
- Understanding your personality and risk tolerance
- Picking your investments
- Determining how you will fund your investments
- Choosing the best brokerage for your investment properties
- Diversifying your portfolio based off your risk tolerance
A last word of advice—don’t ever invest in anything that you don’t understand.
Just because you saw someone on Twitter say you should buy shares of Tesla, doesn’t mean you should buy shares of Tesla.
Do your research, understand what you are investing in and why, and you will be well on your way.
I hope that by now you feel confident enough to get out there and start investing. If you’d like to see more articles on investing, take a look here.
See you again soon!
Joshua Mayo does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.