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How to Invest Your Money Wisely: A Helpful Guide

Hard times are a lot less hard when you have emergency funds or your money is tied up in profitable investments. Since the COVID-19 pandemic, people are taking their finances much more seriously.

Are you wondering how to invest your money wisely? Keep reading to learn the steps.

Identify Your Financial Goals

Learning how to invest your money wisely begins with giving your money a goal. Determine your financial goals and when you want to achieve them.

Split your goals into two categories: Long-term goals and short-term goals.

Long-Term Goals

Long-term goals are at least five years away. A common example of a long-term goal is retiring with a specific amount of money by a certain age.

You might have other goals, such as making a down payment on a house or saving for your child’s college tuition. Maybe you wish to buy a vacation home in 10 years and eventually settle down in it.

Short-Term Goals

Short-term goals are less than five years away. If you plan to buy a house within a year or go on vacation, you’ll save for these short-term goals. An emergency fund is a great short-term goal to save for as well.

To best differentiate long-term and short-term goals, consider investments. You won’t invest short-term money but you’d likely invest for long-term goals to gain a higher return.

Decide if You Want Help

A lot of investors take the DIY approach but these investors have a better understanding of investment accounts and the stock market.

If you are a beginner looking for the best investing tips, you’ll find the best luck when you have someone to invest your money for you.

A professional financial advisor can choose the right investment account and investment vehicles for your situation. Nowadays, this option is affordable compared to the price you used to have to pay to hire an expert.

Advisors use online computer algorithms and top-tier software to create and manage an investment portfolio for a client. These services offer automatic rebalancing, tax optimization, and more!

Pick an Investment Account

If you go the DIY route, you first need to pick an investment account to get started. To buy most stocks and bonds, this is an essential step to take.

Different investment accounts offer their own advantages. If you pull your money out early, you could be penalized or taxed.

If you are investing for retirement, the most common investing accounts are a 401(k) and a traditional or Roth IRA. If you are investing to reach a different goal, you can use a taxable account or college savings account.

You can open any of these accounts with an online broker except for a 401(k). 401(k)s are offered through employers.

401(k)

401(k)s are offered by many employers and take contributions straight from paychecks. Companies will match the contributions you make to your investment account up to a certain limit.

If your company offers this perk, contribute enough to earn your match before investing in other places.

Traditional or Roth IRA

If you wish to open an individual retirement account, this is the go-to.

In a traditional IRA, contributions you make are tax-deductible. However, distributions are taxed as regular income.

A Roth IRA has the opposite tax treatment. Contributions are made after-tax without offering upfront tax deductibility. Money will grow in the account tax-free and distributions are not taxed.

If you are self-employed, you can find a specific retirement account that caters to your role.

Taxable Account

A taxable account might be referred to as a nonqualified account or brokerage account. These types of accounts are flexible and don’t have a specific purpose.

There are no contribution rules for these accounts and holders can take money out whenever they’d like. These accounts don’t have tax deductibility so if you’ve maxed out your retirement account, you can continue saving with this account.

60% of U.S. households own securities investments, most through taxable accounts.

College Savings Account

An account opened for college savings offers tax benefits. Two of the common accounts for college savings are a Coverdell education savings account and a 529 account.

Choose Investments That Match Tolerance Risk

Where you invest money is one of the most important considerations to make once you have your investment account open. Always choose investments that match how much money you can risk.

Stocks and bonds are among the most common investments, but mutual funds and real estate are becoming more popular.

Some investors choose to take different routes, like learning how to invest in art, without opening an investment account.

Here is a brief breakdown of the most common investments, each of which you can utilize:

Stocks and Bonds

Stocks refer to individual shares of companies that investors believe will increase in value. With a stock, you are buying a piece of ownership.

Bonds are when governments or companies borrow money from you to refinance their debt or fund a project. These are fixed-income investments and investors will make regular interest payments.

You’ll set a date for the principal to be returned.

Mutual Funds

Mutual funds allow investors to purchase multiple investments, like stocks or bonds, at one time. You’ll instantly diversify your investment portfolio with this type of investment.

Funds are typically actively managed by a professional. They will select and trade stocks for you.

Real Estate

If you want to go beyond the traditional mix of stocks and bonds, real estate is the way to go. You can invest in REITs, which act much like mutual funds, if you don’t want to become a landlord.

How to Invest Your Money Wisely: Explained

Knowing how to invest your money wisely always begins with setting financial goals.

From there, it will be easy to pick an investment account and choose investments that match your risk tolerance. If it’s not so simple for you, seek outside financial help.

Keep coming back to this blog for more financial tips.

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