For many, the idea of investing can be daunting. How much money should you invest? How should you invest it? Where? What is investing, even?
Don’t worry — investing is not as complicated as it may seem, and in fact there are some very simple things you can do to get started.
First, let’s answer the question, “What is investing?” According to Investopedia (one of our favorite financial resources), investing is “the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.” You can invest in a property, a managed fund, the stock market or something else.
In terms of personal finance, you’ll want to make sure you’ve paid down any debt and established a savings cushion before you begin investing. There is some overlap here, though: by using a 401(k), 403(b) or IRA to save for retirement, you are investing, and we certainly wouldn’t recommend skimping on retirement savings if you can avoid it.
How much money should you invest and where should you invest it? To answer those questions, first think about your goals. Why are you investing? Are you saving money for your wedding or your child’s college education, or are you investing to diversify your financial portfolio?
Generally speaking, the more immediate your need for the money you’ve invested, the more conservative your investment choice should be. Your investment choice will also depend on your risk tolerance, and how much of a loss you’re willing to take on the money you’ve invested. There are number of calculators and questionnaires you can use to help you ballpark your risk tolerance, such as this one.
It’s best to stick with a savings account, money market account or CD for any funds needed in two years or less. Bonds and some managed funds are examples of conservative investment choices that are a good fit for funds needed in 3-5 years. If you have no immediate need for the money you’ve invested, consider investing in the stock market or a managed fund dedicated largely to stocks.
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