Investing for the first time can be an overwhelming and confusing process. There are so many moving pieces with how much you should invest, who to invest with, what types of investments you should choose, and when you will reach your goals. While investing for your future at a younger age may seem like a stretch, it is essential for your financial stability and growth in the years ahead. It is important to think about what goals you would like to reach by the time you reach a certain age or season of life, such as retirement, purchasing a dream home, or helping your child go to college. All these things can be made possible through investing.
We understand that with investing, there are many questions that may be at the forefront of your mind. As you prepare and adjust your financial plans to start your investment journey, here are some key questions that you should consider.
There are many different types of investments you can choose from, but it is important that you narrow down what financial goals you have in mind before trying to decide. One of the most common goals people think of when it comes to investing is their retirement. While your retirement may be decades away, it takes a lot of time to save the money you’ll need to live comfortably, especially if you want extra money to spend for a new home or dream vacation with your family. Other goals you may have for investing could be paying for your child’s college, doing a makeover for your kitchen, starting a business, or purchasing a new car. Once you’d decided which goals are the most important to you, it’s time to start deciding on investments.
A type of investment that is wise for everyone to have is for their retirement, such as an IRA or 401(k). These accounts have some key differences, but they serve the same purpose of making sure you are financially prepared for when you retire. 401(k)s are investment accounts that are often set up by an employer, and you can choose how much of your paycheck you want to be set aside as a contribution. A benefit to having a 401(k) with your employer is that some might match your contributions, which is a great way to grow your investment faster. For example, let's say you personally invest 3% of your salary. An IRA, which stands for individual retirement account, is an account that you set up for yourself if your employer does not offer a 401(k).
Traditional v. Roth
When you are trying to decide which retirement plan is right for you to invest in, it is important to consider the differences between a traditional investment compared to a Roth. Traditional IRAs or 401(k)s are a tax deferred option, where you use pre-taxed contributions. They will be taxed when you make withdrawals during retirement. Since Roth IRA or 401(k)s use money that is already taxed, your withdrawals will be tax-free. Because of this fact, Roth accounts are typically better for younger investors. No matter what other investment options you decide on for your financial goals, it is so important that you have the right retirement plan that will gain traction for your future.
If you’re looking for an investment that is relatively low-risk, bonds might be a good match for you. A bond is when you provide a loan to a borrower, and you’re compensated by the interest they pay. Not only are you getting extra money from the interest, but you’ll also receive the amount you loaned back after a period of time. Bonds can be given through different entities, such as corporations, municipalities, or government agencies. The maturity of a bond can be a few years or more than thirty, so keep that in mind when considering this as an investment.
This investment type has remained a hot topic for the last several years. When you invest in a stock, you are owning a piece of a company. For example, you could own stock in a major corporation like Apple or a smaller local company in your town. While stock tends to be a riskier investment, the returns can be relatively high, making it worth it to many investors.
Mutual funds are multiple investments wrapped up into one. They can include stocks, bonds, and real estate. What makes them unique is that they are “mutually funded,” which means you and many other people are funding these investments together. The risk in these types of investments can vary, but they are a great option if you’re looking for diversification, which we’ll elaborate more on later.
Like mutual funds, exchange-traded funds (ETF) are also a collection of stocks, bonds, and other investments. However, the key difference between them is that they are traded throughout the day, not over time.
Before moving forward in choosing which investment options are best for you, there are two steps you need to take to ensure you're ready to tackle investing head-on:
1. Have an emergency fund. You need to have a stable financial backup plan before you start growing your wealth, so you can be prepared for any unexpected expenses that might come your way. Make sure you have your current financial situation under control before jumping too far ahead into your future one. Remember, the choices you make now will impact how much or how little wealth you’ll have down the road.
2. Pay off debt. Sometimes it’s easy to think that we can juggle both paying off debt and our savings all at once. However, this may not be the best strategy if you’re entering the world of investing. Take a break on your investment journey to focus on tackling any debts you may have.
Having an emergency fund is essential, but it is important to note that if you're still paying off some debt, that is okay! While not having to worry about debt so you can focus on your investments would be ideal, we understand that it not always a realistic option. You will likely have to pay for things like your mortgage, a car payment, or student loans. Just make sure that you are managing your debts well before fully committing to an investment plan. Remember, your investments are not insured by the National Credit Union Administration.
A question that you might be pondering is how much money you want or may even need to start. The exact amount will vary depending on your income. If you’re wanting to save for your retirement, you could invest 10-15% of your income each year.
Let’s say you follow the 50/30/20 budgeting strategy where you spend 50% of your monthly budget on needs, 30% on wants, and 20% on savings, investment, or debts. As we’ve already mentioned, it’s ideal to start investing once you’ve paid off your major debts, so we can take that out of the equation for the 20%. That leaves 10% for your savings and 10% for your investments. The 10% you delegate to your investments could be for your retirement and other investment goals.
Diversification is a key piece for the health of your investment portfolio. When you’re considering how to invest your money, you won’t want to put all your eggs into one basket. Diversifying your investments creates more stability because you are allowing your money to have multiple opportunities to grow in a variety of markets. For example, let’s say you’ve chosen to invest in just stocks. Since stocks tend to be riskier than some other investment options, your money could fluctuate constantly and the company you’ve chosen to invest in might not perform as well as you’ve projected them to in the future. A way to diversify these stocks is to invest in multiple stock types, such as value and growth stocks. Using a mix of small, mid, and large-cap stocks can also help with diversification.
A simple way to diversify your portfolio is to invest in mutual funds or ETFs, which by nature are a variety of stocks, bonds, and other assets. You may consider purchasing an index fund that tracks multiple stocks, such as the S&P 500, which has proven to deliver value over a long period of time.
Having a financial counselor can help you learn the basics of investing, so you can have a solid foundation of understanding how it works. Plus, if you have any roadblocks or bumps along the way, they can help you navigate how to get through them. Along with revealing any weaknesses, a financial counselor can also point you back towards your goals for you to stay on track of when you want to reach whatever amount of money you had in mind.
Are you ready to invest your money, so you can invest in your future goals? It’s never too early to start your investment journey, and it’s important to have a financial institution you can trust to help you along the way. Our Investment Champions would be happy to answer any questions or concerns you have about how to get started. If you want to explore investing further, take a look at our free Investing 101: A Guide to Growing Your Wealth.