Back in high school, where you sat during lunchtime signified your social status. Jocks were at one table, and the geeks were at another. This dynamic made movies like “She’s All That” hit close to home – the idea of being rescued from obscurity and thrust into the secrets of social success was powerful.
In adult life, we often find ourselves in a similar scenario, wanting to join the financial elite while feeling stuck with those struggling to manage money. Consider this your formal invitation to the Everything Finance edition of “She’s All That.”
This article will cover the basics of investing, equipping you to hold your own in financial conversations during dinner parties or nights out. By the time you’re done reading, you won’t be an investment guru, but you will be ahead of about 52% of Americans who aren’t investing in stocks at all.
WHO SHOULD INVEST?
Simple answer: Everyone. No matter what your future plans are, you’ll probably want to retire comfortably someday. Just leaving your paycheck in a savings account won’t cut it because the growth rate won’t beat inflation. You’d have to spend way less than you make, which isn’t easy. Investing lets your money work for you, offering better interest rates through the stock market.
WHEN SHOULD YOU START INVESTING?
Understanding the importance of investing is one thing; jumping in with all your money is another. First, make sure you meet these two critical criteria:
1. Have Disposable Income – Investing isn’t like gambling. Don’t risk money you need for bills, which could lead to debt. If you have existing debts, it’s best to pay them off first (though contributing to your company’s 401(k) is usually an exception because not doing so might mean missing out on employer contributions).
2. Have an Emergency Fund – Without a cushion for unexpected expenses like car repairs or medical bills, you might invest too cautiously to get significant returns. Aim to set aside 3-6 months’ worth of living expenses before you start investing seriously.
HOW TO START?
The easiest first step is usually your company’s retirement plan. If you’re self-employed, look into retirement planning options tailored for you. Once you’re comfortable, you can branch out to other options like brokerage accounts.
INVESTING 101: TERMINOLOGY
Before you dive in, get familiar with these investment terms:
– STOCKS: Represent ownership in a company. Your investment grows as the company does.
– BONDS: Loans to corporations or governments that pay back the full amount at a set date, with periodic dividends.
– COMMODITIES: Physical items like agricultural products, with prices set universally but slightly differing based on industry use.
– MONEY MARKET: Investing in financial instruments like Certificates of Deposit.
– MUTUAL FUNDS: Professionally managed funds pooling money from different investors to spread across various securities.
6 FUNDAMENTAL INVESTMENT PRINCIPLES
1. BUY LOW, SELL HIGH: Purchase undervalued stocks and sell them when their value increases.
2. RESEARCH: Base your investment decisions on thorough research.
3. INVEST IN WHAT YOU KNOW: Familiarity with an industry helps you identify good investments.
4. INVEST FOR THE LONG TERM: Sticking it out through market lows usually pays off more than panic selling.
5. DIVERSIFY: Spread your money around to reduce risk.
6. BE YOUR OWN INVESTOR: Make decisions based on your understanding rather than following trends blindly.
Investing has its risks, but learning how to do it smartly can lead to significant gains. Fear often comes from not knowing, but once you learn, be sure to invite someone else to join you in the investing world.
We’re curious: What investment concept was most confusing to you at first? Have you hesitated to invest in the past? Do you contribute to a 401(k) plan?