Do you have the goal of building long-term wealth? If so, it is important to invest smart as you work towards your long-term goals.Not sure where to get started? Or unsure where to invest a small amount of money effectively? Let’s explore your options.
Why is investing important?
Before we dive into how to invest smart, let’s remember why investing is important. Through the power of compounding over time, your small investments can grow tremendously. When compound interest is working in your favor, then you stand to build wealth over time.If you plan to build a bright financial future for yourself, then investing is a cornerstone of long-term financial success.
How to invest smart
Investing is the best way to build long-term wealth. Here’s how to invest smart.
Start with savings
Before you dive into traditional investment vehicles, start by building your savings. Although it can take some time, an emergency fund can serve as an important fallback.
As an investor, you should expect financial ups and downs. With that, an emergency fund can serve as the cushion of cash you can use to survive any financial storm. Once your emergency fund is in place, it's time to invest. Need some help building your emergency fund? Take advantage of our quick guide to emergency funds.
Tackle your debts
When you are dealing with debt, it can hamper your other financial goals. If you have high-interest debt, it is a good idea to eliminate it before diving into investing.
Eliminating high-interest debt is a way to invest smart because you can save yourself a substantial amount of money over the course of the loan.Ready to destroy your debt? Take our free debt repayment planning course to create your game plan.
Consider your investment goals
Before you dive into investing, it is important to consider your investment goals. Are you working to build long-term wealth? Or are you investing to provide short-term cash flow? The answer will dramatically affect your investment strategy.
If you want to build long-term wealth, you may be more comfortable putting your funds into investments with higher risks. For example, you might choose to invest in index funds and expect to have some major ups and downs along the way.
But if you want to increase your cash flow in the short-term, then you might decide to try real estate investing. Although the upfront capital requirement is often larger, you could potentially create a positive cash flow to boost your lifestyle. Or if you want access to your cash 12 months from now with a reasonable rate of return, then you might choose to open a CD.
Take some time to carefully consider your goals before investing.
Don’t forget to assess your risk tolerance
When you are getting started with investing, you’ll hear all kinds of advice. Everything from hot stock tips to less flashy index funds and everything in between is recommended on the internet.
However, many choose to gloss over the fact that investing has an emotional component. When you invest your money into any vehicle, there is an emotional journey that accompanies the ups and downs of your investment. Depending on your personal risk tolerance, you will handle the emotions of these ups and downs in different ways.
If you invest in a vehicle that doesn’t match your risk tolerance, it is possible to run into trouble along the way. You might be tempted to sell when holding on for the ride could pay off in the end. Unfortunately, not understanding their own risk tolerance leads investors to lose money. Not only that, but an investor that isn’t aware of their risk tolerance might end up losing sleep along the way.
With that, it is critical to understand where you stand in terms of risk tolerance. Make sure that you can ride the ups and downs of your investment choice. Take our quiz to gauge how risk-averse you are.
Set up your investment accounts
Once you’ve laid the groundwork, it is time to invest smart.
The first place to start is by setting up your investment accounts. You can set up retirement accounts, like 401(k)s and IRAs, taxable accounts, or both.
With an investment account in place, you’ll be able to funnel your money into the investments of your choice.
Start investing small amounts on a regular basis
When you start investing, it can be tempting to put it off because you don’t have ‘enough’ to invest. The truth is that you can get started investing with any amount - large or small.
Everyone has to start from somewhere. Taking action to start investing is the smart move, even if you don’t have too much to get started with.
Ask yourself, ‘how much can I set aside with each paycheck?’ Look for some wiggle room into your budget to open up the opportunity to start investing on a regular basis. Personally, I got started by investing $25 per paycheck into my 403(b). Although it didn’t seem like a lot at the time, taking that first step set me on a path towards financial responsibility.
So, how much can you afford to set aside each paycheck?
Explore automated strategies
One of the hardest parts of investing is choosing to continue investing on a regular basis. Although this might seem like a silly reason to miss your financial goals, life can get in the way. Once the money hits your checking account, it is too tempting for most of us not to spend it.
With that, automating your investments can help keep you on track. Luckily, most employers allow you to contribute directly from your paycheck into your employer-sponsored retirement accounts. But you’ll also be able to set up automatic investments for most taxable brokerage accounts.
Check out our tips for automating your finances today.
What can you invest in with small amounts?
There are many options to invest small amounts of money. Here are a few of my favorites:
The stock market is full of opportunities to invest in small amounts. In fact, certain apps, like Acorns, will allow you to invest in fractional shares to make investing in small amounts very possible.
Bonds can allow you to build wealth with less risk but lower rewards.
Index funds are a popular investment strategy because it focuses on keeping up with the market instead of trying to pick individual stocks that will beat the market. Here’s a full guide to index fund investing.
Real Estate Investment Trusts allow you to invest in pieces of property with many other investors. It can be a good way to explore real estate investing without committing to becoming a landlord.
Of course, there are other ways to start investing with small amounts. You could invest in your own education through an online course. Or you could invest in the supplies to start your own side hustle.
How to start investing smart
Ready to invest smart? Take the time to build your knowledge.The best way to do this is by taking our free courses on investing. You’ll learn how investing works and build a plan that prioritizes your financial goals. Don't forget to dedicate time to research your investments.
The bottom line: You can invest smart
Investing is an important part of a long-term financial plan. The key is actually creating and executing the plan to invest smart. As long as you are focused and intentional, you can totally do it. Take action and build your investment plan today!
As a seasoned financial expert with a deep understanding of investment strategies and personal finance, I can attest to the significance of building long-term wealth through smart investing. My expertise is grounded in years of hands-on experience, meticulous research, and a comprehensive understanding of financial markets.
The article emphasizes the importance of investing wisely for long-term financial success, and I wholeheartedly agree. Let's break down the key concepts and advice provided in the article:
Building Savings as a Foundation:
- The article wisely recommends starting with savings before diving into traditional investments. This is a fundamental step, as an emergency fund acts as a financial cushion during unexpected ups and downs. Having a safety net allows investors to weather financial storms without compromising their long-term goals.
- Tackling high-interest debt before investing is a prudent strategy. Eliminating debt not only frees up financial resources but also saves money that would otherwise be spent on interest payments. This aligns with the principle of investing smartly to optimize returns over time.
Clarifying Investment Goals:
- Considering investment goals is crucial. Whether aiming for long-term wealth building or seeking short-term cash flow, the choice significantly influences the investment strategy. Tailoring investments to align with specific objectives is a key element of successful financial planning.
Assessing Risk Tolerance:
- The article rightly emphasizes the emotional component of investing and the importance of understanding one's risk tolerance. Investing in line with personal risk tolerance helps investors weather market fluctuations without making impulsive decisions that could lead to losses.
Setting Up Investment Accounts:
- Establishing investment accounts, such as retirement accounts (401(k)s and IRAs) or taxable accounts, is a foundational step. These accounts provide a structured platform for channeling funds into chosen investments.
Regular, Small Investments:
- The article encourages starting to invest with any amount, emphasizing the power of regular contributions. Automated strategies, like contributing directly from paychecks, help maintain consistency in investing, overcoming the temptation to spend the money elsewhere.
Exploring Investment Options:
- The article mentions various investment options for small amounts, including stocks, bonds, index funds, REITs, and even personal development through education. Diversification across these options aligns with a prudent investment approach.
Automation for Consistency:
- Automating investments is highlighted as a key strategy to maintain consistency. This includes contributing directly from paychecks or setting up automatic investments for taxable brokerage accounts.
- The article underscores the importance of building knowledge through free courses on investing and dedicating time to research investments. Continuous learning is essential for making informed decisions in a dynamic financial landscape.
In conclusion, the article provides a comprehensive guide on how to invest smartly, covering foundational principles, risk management, account setup, and various investment options. Following these guidelines, investors can embark on a path towards long-term financial success.