What a Beginning Investor Should Know

It is common for beginning investors to be intimidated. Financial matters can appear complicated. However, they don't have to be. Investing is a matter of risk and time horizon. The longer you have to invest, the more risk you can take with the investment. The key is to find the right balance of short-, medium- and long-term investments for you.

Function

You don't have to be rich to invest. In fact, the way to become rich is to invest wisely. Make an effort to set aside a little money from every paycheck for investing. The easiest way to do this is to think of investing as a bill. Pay yourself a predetermined amount for your investments before spending your paycheck on anything else. This will prevent you from spontaneously wasting your money. If you get a raise or a bonus, use that money to invest.

Prevention/Solution

If you are not investing you are falling behind. Inflation makes the price of everything go up. If your money is not growing in investments, its buying power is shrinking. There will come a time that you will need a large chunk of money. This can be for an emergency, a major purchase or to retire. If you do not save money over time, the money won't be there when you need it. Investing helps you get to your savings goals faster because the money is working for you by growing.

Potential

It is far more important to invest early than it is to invest a lot. Take retirement savings, for example. If you were to invest $2,000 per year in investments that average 8 percent per year from the age of 22 until you are 30 and then stop, you will end up with more money at 65 years old than if you had invested $2,000 per year from 30 until 65. This is because of the power of investing over time. Even if you can only afford to invest a few dollars per week, it is worth doing while you are young and have time to wait.

Benefits

Take advantage of tax-sheltered accounts. Many employers offer 401k accounts that allow you to invest money tax-free from your paycheck. Some employers also contribute extra money as a bonus. This is the absolute best way to invest for retirement. You get extra money from your employer and lose less to taxes. Roth IRAs and Traditional IRAs are also good tax-shelter options. A 529 plan offers tax benefits for college savings. Over the course of several years, these tax benefits add up to thousands of extra dollars in your pocket.

Time Frame

Don't take unnecessary chances. The riskiness of your investments should match your time frame. Money that you might need within a year should be in no-risk investments like money market funds or certificates of deposit. Money that you could need within five years can be invested in riskier securities like bonds or conservative to moderate stock mutual funds. Longer-term investments can withstand the most risk and can be placed in aggressive stocks or mutual funds. The key is to distribute your money among short-, medium- and long-term investments. Redistribute the proportions of each as your needs change.

Warning

Don't panic or get greedy. Investing is all about patience. Resist the temptation to risk all your money when you think there is a great opportunity and don't cash out everything when the market takes a downturn. A well-balanced portfolio will protect you from major fluctuations in the financial markets. History shows that the market always levels off from unusual highs and lows.