How to Invest Money
Best Ways to Invest Money
for Financial Freedom
An essential step to financial freedom is to learn how to invest money. Without investing, you most likely will not be able to reach your financial goals even if you follow a budget, get out of debt, and live frugally.
Before determining the best ways to invest your money, you need to determine your financial goals, how much money you have to invest, and how long you have to invest the money.
A financial freedom plan useful in defining your goals. In addition, a budget will help you determine how much you can regularly add to your investments. A personal budget worksheet can be useful in helping you plan a budget.
The types of savings and investment products you choose will largely be based on your risk tolerance, your need for liquidity, and the length of time you plan to keep the investment.
Risk tolerance is your willingness to live with decreases in your investments with the hope that the value will increase in the long run. In general, if you want a higher return, you must be willing to accept a higher risk.
Liquidity refers to how easy it is to convert an investment to cash quickly and without losing money. For instance, a savings account is very liquid. You can easily withdraw the full value in cash. A house, on the other hand, is not very liquid, especially in a slow real estate market. It may take several months or longer to sell a house and you may have to sell it for a loss.
How to Invest Money for the Short Term
For short term needs, such as saving for a trip or maintaining an emergency fund, you will want to put your money in something that has a low risk and is highly liquid. For short term investing, use checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs) at a bank.
These are insured by the Federal Deposit Insurance Corporation (FDIC.) The CDs may not be as liquid as there is often a penalty for withdrawing them before maturity. But if you buy several with staggered maturity dates, you will always have some funds available.
Money market mutual funds, offered by brokers, are also very liquid. They are usually safe but are not insured by the FDIC.
How to Invest Money for the Long Term
For money that you won’t need for a longer period of time, you have several options for how to invest money for the long term. First, you will need to thoroughly understand the concept of risk versus return. With any investment, there is an element of risk. You need to understand what the risks are for a particular investment and be comfortable with them.
One of the most common options of how to invest money is to purchase shares of stock in a company. When you buy stock in a company, you actually become one of the owners. If the company does well and makes money, the value of your shares could increase. Likewise, if the company does poorly, the value of your shares could go down.
Most likely, the value will fluctuate up and down while you own the stock. That is why it is important to have enough other money to meet short term needs so that you will not have to lose money by selling the stock when it is down in value.
Some companies also periodically pay out some of their profits to stockholders in the form of dividends. An advantage of owning shares in a company that pays dividends is that you can receive some income regularly without selling the stock.
Another way to invest is to buy bonds issued by a company or the government. When you buy a bond, you are actually loaning money at a set interest rate for a specific period of time. The interest is paid at certain intervals.
At the end of the specific time period, called the maturity date, your principal is returned to you. If you need your money back before the maturity date, you may be able to sell the bond. But, depending on the current market interest rates, you may take a gain or a loss on the sale.
When you own multiple investments, it is called a portfolio. It is a good idea to spread your money around between different types of companies and investments to reduce your risk. This strategy, called portfolio diversification, is an important component of safe investing.
Investment in Mutual Funds
If you don't have much time or interest, it may be difficult for you to research each company in your portfolio. Instead, you could consider an investment in mutual funds.
A mutual fund pools together money from many investors and invests in a portfolio of various investments. It is run by an investment advisor. The mutual fund increases or decreases in value depending on the value of its underlying investments.
Investing in mutual funds is probably one of the easiest ways to get started when you are first learning how to invest money. There is a wealth of information available in magazines and online to help you get started. Several websites actually specialize in rating mutual funds.
Investing in index funds is another good option, especially if you are looking for a low-cost, simple investing idea.
These suggestions are just a sampling of options of how to invest money. There are many types of investments and investment strategies from which to choose. The importance of saving money and investing cannot be overemphasized.
The younger you are when you start investing, the longer you will have for your money to grow. That is the reason that it is important to start financial planning for retirement at a young age.
Please be aware that this is general information and not meant to be investment advice for your situation. You can see a full disclaimer here.
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Target Date Funds
Target Date Funds may be appropriate for people who are not interested in managing their investments for themselves.
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