Once you have a financial plan and have paid off any high interest debts, it’s time to consider how to make your money grow!
There are two ways to make money:
1. You work for money. Someone pays you to work for them, or you have a business.
2. Your money works for you. You take your money, and you save or invest it.
The Differences Between Saving and Investing
Some people get into the habit of saving and investing by following this advice: always pay yourself or your family first. Many people find it easier to save or invest first if they direct their bank to automatically remove money from their paycheck and deposit it into a savings or investment account.
Savings
- Savings accounts
- Certificates of deposit
- Checking accounts
Your savings are the money you earn but don’t spend. This money is usually invested in ways you feel extra secure, so you don’t have to worry about losing it. And where you know you can access them at any time. Savings products include savings accounts, checking accounts, and certificates of deposit.
Some deposits in these products may be insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. But there’s a tradeoff for security and ready availability. Your money is paid a low wage as it works for you and may not keep up with inflation. If you want your money to grow and are willing to invest a little, you should continue reading about investments.
Investments
- Bonds
- Stocks
- Mutual funds/ETFs
- Real estate
- Commodities (gold, silver, etc.)
When you invest, you try to make the money you earn, grow. When you invest, you have a greater chance of losing your money than when you save. The money you invest in securities, mutual funds, and other similar investments typically is not federally insured. If you put your principles aside for a while and open up to the possibility of daring to let the money grow, you can always start by investing in certain parts.
Automatic Contributions
One of the best options for making automatic contributions for money you want to invest is to participate in a retirement plan offered by your employer. Many public and non-profit private schools offer 403(b) and/or 457(b) retirement plans. Contributions can be automatically deducted from your pay and provide tax advantages today (traditional) or in the future (Roth). These are the 403(b) and 457(b) plans.
What are the best investments for me?
The answer depends on factors like:
- when you will need the money
- your goals
- your ability and willingness to take risk
If you are saving for retirement and have 35 years before you retire, you may want to consider investment products that may grow faster over the long run. If you stick to only savings or less risky investment products, your money will grow too slowly.
Or, given inflation and taxes, you may lose your money’s purchasing power. A common mistake is putting money they will not need for a very long time in investments that pay little interest. However, with the possibility of growing faster comes exposure to more risk and the possibility of losing money.
- On the other hand, if you are saving for a short-term goal, five years or less, you don’t want to choose high-risk investments because when it’s time to sell, you may have to take a loss. Since investments often move up and down in value rapidly, you want to ensure you can wait and sell at the best possible time.
Stocks and Bonds
You can buy stocks or bonds to invest in individual companies. When you invest in a stock or bond, you hope the company will succeed and your investment will grow.
A stock
is an instrument that signifies an ownership position. Called an equity security in a company and a claim on a proportional share in its assets and profits. Generally, you can buy and sell stock listed on a stock exchange through a broker.
If the company profits or is perceived as having strong potential, its stock may increase in value. The company may also pay dividends, and you may make more money than from the bonds.
Risk: The company may do poorly, and you’ll lose a portion or all of your investment.
A bond
is a debt security, similar to an IOU. When you buy a bond, you are lending money to the company. In return for the loan, the company promises to pay you a specified interest rate during the bond’s life and to repay the principal when it matures or comes due. You can buy or sell bonds through a broker.
The company promises to return money plus interest.
Risk: If the company goes bankrupt, your money may be lost. But you will be paid before the stockholders if any money is left.
This is Mutual Funds and ETFs!
Because it is sometimes hard for investors to become experts on various businesses, they often depend on professionals trained to research companies and recommend companies that are likely to succeed. Since it takes work to pick the stocks or bonds of the companies that have the best chance to do well in the future, many investors choose to invest in mutual funds and ETFs.
A mutual fund, exchange-traded fund, or ETF, is a pool of money run by a professional or group of professionals called the investment adviser. In a managed fund, after researching the prospects of many companies, the fund’s investment adviser will pick the stocks or bonds of companies and put them into a fund.
Investors can buy shares of the fund, and their shares rise or fall in value as the values of the stocks and bonds in the fund rise and fall. Investors may pay a fee when they buy or sell their shares in the fund, and those fees, in part, pay the salaries and expenses of the professionals who manage the fund.
For more information about mutual funds and ETFs, read more about them before you contact any financial advisor for counselling.
Index Fund vs. ETF
Learning investing basics includes understanding the difference between an index fund and an exchange-traded fund, or ETF. First, ETFs are considered more convenient to enter or exit than most mutual funds. ETFs can be traded more easily than index and traditional mutual funds, similar to common stocks traded on a stock exchange.
In addition, investors can also buy ETFs in smaller sizes and with fewer hurdles than mutual funds. By purchasing ETFs, investors can avoid the special accounts and documentation required for mutual, for example.
Keys to Keep in Mind
- Mutual funds are pooled investment vehicles managed by a money management professional.
- Exchange-traded funds ( ETFs) represent baskets of securities traded on an exchange, like stocks.
- ETFs can be bought or sold at any time.
- Mutual funds are only priced at the end of the day.
- Overall, ETFs are lower cost and more tax-efficient than similar mutual funds.
Index Mutual Funds
Index funds represent a theoretical market segment and are designed to act as the performance and makeup of a financial market index. You can’t invest in an index itself, but you can invest in an index fund. When you do so, you utilise a form of passive investing that sets rules by which stocks are included and then tracks the stocks without trying to beat them.
These funds follow a benchmark index, like the Nasdaq 100 or S&P 500. Index funds have lower expenses and fees than actively managed funds.
People interested in investing in an index fund can do so through a mutual fund designed to mimic the index.
Exchange-traded funds (ETFs)
ETFs are baskets of assets traded like securities. They can be bought and sold on an open exchange, just like regular stocks, as opposed to mutual funds, which are only priced at the end of the day.
Other differences between mutual funds and ETFs relate to the costs associated with each one. Typically, there are no shareholder transaction costs for mutual funds. However, costs such as taxation and management fees are lower for ETFs. Most passive retail investors choose index mutual funds over ETFs based on cost comparisons. Passive institutional investors, on the other hand, tend to prefer ETFs.
Financial experts consider index fund investing a rather passive investment strategy than value investing. Both of these types of investments are considered conservative, long-term strategies. Value investing often appeals to persistent investors willing to wait for a bargain. Getting stocks at low prices increases the likelihood of profit in the long run. Value investors question a market index and usually avoid popular stocks, hoping to beat the market.
How can I keep Fund Fees and expenses Low?
One way that investors can obtain nearly the same returns as the market is to invest in an index fund or index ETF. Unlike a managed fund, this type of fund does not attempt to pick and choose stocks of individual companies based on the research of the fund managers.
- An index fund seeks to equal the returns of a major stock market index. It tracks the holdings of a chosen index and aims to generate the same returns as an index minus, of course, the annual fees involved in running the fund. The fees for index funds and ETFs are generally lower than those for managed funds.
Remember that index funds, like any investment, involve risk, and historical data does not guarantee future returns.
Fees and expenses vary from fund to fund, and the amount you pay may depend on the fund’s investment strategy. A fund with high costs must perform better than a low-cost one to generate the same returns. Even small differences in fees from one fund to another can add substantial differences in your investment returns over time.
What about risk?
All investments involve risk. You must fully understand that you could lose some or all of your money in stocks, bonds, ETFs, or mutual funds.
Diversification, or spreading money among various investments, is the best way investors protect themselves against risk. This strategy can be summed up as, “Don’t put all your eggs in one basket.” Diversification can’t guarantee that all of your investments won’t suffer if the market drops. But it can improve the chances that you won’t lose money or that if you do, it won’t be as much as if you weren’t diversified.
Smart to Get Help from a Financial Advisor
Investment professionals offer a variety of services at a variety of prices. It pays to comparison shop. You can get investment advice from most financial institutions that sell investments, including brokerages, banks, mutual funds, and insurance companies. You can also hire a broker, an investment adviser, an accountant, a financial planner, or a professional to help you make investment decisions. Some financial planners and investment advisers offer a complete financial plan, assessing every aspect of your financial life and developing a detailed strategy for meeting your financial goals.
Disclosure: This information is for educational purposes only and should not be construed as financial advice. Please consult with a qualified financial advisor before making any investment decisions.
About Author
Bill Wallace blends his academic background in Literature with his ventures in International Business and finance. His professional journey took him across Europe, especially in Spain, where his passion for writing evolved. Since then, armed with his literary finesse and investment acumen, he has been crafting financial content for teachers worldwide. More about me.
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