The first time you do anything new, you might feel a bit unsure of yourself. When you're embarking on new territory in your financial life, this may be especially true, such as the first time you decide to make an investment.
Perhaps you just received a signing bonus for a great new job, or maybe through careful savings strategies, you've managed to procure $500, $1,000 or $2,000. Regardless of the money's origin, it's important that you address it with care and intelligence.
Make Sure You're Financially Ready to Invest
The first thing you should do when you have some extra money is to make sure the rest of your financial obligations are in order. Ask yourself:
- Will my payments for debts like student loans or car payments be affected by investing this money elsewhere?
- Do I have at least 3-6 months' worth of living expenses saved up in case of an emergency?
- Are there any crucial purchases that I'll need to make in the next few years?
If the answer to these questions are "no," congratulations! You should feel comfortable investing this money and watching it grow, instead of spending it or keeping it stowed away somewhere with a low interest rate.
Think About Timing
When you invest money, you may have a plan for it. Perhaps you want to grow it until you're ready to make a home purchase. Or, maybe you want to let it develop and flourish until retirement. Thinking about when and how you'll want to use your money is key to how you will decide to invest it.
"It's in the young investor's best interest to let money grow for at least five years."
Forbes contributor Rob Berger explained that it is in the young investor's best interest to let money put into stocks grow for at least five years, but 10 is better [1]. That means that if you want to take your money out any sooner, think twice about entering the stock market. Instead, a high yield savings account or certificate of deposit might be your best bet.
Consider Your Risk Tolerance
It is entirely possible to allow your money to grow without any risk. However, these options probably won't give you the high returns you'd like. However, when you're a young investor, taking some risks is more or less encouraged. This is because over the long term, your money will most likely grow, but there will be some bumps along the way. If you are planning on taking your money out sooner, there may not be enough time for those bumps to smooth over and result in a profit.
A good rule of thumb to determine how much of your money you should have in riskier accounts is to take your age and subtract it from 100, explained U.S. News & World Report [2]. So, if you are 27, you should have 27 percent of your money saved in less risky accounts and the remaining 73 percent in accounts with higher risk. But when you're older – say, 67 and thinking about retirement, you'll want more of your money in low-risk or risk-free accounts.
Jim Cramer, personal finance expert and host of "Mad Money" on CNBC, believes that young investors should almost always opt for more risk, CNBC reported [3].
"There's absolutely no reason for someone who's in their 20s to have bond exposure when that money could be invested in stocks where it will most likely end up consistently making you a higher return, year after year," Cramer said.
Of course, everyone is different, so you may approach risk differently than your best friend or colleague. When it comes to your own finances, it's best to do what you feel comfortable doing.
Know Your Options
Once you're ready to actually make your decision, there are several options available to you. Perhaps the safest option is a certificate of deposit.
CDs are insured by the Federal Deposit Insurance Corp., so you will never lose money in a CD. When you take out a CD, you'll choose a term, such as three months, one year, three years or five years. The longer the term, the higher your rate will likely be.
Your money will grow over the course of its time in the CD at the rate you choose. However, you will not be able to take your money out early without paying a fee, and if the market changes, your money will not be affected until the term is over.
Stocks hold the highest risk, but sometimes the highest reward. They can be bought and sold at any time during the trading day. When investing in stocks, you'll want to make sure you can live without that money for at least five years to a decade.
Mutual funds are another option. These generally cost a little bit more, but that doesn't mean someone with $1,000 can't invest in them. Typically, the minimum for a mutual fund is $1,000 with $25 minimum deposits.
Exchange-traded funds are similar to mutual funds in that they are comprised of several assets together. However, like stocks, they can be bought and traded throughout the day.
Once you decide which method of investing is right for you, you'll be able to watch your money grow and reach your financial goals, and that is always a good feeling.
Sources:
[1]. How To Invest For The Very First Time
[2]. How to Invest Your First $1,000
[3]. Jim Cramer's 3 tips for investors who are just starting out