Bitcoin is not the answer for beginner investors. The wide world of investing can be challenging to decipher and a little daunting when trying to figure out all the market options. Some beginner investors start with a savings account to get a taste of what earning a return on their income could be in the future. With a savings account, you earn interest on what you put into it, resulting in compound interest from month to month. Savings accounts can be good for saving for a goal like a car or a vacation. A savings account is also reasonable for short-term goals where you're not looking to make a big profit. So, how do you make a more significant profit through investing?
What's the Difference Between Saving and Investing?
When saving your money in a bank, it's protected by the Federal Deposit Insurance Corporation up to a certain amount. The bank does have to be an FDIC-insured bank for you to receive this protection in case the bank fails. When you save your money in a bank, you earn a small amount of interest on your deposits. As you transfer more money into your savings account, you earn compound interest on the money you've deposited from month to month.
With investing, there's the possibility that you could earn gains on your money, or there's a risk that you could lose your money. Money put into investments does not have guaranteed returns because of the unpredictability of market fluctuations. Predicting a company's sustainability can also be challenging due to unknown financial information not being released in real-time.
What You Need To Know As A Beginner Investor
Stocks - When you purchase a stock, you buy shares of ownership in a company. You can buy a stock split, one stock, or numerous stocks in a company. Stock splits are used if you don't have the funds to purchase an entire stock. Owning company stock means that you own a percentage of the company itself.
Bonds - With bonds, you loan your money to a company or the government in return for interest. The most popular type of bond is a savings bond. These come in EE or I series bonds. You can purchase these independently or when filing your tax return. Savings bonds can also be purchased as gifts for children.
See What are Savings Bonds to learn more.
Retirement Accounts - There are many types of retirement accounts available. A few options are a 401(k), 403(b), IRA, or Roth IRA. You can invest in these independently or through your employer, and there are pre-tax and post-tax options. Pre-tax means that you will pay less in tax now on your contributions and income. When you reach retirement age and decide to withdraw your funds, you will pay taxes on the distributions. Post-tax means that you've already paid taxes on your investments.
It's essential to invest early in your financial future. It's never too late to start contributing to a retirement plan. If you start contributing $100 per month into a retirement account when you're 20, you could have $600K when you turn 65. If you contribute the same amount at age 30, you could have about $310K at 65. So, starting and continuing to contribute to your retirement early makes q big financial difference.
See my feature in How To Make Yourself A Retirement Millionaire.
What's Your Risk Tolerance
It's essential to assess your risk when investing. When you assess your risk, you determine your risk tolerance. When investing, there's the possibility that you may lose money, so understanding, if you have a low, medium, or high-risk tolerance, can help you make the best decisions on what to invest in. A financial planner can also guide you in determining your investing risk tolerance.
Make A Plan
After assessing your risk tolerance, you want to determine how you want to invest. Do you want to put your money in a savings account, stocks, bonds, your retirement fund, or real estate? And how do you want to portion out your investments? If you are risk-averse and have a lot of debt, you may want to keep your money in a safer option like a savings account. Or, you may pick a combination of two or more investment options. It's essential to weigh your options and plan for your financial future.