Investing is one of the best ways to build wealth and achieve your financial goals. The key is to start early, invest regularly over time and avoid getting spooked by short-term market ups and downs. Check out more at how to invest.
The first step is to make sure you’re in a good financial position to invest, with manageable debt levels and an emergency fund. Then, determine your investment goals and the time frame you want to reach them in.
Know Your Investment Goals
The first step in determining the right investing strategy is knowing what your investment goals are. These should be clear and attainable within a realistic time frame. Investing without goals is like a traveller jumping in the car with no destination in mind.
Identifying your investment goals will help you determine what savings vehicles you may want to use and what risk tolerance you should have. It’s also important to understand how long you have to invest toward your goal, which is known as your “time horizon.” Generally, the longer the time horizon, the more risk you may be willing to take in order to earn higher returns.
You should also decide whether your investment goals are primarily focused on growth, income or stability. Having growth as your primary investment goal means you want to increase the value of your initial investment, or capital appreciation. Stability (sometimes referred to as capital preservation) investment goals are those that seek to protect the value of your initial investments, typically through bond interest and dividends.
Evaluate Your Risk Tolerance
Your risk tolerance is your willingness to tolerate investment losses in pursuit of higher returns. It is based on your beliefs, personality and experience with investing.
A risk-tolerance assessment usually includes questions about your investment history, your goals and how you’d react in a down market. It should also address your time horizon. People with short-term investment goals like next winter’s utilities bills or a child’s tuition bill may need to consider a less aggressive investment strategy than someone who is saving for retirement in two, three or four decades.
Investors should be encouraged to answer these questions honestly, even if their answers may be embarrassing or uncomfortable. A financial planner can help you evaluate your risk tolerance by taking into account other factors such as your age, major life changes (like purchasing a new home), income and family status. Using these facts, the planner can create an investment plan that will help you achieve your long-term goals with a comfortable level of risk.
Create a Financial Plan
A financial plan is a roadmap for effectively managing money, reaching short- and long-term goals, and making informed decisions about the future. Whether you choose to do it yourself, work with a robo-advisor or a financial planner, creating a financial plan can help ensure that your money is going where you want it to go and is working for you.
The first step in creating a financial plan is determining your starting point by taking inventory of your assets and debts. This includes a list of your bank and investment accounts, property and valuable personal possessions, as well as an assessment of any outstanding mortgages, credit card debt or student loans. The total value of these assets minus your debts is your net worth.
Next, you’ll create your savings goals. This will likely include a short-term goal like building an emergency fund and a long-term goal such as saving for retirement or buying a new home.
Choose Your Investments
Putting money into an investment account is a good start, but you’ll also need to select and buy investments that work for your goals. Without that step, your money will simply sit in cash or a default money market account, and it won’t have the opportunity to grow as much as possible.
Your knowledge of investing plays a role in what you choose to invest in, too. While safe choices such as savings accounts and CDs require little knowledge, market-based investments like stocks and bonds can become complex to understand.
Learn about the different types of investment accounts and which one works best for you, such as a Roth IRA, traditional IRA, or self-employed retirement account (SEP, SIMPLE or solo 401(k)). You’ll also want to figure out how to fund your new account — either by opening an online brokerage or working with a service that manages your money. NerdWallet’s ratings of online brokers and robo-advisors can help you decide which one to choose.