Knowing where to begin your road to financial security can be difficult. If you’re starting out, or you’re having to start over, you might feel overwhelmed by the range of options available. Not everyone has a supportive family or education; poor health, incarceration, poverty and other hurdles can create enormous knowledge gaps that aren’t easily overcome. Here are some basic, no-nonsense pointers for those investing for the first time.
1. Learn Responsibility Using the 50/30/20 Rule
First, start sorting your income into needs vs. frills. Many financial advisors recommend a 50/30/20 rule, in that 50% of your income goes to necessary expenses (rent, energy, groceries, car payments, etc.), 30% goes toward savings (emergency funds and other forms of long-term investing described below), and 20% goes toward having fun (hobbies, recreation, and so forth). Sticking to this ratio will build discipline and self-restraint with every paycheck.
2. Grow Your Cash in a Savings Account
All first-time savers should have an emergency fund in case of exactly that: an emergency. But cash that sits in an envelope, safe, or a checking account will never grow in step with the costs of inflation. The second principle to learn is that you want your money to earn interest.Start with a high-yield savings account. Interest rates (and policies determining how accessible your money will be) will differ depending on the bank, so shop around to find the best deal for your needs. Try to contribute as much into your savings account as you can (as you go, consider bolstering your contributions by selling off unused or unwanted goods, such as furniture, collectibles and jewellery via online marketplaces and other buyers;, for example, can offer high prices for gold and silver jewellery due to sky-high market trends).
3. Expand to Certificates of Deposit
Once you’ve learned some discipline and seen how a high-yield savings account can grow, move on to a. A CD is much like your savings account, but the money you contribute to a CD will be locked away (i.e., inaccessible to you unless you pay a fee — try to avoid that!) for a pre-set period of months or years. The upside? You’ll get a better percentage yield than most high-yield savings accounts. Use a CD for future-oriented goals and remember not to touch the money until maturity.
4. Start Thinking About RetirementRetirement may be decades away, but saving for it is a must if you want to enjoy your golden years. Learn more about tax-advantaged retirement accounts, like a 401(k) or RRSP, depending on where you live. Basically, once established, the portion of your income you decide to contribute to your retirement plan won’t be taxed (and won’t be taxed until you stop working). Many employers will also agree to match whatever you decide to contribute — this is a solid deal you should always take, if it’s on the table. If you’re self-employed or don’t have a contributing employer, investigate simple IRAs (individual retirement accounts) or the Solo 401(k).
5. Explore Mutual Funds, ETFs, and Individual StocksNow that you’re distributing your income correctly, saving and accruing interest, and locking away money for long-term goals and retirement, you can dip your toes into the world of stocks and bonds. The most stress-free (or low-risk) way to begin is to purchase a share from a mutual fund.
Once you’ve reached this stage, it’s time to contact a financial advisor; they’ll help you broaden your horizons and find the right balance of risk, passivity, and diversity for you. For example, if you’ve sold some jewellery above, you might now be interested in acquiring bullion, which is an intelligent way to inject some diversity into your portfolio; gold and silver tend to increase in value when other stocks and bonds fall or inflation increases. In other words, gold keeps up with inflation, while CDs and savings accounts rarely offer interest rates above it.
This is just a taste of the exciting decisions you’ll soon be making: how to play and observe the market and keep making money when other investments have temporary dips.