One way to achieve financial freedom is to let your money work for you. This can be achieved through investing your income in ventures that suit your needs. Here are some tips to secure your financial future and ensure that you need not be a slave to money for all your days.
Step 1: Differentiate between the different investment types
Knowing the different investment options available will help you choose wisely and make informed decisions.
- Stocks: There is great variety in the stock market. Some stocks offer the potential for huge returns -- or total losses. Others offer small but stable returns and a reliable income stream.
- Bonds: One of the more popular investment choices out there, bonds give you the flexibility of choosing between government bonds, agency bonds, and more. They are considered one of the "safest" investment classes, because there is little chance you will lose your initial investment. You will also receive interest upon the bonds' maturity.
- Mutual funds: Mutual funds let you tap into a money manager's knowledge to invest your money in a professionally managed portfolio of assets.
- Precious metals: Considered one of the most stable investments out there, precious metals such as gold, platinum, palladium, and silver give you the chance to take advantage of the steadily rising price and high demand around the world. One of the major downsides of precious-metals investing is that you need to deal with possible volatility and worry about a safe place to store your coins or bullion.
- Real estate: Investing in real estate gives you regular income, even if you do not own properties. This can be done through real estate investment trusts, or REITs. Putting your money in a REIT lets you earn rental income without being a landlord, as the trust owns the apartment buildings or shopping malls, thus giving you less hassle.
Step 2: Determine how much you're willing to invest
Now that you're determined to invest a part of your hard-earned income, you need to decide how much you're willing to commit. If you already have some money sitting dormant in your savings account, you may as well invest it, and you need to know how much of that is going into your future investment. Don't be disheartened if you can't spare thousands of dollars; just $500 is enough to get investing in shares.
Step 3: Short-term versus long-term investments
People invest to get returns on their money, but before they can enjoy profits, they need to give up a portion of their money, or capital, for a specific amount of time. Before you decide what to invest in, decide how long you want your capital to be "trapped." If you need access to your funds almost immediately, then long-term investments like stocks, bonds, and real estate are not suitable for you.
Step 4: Give purpose to your investment efforts
If you're saving up for your retirement and want to use your investment returns for your twilight years, then perhaps a long-term investment may be in the cards for you. But should you decide that you need the funds for a long-awaited vacation, then you'll need quick and certain returns.
Step 5: Are you investing for now or later?
If you're investing for later, it probably means you need a pension fund to fall back on during your retirement. This provides a regular income, which you can gain via real-estate investment (i.e., buy property and receive monthly rental income) or through corporate bond funds.
Step 6: Let your age determine your investment risk
If you begin investing at a younger age, you need not be as averse to high-risk, high-reward investments as a senior citizen who can't easily afford to gamble his or her money.
Step 7: Testing the waters
When getting into your first investment, it pays to be conservative and cautious. If you're an experienced investor, you might take greater risks in hopes of earning greater returns.
Step 8: Create an investment portfolio of your own
After you've narrowed down the investment choices that suit your needs, the next step is to create a mix of diverse investment options to put into your investment portfolio. Building a profitable portfolio involves deciding how aggressive or conservative it should be, and the beauty of it is that you're free to make changes yourself -- for example, if you develop a stronger tolerance for risk, you can adjust your portfolio by adding some risky but fast-growing investments.
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Fool contributor K.S. Bisht has no position in any stocks mentioned. He contributes his thoughts about investing and stocks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.