If you're saving money for a goal and won't need the cash for at least five years or so, the money should be invested. Unfortunately, many people are afraid to invest, or don't do it because they don't know how to get started.
The good news is, investing can be easy, and you don't have to know a lot about the stock market to make wise investments. You just have to follow these five simple steps to get your money into the market.
1. Decide on an investment approach
When you invest your money in the stock market, there are a few different approaches you can take. You can manage the money yourself, you can turn to a full-service brokerage and have an investment advisor manage your money, or you can use a robo-advisor.
Managed investment accounts usually carry high fees, and handing off investment decisions to an advisor isn't the right approach for many people. Instead, you'll likely choose between managing investments on your own or investing with a roboadvisor, which means an algorithm picks diversified investments for you based on your risk profile and investment goals.
While investing with a roboadvisor sounds simplest, there are fees associated with automated financial advising -- albeit lower fees than if you have a human advising you. Paying these fees probably isn't necessary because it's actually pretty simple to build a diversified portfolio yourself using exchange-traded funds. Still, if you want a totally hands-off approach without paying a fortune for investment advice, roboadvising may be the way to go.
2. Open an investment account
Once you've decided your approach, it's time to open an investment account. If you're using a roboadvisor, you have a pretty limited number of options -- Wealthfront, Betterment, Ellevest, and Wealthsimple are the biggest players, althouh new roboadvisors seem to appear regularly.
When shopping for a brokerage, compare fees you'll pay for buying and selling assets, minimum deposit requirements, types of investments available, and trading platform. Select a brokerage that offers low commissions or free trades with plenty of commission-free investments, and an online platform that provides education if you're a beginner.
3. Fund your account with an initial deposit
After opening your account, you'll make an initial deposit -- usually through a transfer from your bank account. There's generally no fee for this transfer, or you can also send in a check if you'd prefer.
If you're investing in an Individual Retirement Arrangement (IRA), there is a $5,500 contribution limit for 2018, although those over 50 can make an additional $1,000 contribution.
For other types of investment accounts, you can put in as much money as you want to. The more you invest, the more you can earn.
4. Set up automated transfers of money to your investment accounts
When you're setting up your investment account, it's a good time to set up automated transfers into that account so you can save as close as possible to the recommended 20% of your income.
If you're not sure how much you can afford to invest, make a budget that allocates funds to savings as a top priority. Budget to save as much as you can and set up automated transfers on payday into your investment account so you'll never miss a contribution.
5. Buy assets to build a diversified portfolio.
Once you've got money into your investment account, it's time to actually purchase investments.
A roboadvisor will take care of this process for you once you've filled out some basic information about your risk profile and goals for the money. If you're investing yourself, you'll need to determine where to put your funds.
You don't want to put all your eggs in one basket, so invest in a mix of different assets. A classic mix for a diversified portfolio includes investing in large-cap U.S. stocks, small-cap U.S. stocks, real-estate investment trusts, bonds, and foreign stocks. You can find model portfolios here to get you started, or check out these 4 ETFs you can buy for a balanced portfolio.
ETF stands for exchange-traded fund, and the funds pool a bunch of investor money to buy different categories of assets such as buying shares of all of the companies that make up the Dow Jones Industrial Average. ETFs, or exchange-traded funds, make it really easy to diversify because you can trade them on the market like stocks, and there are many different ETFs that give you exposure to a broad array of different kinds of assets.
Whatever approach you take, just start investing today
Whether you decide to get an investment advisor to manage your investments, use a roboadvisor, or buy ETFs, you're going to be in a much better position if you start investing now rather than leaving your money to languish in a low interest account, or spending all you earn.
The younger you are when you start investing, the more you can take advantage of compound interest and build real wealth. So, start today -- open your brokerage account now and get your money in the market so it can start working for you.