Investing can be one of the best ways to build wealth and financial stability. It could help you meet your financial goals faster.
Investing is an important part of your financial plan and way to reach your goals. It enables you to make your money work for you and potentially grow over time, allowing you the chance to accumulate wealth over the years.
But it’s not always as simple as deciding to invest — there are many factors that go into making smart investing decisions, from choosing which securities or asset classes will give the highest return, to understanding risk tolerance and diversifying your portfolio.
In this guide, we’ll break down why it pays to invest in the stock market, including how investors can set effective investing goals and manage their strategy over time.
Why is investing important?
Investing is essential for anyone looking to grow their savings and build wealth. It allows you to put your money into assets that may increase in value over time, as opposed to leaving it in a bank account where it collects interest at a much slower rate.
Investing can also protect you from inflation because as prices rise, the value of your investments usually rises as well.
The key benefit to investing is potential long-term growth. You can create a portfolio of investments that grows in value over time, allowing you to accumulate wealth and meet financial goals like saving for retirement or purchasing a home.
Though the markets fluctuate, the longer you keep your money invested, the greater chance you have of increasing your wealth. You can use investing to take charge of your future financial security and meet your short, medium, and long term financial goals.
Additionally, there are tax benefits available to investors who choose to save in a retirement account, such as an IRA or 401(k). Investing in accounts like these can be a great way to diversify your overall financial portfolio and reduce risk. And by investing in different asset classes and sectors, you can help ensure that any losses are balanced out by gains elsewhere.
Identifying your financial goals
Setting realistic financial goals is an important first step in achieving success with investing.
Your individual investment goals will vary depending on your unique financial circumstances, including your age, income, and risk profile. For example, someone who’s young and just starting out in their career may have different goals than a middle-aged parent who’s in their peak earning years.
Knowing whether you want to pursue short-term gains or long-term gains, or a combination of both, can be a starting point for developing an effective plan for managing and growing your wealth:
- Short-term goals are typically achievable within one year and may include reducing debt or saving enough money for a purchase like a new car or vacation.
- Long-term goals, on the other hand, require higher levels of commitment because they involve investing in the future and cannot necessarily be achieved within a year. Examples of long-term goals include retirement planning or funding a larger purchase like a home.
Deciding to prioritize short-term or long-term goals (or both!) can help shape your investing strategy.
Should I invest now or later?
In most cases, the answer is now! You’re never too young or too old to start investing. Big financial goals often require big saving, so starting as soon as possible will give you more time to prepare.
Investing for the long term allows you to ride the ups and downs of the stock market to help maximize the growth of your assets. Even if the market looks turbulent, if you’re invested for the long run, you’ll have more time to recover your losses.
Over time, earnings on your investment will drive more earnings, thanks to compounding interest. This creates a flywheel effect that can lead to substantial growth outside of your initial investment.
But it’s never too late to begin investing — you may just need to take a different approach from someone younger. If you are closer to retirement and have money to support your lifestyle that you won’t need in the next five years, there are still benefits to investing in and growing your retirement fund. This is why investment is essential, whatever life stage you are at.
Tip: To start investing on eToro, you’ll need a minimum opening balance of $100.
That being said, there are some scenarios where you may need to wait to jump into investing. If you have debt, are living paycheck-to-paycheck, or have no emergency savings, it’s best to focus on improving those areas before investing. Using a budget can help you identify places to cut back, and any extra money should be put toward paying off your debt or shoring up savings.
If you aren’t sure if you have the money to invest, ask yourself these questions:
Do you have enough money to cover your living costs?
If you don’t have enough money to cover your essential expenses (think rent or groceries), or you think you may struggle in the near future, now is probably not the best time to start investing. Most investors put their money in the market for the long-term, so it’s important that your short-term finances are secure beforehand.
Do you have an emergency fund?
You should have a savings fund specifically to cover any emergencies. Most experts agree you should have at least three months’ worth of expenses in your rainy day fund, but you may want to consider saving more depending on your situation (e.g. upcoming expenses, like college or paying off loans)..
While you can access your invested money at any time, it can be better to have a separate place to keep your emergency money. Plus, you don’t want to store your emergency money in a place you could lose it.
If you need to tap your invested money for an emergency, you run the risk of the market being down, meaning you could lose money or miss out on future gains.
Do you have any outstanding high-interest debt?
Your investments will grow over time, but they may not outpace the rate of interest you are paying on your debt — especially high-interest debt like credit cards or personal loans. Paying off this type of debt in the short term will save you money in the long term, which you can then invest when you are debt-free.
Keep in mind this doesn’t include long-term forms of debt, like a mortgage. These loans often have interest rates below what you could earn in the stock market, so you can prioritize your mortgage and investments at the same time.
Consider your risk tolerance
Risk tolerance is an important concept to understand when constructing your investment portfolio. Whether you are looking to grow your wealth as quickly as possible or just looking for steady returns with minimal risk, it’s essential to have a good understanding of how much risk you’re willing to take on.
Taking on greater levels of risk may result in more significant rewards, but it can also mean more volatility and potential for loss. By taking the time to consider your own level of risk tolerance, you can make financial decisions that are more closely aligned with your short and long-term goals.
- Aggressive investors have the primary goal of maximizing their returns and are comfortable experiencing potential extensive volatility and significant losses to get there.
- Conservative investors have the primary goal to preserve their money, even if it means missing out on potential returns.
Keep in mind risk tolerance is a spectrum, so you likely fall somewhere in between these two extremes.
Understand your investment options
When it comes to investing, it’s important to not only understand the various types of investments available to you, but the advantages and disadvantages of each one. This will help you select investment options that suit your financial needs.
There really is something for everyone in the world of investments. Choosing where and how to invest your money requires careful consideration of which assets fit within your risk tolerance and budget. Choices include (but are not limited to):
- Stocks
- Bonds
- Mutual funds
- Exchange-traded funds
- Commodities
- Real estate
- Cryptocurrency
You should make sure to do the proper research so that you can make an informed decision about adding something to your portfolio. We’ll break down all these different assets in our guide on what to invest in.
Diversification is the key to smart investing. Spreading your money across different asset classes helps mitigate risk by providing more stable, long-term returns. With these fundamentals under your belt, you can begin building a portfolio with confidence and get closer to achieving your goals.
Developing an investing plan
Now that you know your goals, your risk tolerance, and some of the investing options available to you, it’s time to develop a plan.
As we mentioned before, your plan should accurately reflect your goals, how much risk you are willing to take on, and what markets or assets you want to invest in. Before creating a plan, it’s important to do thorough research so that you can make informed decisions on the best investments for you.
You can manage your investments using the SMART goal framework:
- Specific: For example, I want to save X amount for my retirement.
- Measurable: Use systems that allow you to track your progress towards your goals, like an investing app
- Achievable: Make sure your goal is feasible and within your reach.
- Realistic: The goal should be achieved based on your current circumstances.
- Time based: You should set a date for when you want to complete your goal. This will help you stay focused and pick investments that match your time horizon.
Conclusion
Everyone should consider investing as a part of their financial plan, no matter your age, income, or financial goals. With the right knowledge, investing can help you reach your big goals, grow your wealth, and increase your overall financial health.
To begin investing, identify your financial goals and risk tolerance level to understand what kind of return you’re looking for and how much you’ll need to invest in order to make that happen. Next, thoroughly research the different types of investments available that match your criteria.
You can then develop a personalized plan that corresponds with your individual needs. By following these investing tips, you can gain confidence in your skills as an investor.
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