Picture your life in 10 years. What do you want it to look like? How about in 20 or 30 years? No matter what dreams you have, the choices you make today have the power to set you up for financial security later. That’s why I love coaching people on how to start investing!
Building wealth opens exciting options for your life. It helps you make your dreams a reality and gives you the chance to impact other people through living generously. But I want to make something very clear: This is not a get-rich-quick guide. Investing is like a marathon, not a sprint. The road to building wealth is slow and steady.
Are you ready for your investing 101 crash course? Let’s do this.
What Is Investing?
Investing is intentionally setting aside money that will multiply over time and produce a profit down the road. Eventually, you can build a solid nest egg that will allow you to live your dream retirement when you’re no longer collecting a paycheck.
Saving, on the other hand, is setting aside money for short-term goals, like buying a house or paying for a wedding. If you’re saving for something soon, you want to keep that cash in a savings or money market account so that it’s liquid (meaning easy to get to).
Types of Investments
Pretty much every investment you could make falls into one of four asset categories: cash, bonds, real estate, and stocks (single stocks and mutual funds). An asset is something valuable that increases your net worth.
I hope you’ve got your nerd goggles on, because we’re about to dive into some important financial topics!
How to Start Investing: Cash Assets
We all need to have cash on hand to cover living expenses and savings goals. In fact, before you start investing, you should be debt-free and save up an emergency fund that can cover three to six months of living expenses. You’ve heard of Murphy’s Law, right? Anything that can go wrong will go wrong. So, save up enough cash to cover unexpected emergencies. This will give you peace of mind as you start investing.
But keeping your money in a checking, savings, or a money market account is a low-risk and low-return way to store your money. It won’t keep up with inflation. Inflation simply means that life gets more expensive over time. For example, in 1999, gas averaged $1.14 per gallon. But now, gas averages $2.72 a gallon. As inflation generally increases by 1–3% each year.
Let’s talk about CDs (no—not those small discs that you used to put in a Walkman. Uh-oh, I just dated myself!) Certificates of deposit are basically a bank account with a certificate that says you put your money in the bank and will leave it in there for a certain amount of time. CDs have very low interest rates and will not grow your money. I don’t even consider them a true investment.
How to Start Investing: Bonds
A bond is a loan agreement between the borrower (like the government or a corporation) and you as the investor. There are three common types of bonds:
- Government: backed by the U.S. Treasury
- Municipal: issued by state or local governments
- Corporate: issued by companies to fund growth
The borrower usually agrees to pay you a set interest rate after a fixed amount of time. For example, if you buy a $10,000 corporate bond with an interest rate of 8%, you’d get your $10,000 back plus $800 (interest on the loan). The bond will give a specific maturity date, which is the point when you can redeem the money you invested, plus interest.
People have a notion that bonds are safe and reliable, but their values fluctuate the way that stocks do, and you can lose money investing in bonds. And overall, the return on investment is wimpy, especially compared to growth stock mutual funds, so I do not recommend investing in bonds.
How to Start Investing: Real Estate
Real estate is land and anything you can build on it. Houses, apartments, retail space, or commercial buildings are all types of real estate investments. Real estate is a smart investment because it’s an appreciating asset, meaning that its value goes up over time. If you’re a homeowner, you’re already investing in real estate. Congrats! If you’ve made good decisions about your house, you should be able to sell your home for a lot more than you bought it for.
Lots of people purchase extra homes that they rent out to generate income. But hear me on this: Real estate is a very active investment that demands your time and effort to manage. Only invest in real estate if you absolutely love it. Also, don’t buy real estate properties with debt. Use cash so that you’re not taking on unnecessary risk.
How to Start Investing: Stocks
Stocks represent tiny pieces (or shares) of a company. When a company goes public, they sell these small shares to people to fund their growth. We’re going to camp out on stocks for a while and talk about two categories of stocks:
- Single Stocks
- Mutual Funds
If you buy stocks in a specific company, you’re investing in single stocks. There are two primary ways to make money on single stocks:
- Dividends: Some companies will pay stockholders a regular share of the company’s earnings.
- Selling your stocks for a profit: As the company earns more money, the value of its stock will go up. If you buy 100 shares of a stock at $25 a share, and you later sell that stock when the value rises to $50 a share, you’ve doubled your money and made a profit.
I do not recommend investing in single stocks. I’ve done it—and it ended up being a million-dollar investment mistake! Buying single stocks is like playing a sophisticated game of poker. In fact, when you hear phrases like investment opportunity, timing the market, and hedging your bet, I want you to lace up your tennis shoes and run in the opposite direction!
With that being said, if you’re already investing 15% of your income in growth stock mutual funds, then you can consider single stocks as an additional investment. But be prepared to lose money if something goes south with the company you’re invested in.
- The best way to invest for long-term, consistent growth is to put your money into mutual funds. A mutual fund is created when a group of people have pooled their money together to buy stocks in different companies.Mutual funds allow you to diversify—one of the most important principles of investing. Diversification is just a fancy word for don’t put all your eggs in one basket. You want your money to go to work across different kinds of stocks with different levels of risk.The four main types of mutual funds that I recommend are:
1. Growth and income funds: These are the most predictable funds in terms of their market performance.
2. Growth funds: These are fairly stable funds in growing companies. Risk and reward are moderate.
3. Aggressive growth funds: These are the wild-child funds. You’re never sure what they’re going to do, which makes them high-risk, high-return funds.
4. International funds: These funds invest in companies around the world.
With me so far?
Good. Now, hang with me a little longer.
You’ve probably heard the word cap attached to mutual funds. That word is short for capitalization, which describes how much a company is worth. Here’s how companies are classified:
- Small-cap: Companies valued below $2 billion
- Mid-cap: Companies valued between $2–10 billion
- Large-cap: Companies valued over $10 billion
Now, let’s put this “How to Start Investing” Crash Course together with an example:
- A large-cap, growth stock mutual fund is made up of big companies (worth more than $10 billion) that are growing (like Amazon, Facebook, Microsoft).
- A small-cap, aggressive growth fund is made up of small companies (like tech startups) that have a high chance of financial gains, but also a high chance of failure.
So, by spreading out your investments across a variety of mutual funds and company sizes, you balance high-risk investments with more steady and predictable funds.
Compound Interest: The Secret to Investing Success
To be a successful investor, you need to let your money hang out with its two best friends:
- Compound Interest
Albert Einstein called compound interest “the eighth wonder of the world.” Basically, when you invest your money in mutual funds and leave it alone for a while, compound interest allows you to earn interest on interest. It’s like a mathematical explosion!
Let me break it down in simple terms. I think that this example will interest you (dad joke—had to do it).
- Say that you’re 35 years old and you haven’t invested a single penny in retirement.
- You start contributing $687.50 a month in your company’s retirement plan.
- You invest for 30 years.
- You earn 10% interest on your investments. The historical 30-year return on the S&P 500, an index that tracks the performance of the top 500 companies in the U.S., is actually 12%.3
- When you retire at age 65, you’ve got over $1.5 million in your retirement nest egg—but you only put in $247,500!
That’s what compound interest can do for your retirement!
Let’s GET STARTED… CONTACT ME TODAY. COMPLETE THE FORM ON THE LEFT!
My name is Kim Holland-Lyon, I have studied and worked in the financial planning industry for many years educating individuals through numerous programs to enhance their financial intelligence and practices, including estate planning. I am a SmartVestor investing pro. I hold several securities licenses and other certifications and designations to include Life, Health, Annuity, Long-Term Care, Identity Theft, Estate Planning and Real Estate. All of this knowledge enables me to offer comprehensive financial planning for my clients to help them prepare for financial independence and management of their investment portfolios.
Whether you have long term financial goals or short term financial goals, please contact me directly at 561-302-5153 or firstname.lastname@example.org.