How To Start Investing: Basics

When people talk about investing, they bring up the idea of having money for retirement or other situations in the future. However, what is the difference between saving and investing? Today’s article will cover some of the more common questions we run into when we first make the decision to invest.

Saving is putting money aside for future use. It’s important to save so you can cover fixed expenses, like mortgage or rent payments, and to make sure you’re prepared for emergencies. On the other hand, investing is when you put your money to work for you. You buy an investment, like a stock or bond, with the hope that its value will increase over time. They have the potential for greater returns than what you’d get by saving.

Here’s an example: From 1998 to 2018, Albert put $3,000 each year in a bank account to fund his short-term spending needs. The interest he received on his money averaged 1% over 20 years, which was relatively low. But the trade-off was that it was safe and accessible. Diego had $67,694 after 20 years. Over that same period, Alexis was planning for her retirement so she invested $3,000 each year in a moderate portfolio, which returned an average of 6% over 20 years. Alexis had $115,314 after 20 years.

With everything in life, there’s some sort of tradeoff, and for investing that means you have additional risks —including the loss of some or all of your investment. You might be risk-adverse, and the idea of loss might scare you. However, it’s important to think about the loss you might have from not investing. One of the main concerns is inflation, as it can lower your purchasing power over time. As things gets more and more expensive, you need to make sure that your money can still buy the same things as before.

We get this question all the time: “Okay, I’m sold; when should I start investing?” The simple answer is: now. Historically, the longer you invest, the less impact the short-term ups and downs of the market have on your return; this means that the sooner you start, the better it is for you in the long run. Many people sit on the sidelines, waiting for the “right” time to invest. Unfortunately, timing the market is virtually impossible. Instead, consider just getting started and remember this old investing adage: Time in the market is more important than timing the market.

The second question that usually follows is: “How much should I invest?” It depends on how much you have, as well as your goals and timeline (also called your time horizon). But a good rule of thumb is to invest the maximum you can comfortably afford, after setting aside an emergency fund, paying off high-cost debt, funding daily living expenses, and saving for any short-term goals. By investing on a regular basis, over time you can potentially achieve the money you want or need to live a life without worrying about your finances.