The first time I invested in the stock market, I was in a business class in high school. It was a virtual stock exchange, so the money wasn’t real. It’s a good thing too because I lost 25 percent of my original balance in just a few days.
My experience taught me that investing in stocks is risky business and that knowing how to invest money properly requires more than a brokerage account.
In fact, an investment doesn’t have to be tied to stocks or a retirement account at all. An investment also can be a savings goal, a debt payoff goal, and more.
That’s why it’s important to learn how to invest your money in a way that helps you build wealth and security for the future. Here’s how you can get started.
How to invest money and prioritize your investments in 7 steps
Learn how to invest money for your future and protect your investments from the unexpected with these seven steps.
1. Invest in an emergency fund
There’s no point in investing your money if you have to withdraw some of it when your car breaks down or your water heater leaks.
To protect yourself from small emergencies, set aside at least $1,000 in a separate savings account you can access easily. You’ll want to contribute more to this account later, but for now, get to that $1,000 balance and avoid using it except for legitimate emergencies.
By having an emergency fund handy, you’ll free up larger chunks of money you can devote to retirement accounts, debt, and other investments.
2. Invest in your 401(k) match
If your employer offers a 401(k) and matches some of your contributions, invest at least enough money to get the full match.
For example, say you earn $50,000 and your employer matches up to 3 percent of your 401(k) contributions. Each month, you’ll contribute $125 and your employer will add another $125 to your account:
$50,000 x .03 = $1,500
$1,500 / 12 = $125
That’s an immediate return of 100 percent on the money you invest in your retirement account. No matter where else you put your money, you won’t beat that kind of return so quickly. And you don’t need to know anything about how to invest your money to do it.
3. Invest in getting properly insured
No one will argue that insurance is as sexy as investing. But just like small emergencies can set you back financially, big ones can cripple you.
For example, life insurance is a must-have if you have kids or other people who depend on you financially. Even if you don’t, you might want to consider getting a small policy to cover funeral and other final expenses.
A funeral can cost between $7,000 and $10,000, according to Parting.com. An inexpensive term insurance policy is the best option for most people.
You might argue that disability insurance is even more important. That’s because more than 25 percent of 20-year-olds will become disabled before they retire, according to the Social Security Administration.
There are two types of disability insurance, both of which help replace lost wages:
- Short-term disability insurance: It typically covers you for a few months to up to a year. There might be a short waiting period of up to 14 days before you start receiving benefits.
- Long-term disability insurance: It typically covers you until you recover or reach retirement age. There might be a waiting period of a few months before benefits start to kick in.
Health insurance is also essential since you’re more likely to take a trip to the doctor than to become disabled or die.
To make insurance more affordable, you might be able to get some or all of these insurance policies through your employer at a lower rate. If not, shop around to see which insurance company offers the best value for your needs.
4. Invest in paying off high-interest debt
If you have credit card debt or any other debt with an interest rate of, say, 8 percent or higher, pay it off as quickly as you can. Although paying off debt isn’t as exciting as investing, you’ll likely save more in interest than you would earn by investing that money in the stock market.
Plus, once the debt is gone, you can take the amount you were putting toward your monthly payment and invest it elsewhere, such as your retirement account.
5. Circle back and invest in your retirement and emergency fund
Once you’ve gone through the first four steps, it’s time to ramp up your rainy-day fund and retirement investments.
For your emergency fund, set a goal to save enough to cover three to six months’ worth of basic monthly expenses. This number should include only your necessary expenses, not extras such as eating out and entertainment.
For your retirement savings, aim to save 10 to 15 percent of your gross income. Fortunately, your 401(k) match counts toward this number. So, if you’re contributing 3 percent and your employer matches it with another 3 percent, your retirement savings rate is 6 percent.
At this point, you also might consider opening an Individual Retirement Account (IRA), which can give you more control over your investments and offer better tax advantages. For example, investments in a Roth IRA grow tax-free, whereas the taxes on a traditional 401(k) investment are deferred until you retire.
And if you don’t know how to invest money, you can consider using a robo-advisor to do the work for you.
The amount you save for these two goals is up to you, but try to target a figure within those ranges to make sure you’re on the right path.
6. Invest in a college savings account
If you have or plan to have kids and want to help them pay for future college costs, there’s no time like the present to start.
You have a few options:
- 529 College Savings Plan
- 529 Prepaid Tuition Plan
- Coverdell Education Savings Account
- Roth IRA
- Brokerage account
Each option has benefits and drawbacks, and some might require that you know how to invest money, so be sure to compare them all to find the right one for you.
You might be tempted to start saving for your child’s college fund as soon as they’re born. However, consider prioritizing saving for your retirement first. In the end, college students can take out student loans, but there’s no such thing as a retirement loan.
7. Work on building toward other investing goals
Now that you’ve covered all the most important bases, it’s time to work toward other investing goals.
Maybe you want to take a nice vacation with the family, buy a nicer house or car, or save up to start your own business. These goals might be the reason you’re trying to learn how to invest money in the first place.
Whatever your goal is, you can start working toward it knowing that all your other financial needs are taken care of.
You can use a simple savings account or a brokerage account to work toward these goals. The important thing is finding an investment strategy that fits your needs and preferences.
Start with a solid foundation and build upon it
If you’re still trying to figure out how to invest your money in the best way possible, use the above steps to lay a solid foundation so the unexpected won’t derail your investments down the road.
It might not feel like you’re racing to the finish with fast-paced trading and high returns, but you’re more likely to reach your goals this way.
So, as you’re trying to sift through all the advice for how to invest money, remember that slow and steady wins the race.
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