Investing can be a great way to get ahead financially and build wealth.
How should you put your money to work? Let’s say you have $10,000 to invest, whether you’ve never done it before or have a fund already. Before you can spend this money, you need to decide what you want to do with it, when you want to use it, and how you will handle fluctuations.
Here are a few questions to help your decisions:
- Do you have a specific goal in mind for your savings, or do you just want to build up your wealth?
- How soon do you need this money, and how much do you need? Will the whole amount be taken out at once or on a regular plan, like once a month or once every three months?
- How will you handle quick changes in the value of your portfolio, both up and down? Will you put in more money, keep doing what you’re doing, or be tempted to try something different? After you’ve answered these questions, you’re ready to start putting your $10,000. Here are five things you can do to get started.
1. Save money for emergencies.
Simply put, if you don’t already have an emergency fund, that’s the first thing you should do to start saving. Put at least some of your money in a savings account so you’re ready for whatever life throws at you. It is important to have cash on hand in case of an emergency. Three to six months’ worth of bills is a good rule of thumb. Even putting some of your $10,000 in a savings account and leaving it there until you need it is a good way to start investing.
Since most savings rates are low, this may not be very exciting to you. Even so, it’s still a good idea to keep cash on hand. If it means not taking out a loan (like credit card debt) when you need money, your return on investment will come from not having to pay high-interest rates.
2. Pay off any loans with high interest
Along with setting aside money for emergencies, it’s important to get out of high-interest loans. The growth of wealth can be wiped out by debts and interest payments. When you pay interest to a bank, that takes money away from what you can save for yourself.
It’s important to remember that not all debt has to be paid off as soon as possible. For example, the interest rate on a mortgage is usually very cheap. Paying off a house faster than the term may be a good use of money, especially since this is often the biggest expense a family has in a typical month. But you should pay off any loan with a high-interest rate first. For example, the first thing to go after should be credit cards, which generally have interest rates many times higher than a mortgage (often about 20% per year).
If you have a big sum, putting it toward paying off debt can be a great long-term investment. It can also free up money in your budget that would have been spent on interest.
3. Put money into your pension account
No matter what your idea of “retirement” is, a retirement account can help you meet your long-term money goals. You can save for retirement in a few different ways. Individual retirement accounts (IRAs) can be a good way to save a large amount of money all at once. Traditional IRAs often let you get a tax break, as long as there are no income limits, and you can spend the money without paying taxes on it until you take it out.
Roth IRAs don’t give tax breaks, but funds can be taken out tax-free after at least five years. Keep in mind that both funds are meant to be used after age 59 1/2. However, Roth payments can be taken out early without a penalty, but gains cannot. There are also limits on how much you can put into an IRA each year. In 2020 and 2021, those limits are $6,000 ($7,000 if you are 50 or older).
Most of the time, you can’t put money straight from your savings account into a 401(k) or similar employer-sponsored retirement plan. However, these plans are still a good choice. If your workplace gives a “match,” in which they add money to your account based on how much you put in straight from your paycheck, you should definitely take advantage of that money. If you leave that job in the future, you can roll over or join a company-sponsored retirement plan with a personal IRA, as we’ve already talked about.
4. Put your money in an index fund
You can invest in more than just your retirement account. Unlike an IRA, there is no cap on how much you can put into a stock account. Think of it as a savings account where you can also make investments instead of just getting interested. If you have $10,000, it might be a good idea to open a trading account, either with the whole $10,000 or with what’s left over after you’ve set up an emergency fund, paid off debt, and/or contributed as much as possible to your savings account each year.
Now comes the question of where to put that money. An index fund can be a good, safe place to start, especially if you want to make money without having to handle it every day. There are a lot of low-cost index funds available from companies like Vanguard for buyers who want to simply track the success of a market or business. There are funds that invest in bonds, which tend to be less risky but give lower returns, and funds that invest in stocks, which tend to be more risky but could give higher returns.
If you plan to keep your money saved for at least five to ten years and don’t want to keep an eye on it, you might want to look into an index fund in a bank account.
5. Put your money into individual stocks
You can buy individual stocks and index funds through a trading account. Stocks are shares of a company, and they can be a great way to build wealth over the long run. Since their prices tend to change a lot, it’s smart to own several stocks at once to spread out your risk.
You can have a well-balanced collection of individual stocks at $10,000. You can buy partial shares from many trading firms, like Fidelity, Robinhood, and Square’s (SQ -1.46%) Cash App. If a single stock costs so much that it takes up a big chunk of your $10,000 (like a stock that costs more than $500 or $1,000), you can buy less than a full share.
This can be a great way to invest in a variety of businesses, from big, stable ones to small, up-and-coming ones that could become big in the future.
