The way that money works is changing.
Once upon a time, you could put all your extra money into savings accounts and retirement funds, and feel confident in your financial future.
Today, financially literate people understand that savings and traditional retirement funds won’t provide the kind of stability and security needed in another 40-50 years.
Investing your money in ways that allow it to grow and provide a passive income over time is critical to your financial future, but where do you begin?
There’s a lot of confusion surrounding investing — partly because the term is often misused and partly because it feels like you need an entire degree to understand the options.
Fortunately, investing isn’t as confusing as it might sound.
In this article, we lay out:
- What Investing is
- Basic Terms and Strategies
- Building Passive Income
- Maintaining Wealth Over Your Life
You’ll find out how to invest to save for retirement and get answers on how to generate passive income immediately.
If you’ve ever wondered what investing is or how it all works, this article will answer your most pressing questions and help you understand which types of investing will help you best meet your financial goals.
Related to finance, investing is using your money to purchase something that offers the potential of profitable returns such as income, interest, or appreciation.
Simply put, investing is when you use your money to earn more money.
For example, if you’re 18 years old and you do something as simple as skip your daily Starbucks run or pack a lunch instead of eating out, you could turn those $10 daily savings into a million dollars over the course of your lifetime.
Investing is about sacrificing a little bit today to build yourself a financially stable future. You don’t need to invest a ton of money or spend a lot of time to do it.
You only need to take a little bit of time to understand how investing, risk, and compound interest work, and then you can start investing (you can even set it to autopay to make it easier!).
Active Versus Passive Investing
Spending your money to get an education or start a business is considered a “good investment.”
Active investments, such as education and entrepreneurial activities, require your time and presence to flourish.
Since there is only one of you, you are limited in the amount of money you can earn from active investments.
While education and business (and other types of active investing) are definitely a good investment in your future, they are not strictly investments, since you also work for the profits.
When people talk about investments related to finance, they’re referring to passive investments.
Passive investments, such as the stock market and real estate, allow you to earn money without having to work for it, and you don’t need to take time away from your regular job or business to make a profit.
With passive investing, your money does the hard work for you.
For example, when you put your money into a retirement account, it will likely earn interest over time. That’s money that you earn without having to work for it — technically, a “passive investment.”
With passive investments, your money builds upon itself every minute of every day, so long as it stays in that account. It’s slow, but you can see huge returns if you invest for long periods of time.
Why Savings Accounts Are A Terrible Investment
You’ve probably heard your grandparents or parents talk about the importance of saving money in the past. But the economy – and money – has changed dramatically over the past seventy years.
Today, if you put $10,000 in a typical savings account and leave it there for a year, you’ll make about one dollar.
A savings account that pays half of one percent interest (the average for a U.S. savings account) can’t keep up with the current inflation rate of 5%, so you are guaranteed to lose if you save money.
So if you previously thought you’d store your money in a bank to build security for your future, you need to rethink your approach because the money in your savings will lose a significant amount of value over your lifetime.
You could literally go broke from saving your money in a bank for many years.
That’s why, in this new economy, financial literacy is critical to securing your future so that you can enjoy financial stability throughout your lifetime.
Understanding how to put your money into investments that return a high rate of interest or profits, such as the stock market or real estate, is an essential aspect of learning financial literacy.
And just in case you’re thinking that investing is something for “old people,” we strongly recommend that you begin investing by the time you turn eighteen.
Investing from a young age means that you won’t have to make huge sacrifices to build wealth for your future.
When you begin investing at a young age, you spend less, earn more, and are more likely to manage your finances responsibly as you grow.
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Why Investing Matters
When your grandparents were young, finances were simpler.
If you got a decent job, you could stay at it for fifty years and retire comfortably with a healthy pension.
Times have changed since then. A lot.
Putting your emergency savings in the bank IS a good move. You want to bank the equivalent of six months of living expenses, in case you have a life emergency such as a job loss, medical expenses, or… a pandemic.
A bank is the best place to store your emergency savings because it’s safe and you can access your money whenever you need it.
However, the rest of your “savings” is better off in an account where its value will increase over time.
If you invest wisely over your lifetime, your money will retain its value AND return a nice profit that will help you enjoy some of the things that motivate you to work in the first place: vacations, luxury items, and the ability to help others.
That’s why investing matters.
No matter how much you love your job, there will be times when you’d rather do something other than go to work. Perhaps an old friend is in town visiting, or you’re newly married, or you’re just not feeling great and would rather stay home and Netflix your way through the day.
On those days, if you’re a hustler, you go to work anyway because you know that the sacrifice is worth the rewards.
Investing makes your sacrifices more worthwhile.
Investing can take a $10 daily deposit and turn it into millions of dollars by the time you’re 65 years old because it puts your money to work for you while you’re off doing other things such as working and spending time with family and friends.
Investing matters because if you don’t invest, your hard-earned money won’t be worth much in forty or fifty years. If you put your money in savings, you could go broke, but if you put it into smart investments, then your hard work can pay off financially.
Is Investing Risky?
All investments carry some type of risk.
Even the safest investments, such as a savings account or stocks and bonds, can lose their value due to inflation.
Typically, the more risk you take, the more money you can earn — or lose.
When you’re wanting to build financial security for your future, take the following five steps to lower your risk.
5 Steps To Lower The Risks Of Investing:
- Put your money into medium-to-low risk investments that provide a decent return.
- Diversify your investments. In other words, don’t “put all your eggs in one basket.” For example, when you put all your investment money into one company, your risk of losing increases dramatically.
- Research the platforms, apps, and people who assist you in investing.
- Network with other investors.
- Continue to learn more about investing over time.
Understanding how investing works, and researching before you buy, is essential to building profits and security over time.
When Should You Begin Investing?
Begin investing by the time you turn eighteen, if possible.
You can learn as you go.
You don’t need to become an investment genius to get started in the most popular investment strategies such as the stock market. What matters is that you learn as you go.
Connecting with other investors through online forums, Reddits, or other social media can provide you with an excellent way to accelerate your experience and learning process.
Watching your investments grow, and learning from your small mistakes, will help you make wiser decisions in the future.
If you start investing in the stock market when you’re eighteen years old, your money will earn 80% more than if you wait until your early forties!
In fact, if you only invest $10 a day from the ages of 18 – 40 (and stop investing at age 40) and earn a less-than-average return of 7%, you’ll retire a millionaire.
Investing At 18 Years Old Or Earlier
Imagine you faithfully invest $300 a month ($10 a day) until you’re forty years old.
This leaves you with plenty of money, as you grow into your career, to purchase a home, enjoy family vacations, and put your kids in good schools, as long as you earn a decent living and manage your money wisely.
By the age of forty, you’ll have invested about $80,000. Even if your investments return a little less than average (7% instead of 8 – 10%), if you let it sit and keep reinvesting the earnings from it, you retire a millionaire.
On this plan, you stop investing at age forty and enjoy a bigger home and fancy cars and vacations — or whatever it is you dream of enjoying in life.
While you’re out enjoying life, your money is working for you, until it eventually grows to $1,000,000 by the time you’re 65.
Investing at 40 Years Old Or Later
If you wait until you’re in your forties to invest $10 a day, your money only makes a fraction of the profits.
Even though forty is roughly halfway to retirement, your investments don’t make half the earnings.
Investing about $300 a month beginning at the age of forty, you’ll put in about $90,000 by the time you reach 65 years old, but that money only grows to $246,198 — not enough to retire comfortably.
$10 a day can turn you into a millionaire if you invest during the early years of your life, but if you wait until your forties, it earns less than one-quarter of a million.
If you’re already older, though, all hope is not lost.
If you begin investing $600 per month at the age of forty, continue investing until you’re 65, and earn a 10% return, you can retire with close to a million dollars ($850,000).
Or, if you invest $900 per month from ages 40 – 65 and manage to get a 10% return, you can earn $1.25 million dollars by the time you’re 65.
When it comes to investing, sooner is always better.
What Are Passive Investments?
Passive investments allow your money to grow and earn more money while you’re doing other things, such as sleeping, running a business, or traveling the world.
Passive investing requires little to no time on your part, but it’s essential that you set time aside to learn about investing when you’re first getting started.
Understanding investments before you spend money on them provides several benefits:
- Helps you avoid scams
- Helps you avoid unnecessary fees and charges
- Helps you invest your money more wisely
- Helps you build a strategy so you can avoid emotional buying and selling
The most popular passive investments are stocks and real estate, although more adventurous investors might expand their interests to include commodities, bonds, and cryptocurrencies.
Getting an education or starting your own business are good investments, but they are not passive investments because both require your time and hard work.
A home is not an investment.
The home you live in is not an investment. Investments grow in value, but a home depreciates. You may put time and money into the house to hold or increase its value, but that’s work and creativity — not an investment.
In the sections below, we show you how the most popular passive investments work, and how you can get started investing in them on almost any budget.
Stock market investing is a popular way for people to build wealth and prepare for retirement without having to invest a lot of time.
A stock is a share of a publicly traded company that can be bought and sold. When you purchase a stock, it makes you a shareholder of the company.
When you purchase shares of a company, you become part-owner of it. Instead of spending money at the McDonald’s drive-through, you can turn your cash into shares and own part of it!
- When McDonald’s does well, more people buy its stocks and your shares increase in value. Congrats! You’ve increased your wealth through stock market investing!
- However, if McDonald’s does poorly, your shares drop in value and your stocks are worth less money.
As a shareholder, you own a piece of the company and get to enjoy some of its profits.
Selling stocks at a higher value than what you paid for them is one way to earn money in the stock market, however, many companies also pay quarterly dividends to shareholders when the business is doing well.
Owning shares in a company doesn’t give you the right to tell people what to do or weigh in on decision-making.
As a shareholder, your stake in the company is exclusively financial.
After all, your shares only make you one of many investors who own a piece of the company.
For example, a typical startup company might have ten million shares (even more as it grows) that are sold to investors.
What Is The Stock Market Versus The Stock Exchange
The “stock market” is a broad term that refers to the markets in which stocks (shares of publicly-held companies) and other equities are bought, sold, and exchanged.
The stock exchange is a physical marketplace, online and offline, where equities (stocks, bonds, etc.) are sold.
There are sixteen registered stock exchanges in the United States.
- The New York Stock Exchange (NYSE) is the largest stock exchange in the world.NYSE is a 16,000-foot trading floor located in the financial district of lower Manhattan with an equity market capitalization of more than $25.3 trillion.
- TheNasdaq Stock Market (NASDAQ) is the second-largest stock exchange in the world. NASDAQ was the first electronic exchange, all its stock trades happen online.
Together, the NYSE and Nasdaq are worth $32 trillion of the global $105 trillion equities market.
Other U.S. stock exchanges include:
- BATS Global markets
- Over-The-Counter (OTC) and Pink Sheets
- OTC Markets (formerly Pink Sheets)
- OTC Bulletin Boards (OTCBB)
Other major stock exchanges outside the U.S. include:
- Toronto Stock Exchange (TSX)
- London Stock Exchange (LSE)
- Tokyo Stock Exchange (TSE)
- Australian Securities Exchange (ASX)
- BM&F Bovespa (BM&FBOVESPA)
The term “stock market” is a broad term that refers to all the people and companies involved in exchanges on the stock market, while “stock exchange” is the physical (online or offline) location where exchanges happen.
What Is A Brokerage Firm?
You can’t just run out and purchase stocks at your neighborhood convenience store.
To buy and sell stocks, you must go through a licensed professional called a “stockbroker.”
All stock market transactions happen through a stockbroker.
A stock brokerage firm is a financial company that buys and sells financial assets on behalf of clients.
Most stock brokerage firms charge some form of commission or fee to use their service.
Low fees, minimum deposit requirements, and educational resources allow beginners to start investing in the stock market without a lot of money or experience, which is an excellent opportunity for many people.
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How Do Shareholders Make Money?
Shareholders make money through appreciation and dividends. Passive investors build wealth by reinvesting the money they make from the market, which is called “compound investing.”
What Is Appreciation?
Appreciation is when stocks rise in value and can be sold for a profit.
For example, if you purchased a thousand stocks at $100 each, and over time they went up in value to $200 each, you could sell them for $200,000 and earn a profit of $100,000.
You can take your $100,000 profits, cash them out, and do as you please with the money. Or, you could reinvest your earnings and try to turn them into even bigger profits.
What Are Dividends?
When a publicly-held company is doing well, they often share the profits, called “dividends,” with their shareholders, usually each quarter.
Not all stocks pay dividends, but many of them do.
Many stock brokerage sites allow users to filter stocks by which ones pay dividends, so investors can shop for dividend stocks (if they prefer) when investing.
Dividends may be paid in cash or investors may receive more shares to increase their investment.
Before you begin planning how to spend your dividend earnings, though, you should know that people become millionaires by reinvesting their dividends, not spending them!
Reinvesting dividends in the stock market is referred to as “compound investing.”
What Is Compound Investing?
Compound investing, related to the stock market, means that you continually reinvest your dividends.
Instead of spending or banking your dividend payments, you use them to purchase more stocks in the company.
For example, Starbucks shareholders receive an average of 41 cents per share, per quarter, in dividends. So, if you own 1,000 shares of the company, compound investing means that you would use your $410 dividend check to purchase additional Starbucks stock.
Next quarter, you earn dividends on your original shares plus the shares you bought with the previous quarter’s dividend earnings. The following quarter, you do the same.
This way, your dividend checks become larger each quarter since you own more stocks than the previous quarter.
Compounding, or reinvesting your dividends over time, is one way that people become millionaires through stock investments.
The more shares you own, the higher your dividends = the more shares you can buy. The more shares you buy, the more money you earn through dividends.
Over time, this continual reinvesting has a snowball effect that dramatically increases your stock portfolio.
Over the course of 30 or 40 years, compounding really adds up.
Keep in mind, though, that all investing involves risk.
Compounding your investments (rather than spending your dividend checks or selling when stock values rise) isn’t for people who allow emotions to influence their investment decisions.
It’s not easy to hold onto stocks when the market begins rising or falling. The temptation is to sell and cash out on your profits when values rise or to sell and minimize your losses when stock values drop.
However, history shows that stock prices will always rise and fall, and investors who hold on during economically shaky times usually end up profiting.
If you’re serious about passive investing for long-term wealth, you’ll want to develop a strategy that involves reinvesting your dividends rather than cashing them out.
Reinvesting compounds your earnings and builds wealth over time.
Note: Stock “trading” is a different approach that involves more time and knowledge than passive stock investing. Trading is not a passive investment. If your goal is to invest and build wealth over time with minimal risk, avoid stock trading and focus on buy-and-hold stock investment strategies.
Types Of Stock Investments
There are several types of stock investment products to choose from, including stocks, bonds, mutual funds, and index funds.
For passive investors looking to keep their risk low and use a buy-and-hold strategy, we recommend index funds, ETFs, or mutual funds.
Index funds are passive investments that follow a specific index (group of equities) such as the S & P 500. Index funds are one of the easiest ways to get started investing because you don’t have to spend time researching individual companies.
Mutual funds are a collection of investments paid for with money from multiple investors and managed by a professional.
Options are high-risk investments that involve an agreement that you will buy and sell stock by a specific date.
Bonds are loans you grant to a company or the government. They are paid back to you, with a set interest rate, so you know in advance how much you’ll earn. Bonds are long-term investments that pay a fixed annual rate.
Commodities are physical, tradable goods listed on the stock market, such as metals, gold, coffee, oil, gas, and others. The value of commodities relies on supply and demand, which creates a sometimes-volatile market.
Given the massive amount of activity involved in stock market investing (from research to decision-making to making trades) you might wonder how it can be called a “passive” activity.
Researching all those companies and investment types, while also tracking their performances, could easily turn into a full-time job.
That’s why index investing, ETFs, and mutual funds are popular way for people to approach the stock market.
What Is Index Investing?
Index investing is a passive form of stock investing that requires little to no research on your part.
Instead of buying individual stocks, you purchase a collection of stocks chosen by experts that closely follow their performances.
A stock market index (such as the S & P 500, Dow Jones, or Nasdaq) is a method of tracking and reporting on a specific group of stocks.
Each index tracks a different group of stocks.
Indexes make stock investing easier and quicker because they allow you to evaluate the performance of a group of companies rather than attempt to individually track the activity of dozens or even hundreds of separate ones.
For example, the Dow Jones index tracks the performance of 30 companies, whereas the S & P 500 index tracks the performance of 500 companies.
Why Indexes Are So Popular With Passive Investors
If you want to balance out your investments in a way that lowers your risk (like most long-term investors do), you’ll purchase stocks from many different companies instead of gambling on the success of only one or two.
You can imagine how, as you invest over the years, it might become time-consuming to review the performance of hundreds of companies whenever you want to know how your investments are doing.
It could also be energy-consuming and potentially damaging to your portfolio to choose all of your stocks in the first place.
Even if you dedicate your time and effort to research, your understanding still won’t equal the knowledge of experts.
Indexes are popular with investors because they let you invest in and track the performance of a group of investments that have been chosen by experts instead of sifting through hundreds or thousands of options and reports.
What Are The Top Stock Indexes?
There are about 5,000 stock indexes, but the Dow Jones industrial average, Standard & Poor’s 500, and Nasdaq Composite are the most popular.
- Dow Jones Industrial Average (DJIA)The DJIA index was developed in 1896 to track the biggest corporate names in America. It now tracks 30 blue-chip stocks, including Microsoft, Disney, and Johnson & Johnson.
- Standard & Poor 500 (S&P 500)The S&P index, launched in 1957, reports on the top 500 publicly-traded large American companies from all genres of the economy, including Chipotle Mexican Grill, Tesla Inc, and NVIDIA Corporation.
- Nasdaq Composite (NASDAQ)The Nasdaq Composite index, created in 1971, tracks almost all of the companies (over 3,000) that are listed on the Nasdaq Stock Exchange, including Apple, Facebook, and Amazon.
There is crossover in indexes. For example, Apple is listed in several indexes, including Nasdaq and Dow Jones Industrial.
When you invest in an index fund, you’re investing in a specific group, or “basket” of securities that track a broader market.
Indexes are a low cost, low risk way to pursue average market returns.
What Are ETFs And Mutual Funds?
Mutual funds and ETFs are a variation on index funds that provide additional ways to diversify your equities as a passive investor.
ETFs and mutual funds are SEC-registered investment companies that are:
- Managed by finance professionals
- Comprised of stocks, bonds, and other assets
There are a handful of differences between index funds, mutual funds, and ETFs, mainly related to:
- Fee structure
- How equities are bought and sold
- When equities are bought and sold
Mutual funds are actively managed funds, a changing collection of securities determined by the fund manager.
This means that a professional money manager works on your behalf to try and beat the market by purchasing stocks they believe will rise in value and selling stocks they think will not do well.
If you were to invest in multiple companies on your own, you would have to decide how much of each company to buy into, and when to buy or sell for the best profits.
With a mutual fund, you have an expert working for you who decides what to buy and sell, and when to do it, at their discretion.
This allows you to diversify your investments and pursue higher returns than the average index fund, but it also comes with higher fees and more risk.
- Fees: Mutual fund fees run about 2% per year.
Two percent is a significant amount of money over time, especially as your investments grow and compound.
For example, if you invest $500 a month for 30 years, and your mutual fund investments get a typical 7% return, you pay more than $158,799 in fees alone.
- Risk: Mutual funds are a higher risk than index funds, yet often end up returning less over time.
The idea behind paying higher fees and taking more risk with mutual funds is to reap higher rewards from your investment. To do that, your money manager needs to outperform the stock market average.
Unfortunately, many mutual funds don’t earn as much as simple index funds, whose fees and risk are lower.
Index Fund Investing
Index fund investing was created in 1975 as a way for regular people to compete with pros in the stock market.
- Fees: Index fund fees are significantly lower than the cost of mutual funds, since their trading activity is determined by a computer algorithm instead of a money manager.
For example, Vanguard Total Stock (one of the largest index funds) charges only 0.04% per year. That’s only four cents per hundred dollars of investment compared to the average mutual fund fees of two dollars per hundred invested.Tip: shop around when investing in index funds because some charge more than 1% in annual fees – an outrageous makeup compared to the 0.04% mentioned above.
- Risk: Index funds provide a low-risk way to invest for typically average returns.
While index funds aren’t profitable every year, the S&P 500, for example, has returned a historic 10% annually since 2019.
Jack Bogle, former President/CEO of the Vanguard Group, created index fund investing in 1975, but was passionately disappointed to see them develop into ETFs over time.
Bogle felt that ETFs encouraged rapid trading by financial institutions rather than long-term passive investing by regular people.
Exchange Traded Funds (ETFs)are Index Funds that are bought and sold in a different way.
The main differences between index funds and ETFs are:
- Index funds can only be bought and sold at the close of the day, but ETFs can be bought and sold anytime.
- Index funds typically require a $3,000 minimum investment, but ETFs have little or no minimum investment requirement.
- ETFs provide better tax benefits than index funds. When you sell ETFs, you pay capital gains tax only for that sale. With index funds, net gains are passed along to all of its investors, so you could end up owing capital gains taxes even if you don’t sell any of your funds.
Fees and risks are about the same with ETFs and index funds — both are low cost and low risk.
Always shop around to find the lowest fees, because some ETFs charge higher fees for the same investment product.
Pros And Cons Of Mutual Fund, Index Funds, and ETFs
Pros And Cons Of Mutual Funds:
- Hands-off passive investment
- Diversified portfolio
- Professional works on your behalf to earn higher-than-average returns
- Higher fees
- More risk
- Often earns less than low-fee, low-risk index and ETF investing
Pros And Cons Of Index Funds:
- Hands-off passive investment
- Diversified portfolio
- Super low fees
- Low risk
- Have provided 10% returns since 2019
- Costlier tax structure than ETFs
- Can only buy and sell at close of trading day
- Minimum investment requirements
Pros And Cons Of ETFs:
- Hands-off passive investment
- Diversified portfolio
- Super low fees
- Low risk
- May provide excellent returns
- Better tax structure than index funds
- Can buy and sell at anytime throughout the day
- No minimum investment requirements
- All investments carry some risk. Be sure to do your research and shop around before investing.
- Mutual funds are a changing list of securities, determined by an investment manager who works to outperform the market so your shares earn more money. While mutual funds are less predictable than indexes, they also attempt to provide higher rewards.
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Should You Invest In Index Funds, ETF’s, Or Mutual Funds?
Long-term investors are probably looking for diversified, passive investments with low risk and a high chance of building wealth over time with a compound investing strategy.
Index funds, ETFs, and mutual funds meet all of those qualifications — so which should you choose?
Or, should you choose the companies yourself and invest individually?
Warren Buffett advises most people to invest in S&P 500 over individual stocks.
According to Buffet, choosing individual companies is very high-risk and not as easy as it sounds. For example, in 1903, more than 2,000 car companies failed even though they were on the edge of changing the future.
He likens free stock trading, where people buy and sell individual company shares, to gambling.
Buffet feels so strongly about index funds that, in 2007, he made a million-dollar bet with Protege Partners that their hedge funds couldn’t outperform the S&P 500.
He won the bet.
Buffet’s index fund investment returned 7.1% compared to his rival’s hedge fund returns of 2.2%.
If you’re looking for a passive investment strategy with average returns, low fees, and low risk, then index funds or ETFs are probably the best option for you.
ETFs provide the same benefits and investment as index funds, but they typically have no minimum investment requirement and also provide a tax structure that’s less costly for most people.
For these reasons, ETFs may be the best choice for long-term, passive investors.
Before you invest, do your research. In some cases, mutual funds may be a better option than index funds.
In all cases, investing is a risk.
All investing — whether it’s real estate, stocks, or any other type — poses some amount of risk.
The challenge, with any type of investing, is to balance the potential risks and rewards in a way that works best for you.
How Much Money Can You Make From Stock Investing?
How much money you make from stock investments depends on several factors, including:
- How much money you put into investments
- How long you continue investing
- How long you allow your investment to continue growing
- Whether you reinvest your dividends
If you faithfully put your money into good investments each month, continually reinvest their earnings, and allow them to grow over decades, you can make a lot of money from the stock market.
For example, we mentioned above that if you invest $300 a month into stocks from the ages of 18 – 40, and get a below-average return of 7%, you’ll have one million dollars when you turn 65.
If you’re willing to take it a step further, your money can multiply even more.
For example, if you take time to learn more about the stock market so you can make better investments, you might be able to get a 10% return instead of 7%.
If you invest the same amount of money ($300 per month) for the same amount of time (ages 18 – 40), but earn a 10% return instead of 7%, you’ll have 3 million dollars by the time you turn 65.
If you invest $600 a month instead of $300, from ages 18 – 40, and earn a 10% return, you’ll have 5 million dollars by the time you’re 65.
If you invest $600 a month from the ages of 18 – 65 (instead of stopping at age 40), and earn a 10% return, you’ll have 6 million dollars by the time you’re 65.
Investments rely on time and patience to grow. The more money you put into them and the longer you let them sit, the more your money will grow.
Why A Stock Market Investment Strategy Is Critical
When the economy rises and falls, the stock market can become emotional.
The biggest mistake people make when investing is allowing those emotions to interfere with their financial decisions.
People who sell their stocks out of fear or greed when the market fluctuates are more likely to lose money on their investments.
On the other hand, people who take a non-emotional approach to investing earn up to 23% more profits over ten years, according to a study published in the Journal of Financial Planning.
For example, when a recession is on the horizon, many investors get emotional and sell their stocks, thinking that their value is about to drop.
However, as you’ll remember from the 2020 pandemic economy, the stock market is unpredictable — and may rise even as the economy appears to be tanking.
To build wealth and become a millionaire through stock market investing, strategy is critical. Planning how to handle your investments, in advance, allows you to rely on data and rational decision-making instead of emotions.
Following a strategy doesn’t mean that you can’t take advantage of market fluctuations to earn a profit. But, you’ll decide in advance when and how you’ll do it so your approach is logical even in volatile times.
For example, you might keep a list of companies that you’d like to invest in someday, and use market drops (when prices go down) as an opportunity to purchase lower-cost shares.
Plan your strategy in advance and decide how you’ll approach any buying or selling so that you don’t end up making emotional decisions in the heat of the moment — which is almost always a bad decision.
How To Get Started Investing In The Stock Market
Starting stock investing isn’t hard, but in the past there’s been some confusion surrounding how and where to get started.
Thanks to the development of investing apps, automatic investment deposits, and new investor resources, investing in the stock market has never been easier.
When Is The Best Time To Get Started Investing In The Stock Market?
The best time to get started is now. Every month that goes by without investing is a month that you’re missing out on compound investing that can make your money grow over time.
Stock investing isn’t something to put off for “future you.” It’s not something for old people or for people who have their finances in perfect order. It’s for almost everyone, and the sooner you get started, the more money you’ll earn over time.
So how do you know if it’s the right time for you to start investing?
There are three financial goals you should accomplish before you invest in the stock market:
- Build a $2,000 emergency savings account.Ideally, your savings account should house six months’ of living expenses to truly protect you in case of a financial emergency.Your $2,000 will cover some of life’s most common emergencies, such as a broken car or phone, which are bound to happen.
- Pay off your high-interest debt or refinance it.If you have credit card debt or other types of high-interest debt, you should pay it off before you begin investing. High-interest debt will hit your pocketbook hard and cause you to lose a significant amount of your earnings over time. It may not even offset what you earn in investments.If you have high-interest student loans, consider refinancing them for reduced costs.If you have a significant amount of other high-interest debt, such as credit cards, you may consider reconsolidating them into one low-interest loan.Ideally, you should pay off all your high-interest debt before you begin investing. However, if it will take years to pay it off, consider refinancing or picking up a part-time job or side hustle to pay them off sooner.
- Understand how to allocate your earnings. Generally, we recommend allocating 50% of your income to spending (including your bills and living expenses, 30% to investments, and 20% to savings (until you’ve saved six months of living expenses).If you have children to support, however, you’ll allocate more of your money toward caring for and educating them.
For parents, we recommend allocating 75% toward spending, 15% on investments, and 10% to savings. Business owners are actively investing in their future as they work to build their companies, so we recommend allocating 75% to spending (including money into their business), 15% investments, and 10% savings.
The good news is that you don’t need to break the bank to begin investing in the stock market.If you can’t afford to deposit at least a few hundred into your investment account each month, you can deposit as little as $5 a month through fractional trading.
While tiny investment deposits may not generate big earnings, they do offer hands-on experience in the stock market, which can help you invest better and earn more in the long run.
Fractional shares trading allows you to invest in the stock market with as little as five dollars a month. It’s a way to pool your money with other investors so that you can own a portion of a share instead of having to buy whole shares.
Many popular trading apps, such as Schwab, Fidelity, and WeBull provide fractional shares trading options.
Decide How You Want To Invest
You don’t need to make a lot of money to get started investing in the stock market, but you’ll want to commit to a steady amount of money each month if you hope to build wealth.
You can allocate a portion of your income toward investments each paycheck, and even set up automatic payments to your investment accounts, so money gets directly deposited into investments each payday.
If you’re new to investing, consider purchasing index funds with a steady allocation of your paycheck each month. To build wealth over time and retire a millionaire, allow your money to sit in your stock investments as you reinvest its earnings (dividends) throughout your lifetime.
When it comes to stocks, the sooner you begin investing, the better. However, it’s not too late to get started if you missed out on investing when you were younger.
Before you choose a brokerage firm or investing app, determine what investment strategy you’ll take.
- Invest in a single company
- Open a brokerage account and invest in multiple companies
- Pay a fee to invest in a mutual fund, index fund, ETF, or fractional shares
Once you know how you want to invest, it’s time to seek out a brokerage firm or app that can help you buy and sell.
How To Choose A Brokerage Firm (Investment App)
To purchase stocks, you’re required by law to open a brokerage account with an investment firm.
A brokerage account is like a bank account, but it’s used to buy stocks and other kinds of investments.
It doesn’t take a lot of time or money to open a brokerage account and get started investing in the stock market.
Most brokerage firms allow you to manage your investment account online and through their app.
If you’re interested in long-term, passive investing, look for a firm that offers low fees, high ratings, and excellent resources for beginners.
Some points to consider when choosing an investment app:
- Do they offer the stock options you’re looking for?
- Can you diversify your investments through index funds and ETFs?
- Is the website and/or app user-friendly?
- Do they provide visual reports that make understanding your investments easy?
- What are their commission fees?
- What does it cost to open an account?
- What is the minimum investment requirement?
- Do they offer collaboration opportunities with other investors?
- Can you manage your account on a mobile device?
Choose an app or brokerage firm that works best for your needs. If you’re new to investing, consider placing visual resources and learning tools as a top priority on your list.
Many firms offer low cost or zero commission, and some even give you a couple free stocks as a sign-on bonus.
Some of the best stock investing apps for beginner sand long-term investors, according to Business Insider, are:
- Schwab: The #1 choice of Business Insider, Schwab has no account minimums and no trading fees. It’s user-friendly mobile app is a good choice for beginners and experts, and its Schwab Assistant allows you to make voice-controlled trades.
- Fidelity is the top choice for passive long-term investors. It requires no minimum deposit and charges no trading fees. Fidelity offers fractional share investing and also provides tools and resources to help you develop a long-term investment strategy.
- SoFi is recognized as the most beginner-friendly app, and has no account minimum or commission fees. The app is simpler than most, which can make it easier for beginners who are just getting started with stock investing.
Whatever brokerage firm you choose, take a bit of time to research their advantages and disadvantages, review their free structures, and read their online reviews before you open an account.
This will help prevent from unhappy surprises and allow you to invest passively — without having to spend much time or energy on your investing activity in the future.
How To Buy And Sell Stocks
Most brokerage firms make buying and selling stocks as simple as a click in their app.
How you buy and sell them depends on which app you’re using. Your brokerage firm or app should have clear, step-by-step instructions on how to buy and sell your stocks.
Any profits you make from the stock market are taxable.
- Short-term capital gains are profits you make on equities you hold for less than one year.Short-term capital gains are taxed at the same rate as any other income you earn.
- Long-term capital gains are profits you make on equities you hold for a year or longer.- Your rate for long-term capital gains tax depends on your taxable income, and most people pay a 15% or lower tax fee on their capital gains. Earning more than a million dollars in capital gains may put you in a 20% tax category, or more if the tax rates change.
When you sell your stocks for profit, these profits are known as “capital gains” and you will need to pay taxes on them.
All investing requires risk, but stock market investing with a buy-and-hold strategy provides a low-risk way to earn decent returns and build wealth through compound investing.
Index funds and ETF’s are an excellent low-risk, low-cost way to invest in the stock market if you want to build wealth over the years without taking too much of your time and energy away from your career and personal life.
Your experience with stock market investing may rely largely on which brokerage firm or app you choose to facilitate buying and selling. Look for user-friendly apps with plenty of beginner resources and low fees.
What Are Cryptocurrencies?
Cryptocurrency is a global online (digital-only) currency that can be used to purchase goods and services from businesses that accept it. It can be used as both a currency and an investment.
As a currency, crypto provides a few distinct advantages to its users:
- No need to convert money from one country to another when traveling.
- Typically no middleman such as a banker or broker takes a cut out of your money when making transfers and purchases.
- Accessible to the two billion people worldwide who have no access to financial services such as banks.
As an investment, cryptocurrencies are still relatively new, which makes them highly volatile and high-risk. However, as the need for a global, decentralized currency continues to grow, crypto’s potential continues to climb.
Where Did Cryptocurrencies Come From?
In 2008, Cryptocurrency inventor Satoshi Nakamoto (pseudonym) outlined the original structure of the first-ever cryptocurrency in a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.”
Nakamato’s paper laid out an idea for an electronic payment system that would be built on cryptographic proof (via “blockchain technology”) rather than trust, such as is the model of banks.
By 2009, Nakamoto’s ideas were turned into open-source software, and the first cryptocurrency — Bitcoin — was launched.
Top 10 Most Popular Cryptocurrencies
Today, there are more than 5,000 types of cryptocurrencies. The original, Bitcoin, is the largest.
According to a report by Nasdaq, the top ten largest and best-known cryptocurrencies are:
- Bitcoin (BTC)
- Ethereum (ETH)
- Stellar (XLM)
- Binance Coin (BNB)
- Cardano (ADA)
- Dogecoin (DOGE)
- XRP (XRP)
- Litecoin (LTC)
- Bitcoin Cash (BCH)
- Chainlink (LINK)
Where To Buy, Sell, And Trade Cryptocurrencies
To buy and sell crypto, you’ll need an account with a cryptocurrency exchange, plus a special wallet to store your crypto.
A wallet is a software program used to store, send, and receive digital currency.
The most popular crypto wallets, according to Bankrate, are:
While cryptocurrencies are traded on many exchanges, they are not stocks.
To choose the best wallet and exchange for yourself, consider the platforms’ fees, security, reviews, and educational resources.
Cryptocurrencies are high-risk, possibly volatile investments with tempting potential. They are best left to investors with money to gamble and are not recommended as reliable long-term investments.
What Is Real Estate Investing?
Real estate investing means that you buy a property for the purpose of renting it and collecting income from tenants.
Although it requires a bit of time investment, in the beginning, real estate is an overall passive investment that allows you to earn money while you work another job, run a business, travel, or even sleep.
Flipping houses or buying a home that you’ll live in and resell later is not real estate investing because these require time and effort, which amounts to working for an income.
Buying properties and renting them out to receive a monthly income from tenants is a passive activity, and can be a profitable form of traditional real estate investing.
Crowdfunded real estate investing is also a passive investment that allows you to pool your money with other investors to purchase properties, and share the profits.
How Traditional Real Estate Investing Works
In traditional real estate investing, you purchase a residential or commercial property, rent it out to tenants, and collect their monthly rent as income.
To make real estate investing a truly passive activity, you’ll need to hire a property manager to handle activities such as communicating with tenants, collecting rent, managing repairs, fielding inquiries from potential tenants, and finding new tenants when people move out.
You’ll also need to hire an attorney to supervise your transactions.
There are several types of properties that offer investment potential, such as:
- Single-family homes
- Shopping plazas
- Mobile home parks
- Office buildings
- Retail spaces
Investing in real estate offers several advantages over other types of investing, including the fact that you own a physical, tangible asset.
Additionally, it provides immediate income and, if you purchase in the right area, you’re likely to keep your properties filled with tenants because people always need a place to live.
Perhaps the greatest advantage to real estate investing is the fact that you can take advantage of amazing tax perks.
Thanks to U.S. tax codes, investors can take advantage of legitimate tax breaks that allow them to keep more of their profits than with any other type of investment.
The “1031 Exchange” allows you to reinvest your real estate profits without paying any taxes on them.
That means that you can take the earnings from your first rental property and invest it into a bigger property (that pays you a higher income) without paying any taxes.
On top of the 1031 Exchange perk, you get additional tax breaks on the income you earn from the bigger rental property.
This kind of tax break is rare.
Even on the income that you earn from your profession, you have to pay a big chunk of taxes. But when you invest in real estate, you can legally avoid paying taxes on some of your earnings, which makes them much more valuable.
When Should You Start Investing In Traditional Real Estate?
The greatest challenge in real estate investing is raising the money to purchase your first building. Before you can own your first building, you have to save up enough to purchase it (or at least enough for a large down payment).
Before you purchase your first building, there are a few personal financial accomplishments you should achieve:
- Build a complete emergency savings account equal to six months’ living expenses.
- Pay off your high-interest debt such as credit cards or student loans.
- Protect your assets with plenty of life, homeowners, health, and car insurance.
Also before you begin investing in traditional real estate, it will help to develop the following skills and knowledge:
- Communication and leadership skills help you earn more money in real estate. When you’re able to build healthy relationships with agents, property managers, construction workers, and tenants, your properties will run smoother and you’ll stand a much better chance at succeeding.
- Organizational skills will help you manage your team, tenants, and scheduling — as well as your investments.
- Knowledge of your local real estate market helps you spot the best (and worst) deals so you can choose successful properties.
Purchasing your first building and getting started with your first rental property can take time.
To gain experience and begin earning a passive income stream before you purchase your first property, you might consider investing in crowdfunded real estate.
How Crowdfunded Real Estate Investing Works
Crowdfunded real estate allows you to buy into a portfolio of real estate properties for as little as $500.
When you participate in crowdfunded real estate, you invest in dozens of properties and get a share of their profits.
Investing in crowdfunded real estate not only helps you build a passive income, but it also gives you a unique opportunity to learn about real estate investments first-hand by watching your properties grow and return investments along the way.
Normally, if you were to invest in dozens of commercial properties, you’d need to do in-depth research or hire a specialist to evaluate properties for you. But with crowdfunding, each platform has experts that do the work for you, usually better than you could do on your own.
Before you invest in crowdfunded real estate, you should complete the following:
- Build a short-term emergency savings account of $2,000, to cover you in case of small emergencies such as a car breakdown or phone replacement.
- Research crowdfunding investment platforms to determine which is best for you.
Crowdfunded real estate is considered a high-risk, high-reward investment, so if you are looking to build wealth over time for a retirement fund, you may prefer stock market investing.
If, however, you have a passion for real estate and want to get a feel for it as you’re saving to purchase your first building, crowdfunded real estate may be a good investment for you.
There are several ways to invest your money so that it grows over time, for example:
- For example, investing in stock market index funds is a relatively low-risk way to begin building wealth.
- Traditional real estate investing is an excellent way to immediately begin collecting passive income, but it takes time and effort to afford your first building.
- Crowdfunded real estate provides less expensive options, but it’s considered high-risk.
To determine which type of passive investing is best for you, consider the following questions:
- What kind of beginner’s curve are you facing, and will it hinder your profits?
- How much risk does it present?
- How much money do you need to invest?
- How easy is it to get started investing?
Stock investing offers a low-risk approach if you’re willing to let your money sit and grow for many decades.
Real estate investing offers immediate and often lucrative passive income, but the barrier to entry (purchasing your first building) is high.
Crowdfunded real estate offers an easy-in to the world of real estate investing, along with a low minimum requirement, but its dividends may be unreliable and your investment may be riskier.
Savings accounts seem like “safe” investments, however, they don’t typically pay enough interest to keep up with the cost of inflation.
The type of investing you choose should be determined by what your goals are. Stock investing, particularly through index funds, is an excellent choice for beginners. Real estate investing is an excellent choice for people who have or can raise the funds to get started.
Before you choose any investment, do plenty of research and be clear on your goals so that you can choose the best strategy for your situation.
Investing Your Money For The Future
There are several ways to generate a passive income through investments. Stock market and real estate investing are among the best choices for people who wish to build a financially stable future.
You don’t need a lot of money to begin investing (especially if you start with the stock market), and the sooner you get started, the more money you’ll earn over time.
All investing comes with risk, so before you purchase any investments, take the time to learn about the investments and the platforms or brokers you purchase from.
When you do your research, invest steadily along the way, and take the time to educate yourself over time, you stand an excellent chance of developing a generous passive income for your future.