The RAVE Guide to Investing for Beginners

Investing your money is a time-honored method for increasing your net worth, building up a fund for a major purchase, and helping you live comfortably during retirement. Before you start putting your money onto a random stock as a retail investor and hoping you’ll hit it big, you need to start by learning the basics of investing. When you take a look at how to invest in the stock market for beginners, you’ll find there are plenty of beginning investing books and beginner investing podcasts that provide guidance on beginner investing in the stock market. Another avenue to learn how to invest in the stock market for beginners is to use investment apps. Beginner investing apps provide guidance, news, and automated investing to help you stay on track with regular investments. 

What are Good Investments for Beginners?

Anyone can invest in the stock market, but first, you need to know how to get started investing in stocks. The same goes for trading in every type of security. If you’re beginning investment with little money, you have to be risk tolerant and not be afraid of committing your available cash to investment. In early 2021, retail investors caused Gamestop (GME) stock to reach unexpected highs. Those who got in when the stock was low and held eventually wound up with major windfalls. The attention given to these stocks brought a lot of attention from people who want to try their hand at investing and want to know how to get started investing in stocks. 

The first rule of investing in the stock market is to acknowledge the fact that there are no guarantees that you will make money, and that you are at risk of losing your money. Losses are permanent, and you won’t get your money back if you invest in a stock that doesn’t perform. Only invest what you can afford to lose, start with stocks that are stable or invest in funds that allow you to purchase part of a stock along with other investors. The same goes with learning how to start investing in cryptocurrency and other forms of investment. Another piece of beginner investment advice is to try mock trading platforms that use real-time data from the various stock markets, but don’t require the use of real money. You can test out your theories, learn how the markets behave, and see if your decisions result in profits or losses and use what you learn to invest with real money. 

STOP: Before Investing, Tackle Debt

Debt is something that is a part of life. It’s needed to buy large purchase that you would otherwise be unable to make. If it weren’t for lending, you wouldn’t be able to buy a car, home, furnishings and more. However, you pay interest on that debt, and the amount of interest you pay may not be a reasonable trade-off for investment. A general rule of thumb for paying off debt versus investing is calculating how much debt you’re paying compared to how much money you would earn if you invested the money instead.

Debt is money spent whereas investment is money earned. You have to repay that debt plus interest, but an investment may have a better rate of return than the debt. For example: you have a car loan with 3% interest on it. That loan has to be repaid over a period of time, and paying it off serves to free up money that can be used towards investing. But if you have a mutual or index fund that’s returning 7% on investment, you’re going to get better results by putting your extra money into the index fund to boost your return on investment. This approach works well if you have assets with a low and fixed rate of interest. It doesn’t work as well if you have credit card debt

The average APR for credit cards hovers around 19%, or 1.6% every month on an existing balance. Theoretically, if you were to make no payments, the interest accrues and causes the balance to balloon in a process known as compounding interest. Eventually you’ll have more debt than you can comfortably or easily service. You should do your best to lower or eliminate your credit card debt prior to getting involved with investing outside of employer retirement plans. Otherwise, the cost of the debt will keep dragging you down and make it harder to keep it manageable. Does that mean you shouldn’t invest at all while you’re paying down your credit card debt? Not at all.

Budgeting and balance are key to juggling all the demands on your finances. A budget helps you allocate your money and find out how much you can comfortably afford to invest each month. You also need to balance your spare cash to make sure that you feel comfortable leaving your money in an investment fund for a long period of time. The money should be considered untouchable and not within your reach in case of emergency. You need to have enough money to pay your debts, bills, and savings before you start investing. 

How Much to Save and Invest

The best investing books will all tell you to save 10 to 15% of your net, or post-tax, income for personal investing. For example: you make $70,000 a year after taxes and other deductions. Ideally you should set aside $7,000 for savings and investment. Having this money set aside enables you to take advantage of the best investments right now and also allows you to get into the best investments for retirees. Don’t panic if you can’t afford to set aside 10% every month. Instead, set aside what you can and invest into the best investments for returns. 

Best Investments for 20-Year-Olds

You might not have a lot of money to set aside for investment during your 20s, but this is the best time of life to open up an investment account. It’s better to play it safe with investments that include:

  • 401(k)
  • Roth IRA
  • Index funds
  • Money market accounts also known as an interest bearing checking account

Best Investments for 30-Year-Olds

As you get into your 30s, your income increases along with your style of living. Chances are strong that you’ve gotten married, have started a family, and have a home and cars. Even if you don’t have these assets and a partner in your life in your 30s, you should still diversify and build up your investment portfolio. If you already have retirement accounts started with your employer, you’re already ahead of the investing game. At this point, you should consider buying property or other assets that have the potential to gain in value over time. You should also work on paying down debts such as student loans and credit cards. This will help you free up money for investing and other major purchases. 

Best Investments for 40-Year-Olds

Getting to your 40s comes with a shift in thinking about what you want to do with your money. Short-term investing can help you pay off larger debts sooner and give you a low-debt future. You should also push more money into your retirement accounts and take advantage of their tax-deferred status. Vanguard has a chart for target-date retirement funds that states that people in their 40s should have 87% of their portfolio in stock and about 13% in bonds. 

Best Investments for 50+ Year Old

By the time you reach your 50s, you’re starting to think about the nearing of retirement. This is the time to add more money to your investment portfolio and increase your return on investment. Didn’t do the heavy investing during your 30s and 40s? You can make up for lost time by, once again, adding money to your investment portfolio and immediately increase your return on investment. The more money you put into investments, the larger the return, and it can happen quickly when you put a lot in all at once. You can still retire with a reasonable cushion of money and leave money in your investment accounts for further returns. 

Employer Investment Plans

Employers used to provide pensions to their employees no matter what the industry, generating the expectation that employees stayed with their employer in exchange for being taken care of financially during retirement. Nowadays, for most employers, the pension plan has given way to the 401(k) and Roth IRA shifted how employers offer retirement plans. The 401(k) and Roth IRA are considered the best investments for retirement due to the way they function and cover contingencies. Many employers, including state and federal agencies, still offer a pension plan, but some state employees don’t pay into Social Security. You should always take advantage of a retirement or investment plan regardless of the type that’s offered by an employer. 

What hasn’t changed is the fact that employers contribute money into retirement accounts and frequently offer a matching contribution to the amount employees put into their account. It’s highly advisable for employees to take advantage of employer investment plans as it’s another source of guaranteed income during retirement. Another advantage to employer investment plans is the fact that some are funded using pre-tax dollars. You do have to pay tax on the account at some point, but the employer contribution is essentially free money that boosts your employer investment plan and adds to your Social Security income. Here’s a look at the most common types of employer investment plans:

Pensions

Pensions are the original 401(k) in that they require both employee and employer to contribute to a fund for retirement. The difference between a 401(k) and a pension fund is the fact that the money paid towards a pension goes into a pool shared by thousands of people. Money paid into a pension can’t be moved from pool to pool and requires an employee to work for an employer long enough to become vested in the pension. The longer you work for the employer, the more money you earn, but depending on the terms negotiated by employees or a union, a pension may not return enough for retirement. 

401(k)

A 401(k) or 403(b)* is similar to the pension in that both employer and employee contribute to an investment fund, but that’s where the similarities end. In the case of a 401(k), the individual owns the account and can transfer the account to another employer. Another difference comes in the form of the definition of the fund: The 401(k) is known as a defined contribution plan in that the balance in the account is determined by the amount of money contributed to the plan and how well the investments perform.  

The 401(k) is a much more flexible investment account than the pension plan when it comes to what you can do with it. When you open your account, the fund will have different investment options for you to choose from. The options in the fund are typically managed by a financial services advisory group that may be from a well-known name or a group that has a solid track record in terms of performance. In the event you leave a job and don’t take the 401(k) with you, you can roll it over into a Roth IRA. The flexibility of the 401(k) makes it one of the best investments that anyone can make.

The funds in your 401(k) should be left alone until you reach the age of 59 1/2. You can withdraw money at this age, or leave it alone until reaching the age of 72 when the IRS requires a minimum distribution to be taken. A 401(k) can be borrowed against or dissolved entirely before you reach the age of withdrawal, but you’ll pay a hefty tax penalty for doing so. Taking distributions from the 401(k) at 59 1/2 will require you to pay taxes on the income, but you won’t have to pay the FICA taxes that came with earning an hourly wage, putting the amount of tax you pay at a lower percentage.

Sometimes employers offer a 401(k), but won’t put in a matching contribution. This begs the question of “why put money into a 401(k) without a matching contribution?” In these situations, the lack of matching contribution turns the 401(k) into a take it or leave it proposition, but you may want to take it and put in a minimal contribution. The employer still has the duty of managing the fund and making sure your contributions are deposited. The funds that anchor 401(k)s tend to be solid performers which results in a return on investment over time. Also consider the fact that the 401(k) is portable. You may find yourself working for another employer who does match contributions and help your fund grow faster for a nice retirement nest egg. 

*403(b) is for employees of non-profit organizations.

Roth IRA

The Roth IRA (individual retirement account) is the opposite of the 401(k) in that it’s not offered or funded by an employer, and is funded with post-tax dollars. Since a Roth IRA is funded with post-tax dollars, you get to withdraw your money tax-free when you reach the age of 59 1/2. The only drawbacks to a Roth IRA is the fact that it has a yearly maximum contribution amount, and you can’t contribute if you make too much money. The maximum annual deposit amount for 2021 is $6,000 for those under 50 and $7,000 for those over 50. The maximum income for singles is $140,000 and $208,000 for couples. The Roth IRA is the next best investments after a 401(k) as it works in much the same way, but isn’t employer-dependent. 

Why You Should Look Into Index Funds

Investing in stocks is one of the most reliable ways to grow your money over time. Bear and bull markets come and go, but the stock market only goes up over time. The question you need to ask is: how do I want to invest my money in a safe and sensible fashion? Index mutual funds are a great place to park your initial investment and subsequent contributions on a monthly basis. An index mutual fund, or index fund, tracks a specific index for investment. They’re highly diversified which lowers the risk of loss. It’s impossible to eliminate investment risk entirely, but an index fund contains stocks that are known for reliable performance and growth. The longer you stay in an index fund, the more you earn over time. Perhaps the only drawback to index funds is the fact they’re not known for delivering large gains. But if you’re looking for steady returns, you can build up a nice return over time.

Index funds are a great option for people who want to invest, but don’t know where to start, and don’t want to pay the fees associated with a managed fund. They’re also a safer form of investment in that they track indexes with reliable performance records. An index fund can have fees as low as 0.20% because they’re hands-off. In other words, the fund manager doesn’t do anything other than monitor the fund to make sure that the fund is performing as expected. Index funds also tend to have a lower threshold for the initial investment as well as a low monthly recurring contribution. 

Understanding Asset Allocation

The best investment books are going to discuss asset allocation. Asset allocation is similar to a budget in that you allocate the percentage of how much you have of each asset in your portfolio. Another thing the best investment books are going to tell you is that there is no one formula to determine how much of each asset you carry in your portfolio. Instead, you should look at your age, your goals for the money you make on your investments, and the length of time you should expect to hold onto your investment accounts. This is all part of investing for beginners, and there’s no one answer that is right for everyone when it comes to asset allocation. 

Long-Term Investments: Retirement Goals

The core goal of investing is to increase your net worth and have money available to you that you would otherwise find difficult to earn. One of the satellite goals of investment is to have money for your retirement years when you move into a fixed income situation. Throughout your working years, you and your employer paid into Social Security to provide you with an income after you leave work for good. However, Social Security only goes so far, even if you reached the maximum salary to get the most money out of the fund. When you only have Social Security for your income, and no other source of funds, you’ll find it difficult to maintain much more than an existence without much in the way of extras.

Retirement is supposed to be a time when you do the things you put off doing, and investing to meet retirement goals is the best way to enjoy your non-working years. Retirement calculators help you estimate how much you’ll need to earn from investments in order to pay for the lifestyle you want to live after retirement. You can also multiply how much a year you expect to spend after retirement by 25. For example: you want to be able to spend $50,000 a year to maintain your lifestyle. The average life expectancy after retirement is 25 years. You’ll need $1.25 million in total in order to maintain your spending of $50,000 a year.

That number may seem impossible to achieve on the surface, but you can expect to work for at least 40 years, and Social Security will provide a base income. You can set your retirement saving amounts based on the length of your career, and save more as your income increases, and you have more money to save. Reaching your retirement goal is feasible when you look at it over a longer period of time. Funding your retirement accounts and investment accounts with regular contributions helps you generate enough money to maintain a reasonable lifestyle during retirement. 

Short-Term Investments for Major Purchases or Events

Investing money doesn’t always have to be about the long-term goal of retirement or being able to live well without an active income. You can also engage in short-term investing to build up a fund for a major life event or purchase such as a wedding, a home, or a new car. These events are time-sensitive and require you to plan out your investment strategy while identifying investment options that deliver a return on investment that’s sufficient for your plans. A short-term investment period lasts anywhere from three to five years depending on the goal. Some options for short-term investing include:

Peer-to-Peer Lending 

Peer-to-peer lending involves using a peer-to-peer lending platform to fund loans for people who don’t or can’t get a loan through a bank. You get to choose which loans you fund, then get your investment repaid with interest over time. You do lose money if the borrower defaults, but you can also stand to get a nice return on investment when the loan is paid off.

Short-Term Corporate Bond Funds

Corporations issue bonds to fund their investments and pay interest quarterly or twice a year. A bond fund is a collection of corporate bonds that diversifies the investment and minimizes the impact of a bond that’s not performing. This is one of the best investments for short-term investing due to their liquidity and ease of accessing your money at any time. 

Treasurys

You may have heard of T-bills, T-bonds and T-notes. These are various financial instruments for investment offered by the U.S. government. They don’t typically offer high rates of interest, but they’re backed by the federal government, are safe, and can be a solid investment vehicle for the short-term investor. 

Certificate of Deposit 

Certificates of Deposit, or CDs, are deposit accounts that hold a specific amount of money for a set period of time and pays a higher-than-average rate of interest during the time the money is in the account. They usually have low interest rates, but you can get a guaranteed rate of return and know that you’ll get a defined amount of money when you cash in the CD.

Cryptocurrency

Cryptocurrency is an unregulated and decentralized method for holding value. The value of an individual cryptocoin fluctuates constantly and some may find it too risky for their peace of mind. However, trading cryptocurrency is simple, and is made easy by the best cryptocurrency platforms such as Coinbase and Binance. You can sell crypto when it’s up, and sell when it’s down, then repeat as often as the platform allows. Some feel that cryptocurrency is one of the best investments for 2021 and beyond, but only you can make the decision to invest. 

Where to Get Started

In order to invest, you need an account with a brokerage firm, or open your own brokerage account with the best investments companies. Firms like Vanguard and Fidelity Investments are well-known brokerage firms and have solid reputations for being the best for investment accounts for small investors due to their solid performance and investment returns for mutual funds. They’re also good for ETFs, but Charles Schwab is the best investment site for ETFs due to their fee-free ETF trading and $0 account minimum. TD Ameritrade is the best investments platform for beginners, and it’s due to the fact the broker has positioned itself to attract beginner investors. It also has one of the best investment apps for beginners. Last, but not least, is E*Trade, one of the earliest online trading brokerages. E*Trade has a proven track record of helping beginning investors start their investment planning and offers various financial services that include savings accounts, lending, and zero-commission trades.  

Related:

The RAVE Guide to Personal Finance

The RAVE Guide to Credit Cards

Ultimate Guide to Compounding Wealth

Ultimate Guide to Cryptocurrency for Beginners

William Kennedy

William Kennedy is a staff writer for RAVE Reviews. He lives in Eugene, OR with his wife, daughter, and 2 cats, who all politely accommodate his obsession with Doctor Who and The Smiths.