How to Invest Wisely and Build Your Nest Egg
In life, there are always uncertainties as no one knows what the future holds. That is why it is important to have a little nest egg, something to fall back on if you ever run out of money and find yourself in a financial turmoil.
Investing can help you save a substantial amount of money and secure your future. But what if you don’t have any experience and don’t know where to start?
Don’t worry, investing is not as complex as many seem to think and you don’t have to be an expert on the subject.
Here is a simple guide to investing wisely and building your nest egg.
Start Investing Early
Many people think they lack the knowledge and expertise in order to start investing. That is why they don’t start investing until a certain age. However, the most important thing is to start investing as soon as possible. The knowledge and wisdom will follow as you learn more about financial planning.
Even if you have very limited funds and can only set aside a small amount of money for investing, the sooner you start the faster your money will grow. That also means that by the time you reach retirement age, you will have saved a significant amount of money. For example, if you start investing at age 30 and invest a small amount each month, you will have a bigger nest egg by the age of 65 when compared to someone who began investing the same amount per month at a later age.
If you wait until you earn enough to invest, it will never be the right time. Start with the little money you have instead.
Invest in What You Understand
We said that you don’t need to be an expert in order to invest and that is true. However, the more you know the better. To safely invest your money, you should inform yourself a bit prior to investing in something.
How will this investment bring you money? What are the risks? How can you grow your investment?
There might be some dangers you are unaware of. Learn the basics before you buy stocks or invest your money in anything. Start reading financial publications such as The Wall Street Journal to stay on top of things. Try to read a number of publications and websites on investment and financial planning. The more you read the wiser investment decisions you will make.
Create a Budget
Before you start investing and spend more money than you can afford, you need to sit down and put everything on paper. Create a budget. Determine how much you can spend on necessities, wants and needs, and how much you can set aside for investing. It can be as little as $50 a month (or even less) or it could be more, depending on your financial situation.
This step is very important as it gives you a clear picture of what you can and cannot do.
Like most people with a fixed income, you probably think that after you pay rent, mortgage, necessities, bills, entertainment, etc, there is nothing left for savings and investments. But there never will be unless you decide to do it. Think of it as investing in your future and financial stability. There is no better time to start investing than now.
Budget isn’t exactly our favorite activity so if you need help creating your budget, consider the 50-30-20 rule. This rule created by financial expert Elizabeth Warren is a financial guideline that helps people manage their earnings wisely and make sure to save money every month. Invest within your means. And in order to know how much you can afford, creating and sticking to a budget is essential.
Understand Long-Term and Short-Term Investments
Seasoned investors know that investing isn’t a way to get wealthy quickly. Sometimes it takes years to get a return on your investment which is why you need to understand long-term and short-term investments.
Long-term investments are those that promise the highest profit over a period of 10 years, for example. If you decide to make such an investment, don’t expect it to bring you a profit in a couple of years.
Short-term investments are the opposite. These investments are typically held for a shorter period of time (1 year or less). They are usually sold after a few years or less so you can expect a profit much faster.
Do you need money sooner or can you afford long-term investments?
Long-term investments are a great way to help build your nest egg and save for your retirement. Short-term investments might be a good solution for situations when you need cash faster. The type of investment you choose depends on your goals and needs. So think about what you need and when do you need it.
Live Below Your Means
It’s tempting to go on a shopping spree every once in a while, especially when you’re working hard and want to pamper yourself.
But, car payments, expensive vacations, clothes, presents, and other luxuries mean that you’ll be able to set less money aside.
There’s no need to exercise excessive frugality, but making a list of priorities will help. In other words, think your every purchase through, explore whether there are some more affordable options, and ask yourself whether you really need the item you’ve set your sights on.
What you need to understand that living below your means doesn’t mean depriving yourself of all the joys of life – it’s more about controlling your money and spending.
Some tips for achieving this balance include:
- Limiting yourself to living on at least 15% less than the amount you earn. Start by creating a standing order which will direct a predefined sum of money from your paycheck automatically. Or you can opt for saving through 401(k) deductions at work. This way, you won’t be tempted to blow your entire income on something that you don’t need.
- Living off one income. If you live with your partner, you can decide to use one salary for your regular household and personal expenses. The other paycheck could go to paying off debts, retirement funds, and investments.
- Downsizing your home. Don’t opt for the most expensive house or apartment you can afford. There’s no need to spread yourself too thin when you can even save by choosing a more modest home and spending less on your house payments. The same goes for purchasing used cars and eating out.
Play It Safe
No matter how alluring that latest initial offering or investment scheme might seem, don’t jump to making a decision to invest before you’re sure it’s not something shady.
It’s best to be conservative about this and go mainly for safe investments. However, as you can’t expect that your return will bring you too much income, it’s wise to split your investments up.
A good rule of thumb says that you should keep 3-6 months’ worth of your living expenses in low-risk investments.
But, how to identify bad investments and avoid them?
- Huge returns aren’t possible without high risks, so bear that in mind. Don’t put all your eggs in this risky basked as you can lose your hard-earned money.
- Stay away from investments that require hefty upfront commissions. Once your advisor gets hold of the commission, they’re no longer interested in providing ongoing service. They get their incentive in advance and aren’t motivated to make extra effort.
- If you don’t understand how an investment works, it’s a bad investment for you. In that case, either ask more questions and consult a professional, or avoid it. By not understanding the nitty-gritty of the process, you’re more likely to make a bad decision.
With the help of these simple tips, you can not only build your nest egg but stop worrying about what the future holds in store for you.
By Rebecca Brown
I’m Rebecca, a translator and avid traveler, a book worm and horror flick enthusiast. My job has given me the amazing opportunity to travel to dozens of countries around the world, and writing gives me a chance to try to showcase some of them.