baby-sitting-holding-money-shockedFor a large majority of us, we were never really taught the basics of saving and investing our money. If you’re anything like the large majority of us who are now paying student loan debt, or any other kind of loan debt – I get it. 

You probably don’t spend too much time trying to figure out the best investments for yourself until after you become debt free. It’s not uncommon for one to think about their money by evaluating whether or not they should get Taco Bell or a Costco Pizza.

If you play your cards right and live well below your means, you will eventually start to build up extra cash like I have. The problem many people then face is: What the heck do I do with all this money now? (Tough, I know…)

The reality is, you will grow old no matter how invincible you feel and having your money sit in a savings account won’t help you so much. In fact, it will do practically nothing. According to the FDIC, the average savings rates was a measly .06%.

There are so many different ways to invest it would take numerous articles to even scratch the surface. That is why this will be the first of many which will cover the bare bones to help get you started.scared money.jpg

Want to know the secret to investing?

START EARLY. 

Take advantage of your youth so you can be wealthy later on.

Below will be a list of options that you as a young investor will have. These will be marked by indicators indicating their level of risk and diversification.

Red = Bad. Orange = Meh. Green = Oh Boy!

I hope you like my coloring system. School taught me it helps to remember things more clearly.

Options:

Stocks

Risk: High to Moderate
Diversification: Low
Fees: Low

Most people seem to have a basic understanding of what your typical stock is (also known as a share or equity). You are basically buying a small part of the company; of which you want the share to increase over time.

In a Nutshell:

  • Stocks tend to have high risk because of the lack of diversification.
  • When you purchase stock of one company you can fall risk to underperformance, a stock market crash or any other factors that the company could face.
  • Some stocks are riskier than others. Large brands like Apple and Coca-Cola tend to have a history of performing well. This generally makes them less risky than companies without a history of being profitable.
  • You also have to go through a broker to purchase stock. Think Schwab, Etrade, Scottrade, etc. This means that you have to open a brokerage account and order the stocks through the company that you choose. The brokerage industry is very competitive and is largely accessible online, fees are low and can be as little as $7 – $10 per transaction.

Exchange Traded Funds (ETF)

Risk: High to Low
Diversification: High
Fees: Low to Moderate

ETF’s tend to be extremely popular in the investment world because of their high diversification and variety of investing options.

In a Nutshell:

  • For taxes, ETFs are fairly efficient compared to other diversified investment options such as mutual funds.
  • There is no fund manager for ETFs and less transactions within the ETF. This means fewer transactions that could be subject to capital gains taxes!
  • For the same reason, as stated above, ETFs can have lower fees compared to a Mutual Fund.
  • There are MANY different types of ETFs. Some can shadow markets like the DOW or S&P500, or follow different sectors like energy or biotech.
  • The ETF will ebb and flow as these markets and sectors do because they are invested across their respective category.

Mutual Funds

Risk: High to Low
Diversification: High
Fees: Moderate

Mutual funds are an extremely popular investment vehicle and specialize in providing strong diversification across different sectors.

In a Nutshell:

  • Mutual Funds can be less tax efficient than ETFs because there are many transactions needed to manage the accounts. These transactions are subject to capital gain taxes.
  • Because Mutual Funds utilize a fund manager, fees are higher than a non-managed investment vehicle.
  • There are a large range of investment options across different types of mutual funds similar to an ETF. Many brokerages will also offer their own Mutual Funds which may have less fees.
  • However, mutual funds tend to have higher required minimum balances that ETF’s.

Bond Funds

Risk: Moderate to Low
Diversification: Moderate
Fees: Low to Moderate

A bond is a debt investment where the investor loans money to a borrower for a certain amount of time and is repaid with interest.

In a Nutshell:

  • Bond funds are managed in a similar way to an actively managed mutual fund with a dedicated manager. This management brings on extra fees that the investor should consider before investment.
  • Individual bonds are generally sold at the maturation date, but Bond Fund managers can sell the bonds before their maturation dates and reinvest the funds.
  • Interest rates have a MAJOR effect on Bond Funds. A raised interest rate by the fed can significantly lower your asset value in a Bond Fund.
  • Bonds are generally seen as a safe investment, but Bond Funds can carry more risk than individual bonds.

Money Market Accounts

Risk: Low
Diversification: Low
Fees: Low

Money market accounts are a good option for someone who doesn’t want to jump into investing yet but wants a slightly better return on their money than a savings account through a bank.

In a Nutshell:

  • This is seen as one of the safest investments but produces a low return compared to the other investment vehicles in this post.
  • Investment capital that is held in a Money Market Account is FDIC insured up to $250,000, but Money Market Fund capital is NOT insured
  • Funds are invested by banks in low-risk vehicles like debt securities with short maturities or certificates of deposit.

These are just a few of the options that are available and at your disposal. The most important thing is that you get started. Your biggest helper will be time.

Now it’s your turn. GO LEARN

Live Differently. Your bank accounts will thank me later.

Good Luck, Newbies

Join The
Path to Financial Independence
Get Started