Once upon a time, investing was thought to be reserved for the rich. But today, with the proliferation of resources available to the public, pretty much anyone can get into investing. To put it simply, investing is all about growing your funds by putting some of it away now to see more of it in the future. That being said, investing can get complex really quickly, making it overwhelming and even prohibitive for beginners. To demystify investing, here are a few basic investment types that are perfect for people who are just starting out.
401(k)
A 401(k) is a workplace retirement plan that lets you make annual contributions up to a certain amount, which are deposited into an investment account. The contributions grow tax-free until retirement age. Your employer may match part or all of those contributions, which is pretty much free money for you. If you don’t have much time or funds to put into managing your investments, a 401(k) is an easy way to start investing. The money will go straight from your paycheck into your retirement savings account, so it’s a really simple hands-off method of investing.
Mutual Funds
A mutual fund can be thought of as a basket of investments. Basically, mutual funds allow you to pool your money with other investors to mutually buy stocks, bonds and other assets. As an investor, you’ll buy a share in the fund to invest in all of the fund’s holdings in one fell swoop. Mutual funds tend to come with less risk than other investment strategies because your investment is split among different types of securities. Investing in mutual funds also tends to be cheaper than other kinds of professionally-managed investments.
ETFs
Exchange-traded funds are similar to mutual funds because they both hold a basket of securities. With ETFs, like mutual funds, you can split up your investments to reduce risk. The difference is that ETFs are traded throughout the day like stocks, and they are more subject to market volatility. Another distinction is that ETFs don’t come with the same minimum investment requirements as mutual funds. So you can typically get started with ETFs for less than you would with a mutual fund.
High Yield Savings Accounts
A high-yield savings account is what it sounds like. It’s a savings account with a higher interest rate, which allows your money to grow faster as it sits in the account. These accounts come with little risk and greater flexibility. Basically, you can earn more interest on your money than you would with a traditional savings account. The only downside is that these accounts typically come with balance requirements and withdrawal limits. High-yield savings accounts are great options to hold your emergency funds.
If you’re new to investing, start out by considering your personal financial goals and risk tolerance before committing to any investment. With some thought and research, and perhaps a little guidance, you’re sure to find the right investment strategy for you.