hand watering a money treeDid you know that more than half of Americans don’t invest their money? According to a recent Bankrate.com survey, 53% of responders have nothing in the stock market. The majority of responders said they can’t afford to, while others say their lack of stock knowledge is holding them back. Here are some investment basics in case you fall into that non-investing majority.

Many people don’t realize that investing is like a golden ticket to financial independence. There are benefits to investing, especially at a young age, but the single most important motivation is the potential for long-term returns. Consider investing in the stock market because it will yield more than your money would sitting in a savings account or under your mattress at home. Plus, the investments you put away will likely outperform inflation as the cost of living rises.

You can get excited that your growing investments can eventually provide a regular stream of income for you. For example, if you invested $500 each month (total of $6,000 per year) at a 6% annual rate of return, you would have $81,939.67 after just 10 years.

Achieve Your Goals

Anyone can learn how to invest and benefit from investing and the power of compounding! You can achieve a broad range of goals no matter what your financial circumstances, how big your portfolio of funds, or where you are in your life. No matter what your goals are, you can always tweak your investments – thus, your growth potential – by carefully selecting your investments and a reasonable level of risk.

“Investing is important because it helps you stay disciplined to save towards your long-term goals,” said Ed Dixon III, who is a financial advisor for Edward Jones in Frisco, TX. “Investing your money can help whether you want to get out of debt, buy a house, plan for retirement or build education savings.”

Start by mapping out your finances and how much money you have in your budget to invest every month. This means you’ll have to take a good look at your debts, emergency funds and income. While evaluating your money, start building your investment knowledge by consulting with financial advisors and people you trust who are investment veterans.

Educating yourself on fees, tax implications, brokerage firms and investment trends will help you to be more confident and knowledgeable. Doing a little investment research will also help you quickly understand important terminology like “market cap” and “return on equity,” and help you avoid feeling overwhelmed.

Next, lay out an investment plan that includes your financial objectives. Your investment plan can be as simple or detailed as you want; the goal is to tailor it to your financial situation. At this stage, you have to determine how you want to invest your hard-earned money and whether you’ll use an online brokerage like E-Trade or Scottrade, or a traditional investment firm like Charles Schwab or Edward Jones, to invest.

Online brokers allow you to be a self-directed investor, while traditional firms provide a wide range of services and have a staff of money managers to advise you. At this step, you also need to decide your asset allocation – how you’ll divide your money across stocks, bonds, mutual funds and other investments.

Asset Allocation

When creating an asset allocation plan, it should consist of three factors: your goals, the time you have to invest and how you feel about risk. This is also the time to consider the diversification of your money – diversification is the process of allocating your money across various financial instruments, industries and categories.

For example, if you had a portfolio of only airline company stocks, then your investments could drastically and negatively be impacted by one incident like a pilot strike or an airline merger. But diversifying your investments in different industry stocks will help to protect your money from risk and help to grow your portfolio.

Once you’ve opened your account, you can begin investing. Brokerages give you the option of setting up automatic monthly deposits, which allows you to transfer a specific amount from your savings or checking account. This is a simple way to build equity and pay yourself first every month before spending money other ways.

“Investing provides a huge opportunity for people to build wealth and security for their retirement over the long term,” said Dixon, who runs an office in the north Dallas suburb.

Stay Involved

To be a successful investor, you need to periodically check your progress to make sure you’re on track with your goals. Use reliable industry benchmarks to evaluate your progress. Doing this will help you determine when to rebalance your investments and maintain an asset allocation that’s right for you.

“Setting realistic goals will help you stay on or even get back on track even if you’ve started late,” Dixon said. “Starting now will help you to maximize your time for growth to happen. Remember, short-term sacrifices will eventually lead to long-term gains!”

So start investing and saving today! Learn more about getting started as a new investor; the sooner you get going, the quicker your money will start compounding and you can move toward achieving your financial dreams. Do you have any tips for new investors? Share in the comments!

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