If you have managed to save up a few thousand dollars over the years, you may want to think about investing instead of spending.
Although personal savings have increased in the United States, the same cannot be said about personal investing; this is unfortunate since Americans have an unprecedented amount of investment options and tools that can be easily accessed at virtually no cost.
The first thing you should consider when in terms of personal investing is your current financial situation. The funds you choose to invest must be completely free and clear, which means that you should only invest money that will not be used to cover personal or household expenses.
You should have an emergency cash fund plus reserves set aside before you start investing, and you should also cover all expenses before you do so; in other words, if your house is falling apart and in desperate need of repair, be sure to handle those expenses before transforming your savings into investments.
Setting Your Investment Goals
Once you have determined how much of your savings are free and clear for investment, you need to think about an investment horizon. If you have saved between $5,000 and $10,000, you need to ask yourself how long you will be able to live without the money you have saved.
Ideally, your investment horizon should span between five to ten years, and it should also coincide with a financial milestone, for example: children heading off to college, taking an unpaid sabbatical, or even contributing towards your own retirement.
Choosing Your Risk Tolerance Level
The reason you should only invest money that you can actually live without is because the world of investing revolves around risk. Some investments are relatively safe while others are about as safe as playing the lottery or spending a weekend in Las Vegas.
Many people think that long-term investments are the only ones that offer relative safety; this used to be the case decades ago, but there is a greater diversit of investments these days. Here are some investment options for you to consider:
Mutual Funds and Exchange-Traded Funds (ETF)
If you would like to see your investment managed by professionals, your best bet is to evaluate various mutual funds and ETFs. When you invest in a mutual fund, you have the strength of millions of dollars from a pool of investors as well as the expertise of managers who want to perform better than the market. If you do not feel comfortable with the minimum investment and maturity requirements of mutual funds, consider building a portfolio of ETFs, which are similar to mutual funds but are traded like stocks. ETFs are often more affordable and flexible, but they are not as closely managed.
Money Market Accounts and CDs
If you would like to have easy access to your money just in case, consider money market accounts or short-term certificates of deposit. These two investment instruments generally offer better returns than traditional savings accounts, and they both offer short-term options in case you need to tap into your investment funds.
Becoming an investor will require you to do some research on the health of the markets. If you trust in the stability of the markets, index funds may be for you. Index funds are professionally in such a way that they keep up with the markets; this feature allows them to be managed at a lower cost than mutual funds. Many index funds can also be accessed via their ETF versions; however, they may result in a higher tax bill if you trade them too often.