How to Invest: A Beginner’s Guide to Investing in the Stock Market

This ‘Investing for Beginners’ Guide will walk you through, step by step, how to start investing without feeling completely overwhelmed.

Do you want your money to earn you more money?

Well, it can’t do its work hiding in a bank account.

Whether you want to save for your child’s college or prepare for retirement, you’ll reach your goal faster by investing.

Here’s everything you need to know to get started today.

What is Investing?

When you invest, you purchase something with the expectation of profiting off of it in the future.

In the 1990s, some people thought they were making smart “investments” in Beanie Babies and McDonald’s toys. But traditional investments include things like ownership in a business, real estate assets, or lending money to a person or company in exchange for interest payments.

Why Should I Invest?

Merely saving money isn’t enough to build wealth. A bank will keep your money safe. But, each year, inflation makes every dollar you’ve tucked away slightly less valuable. So, a dollar you put in the bank today is worth just a little less tomorrow.

Comparatively, when you invest, your dollars are working to earn you more dollars. And those new dollars work to earn you even more dollars. Which then work to earn you even more. The snowballing force of growth is known as compound growth.

Over the long term, investing allows your assets to grow over and above the rate of inflation. You past savings build on themselves, instead of declining in value as the years pass. This makes it significantly easier to save for long-term goals like retirement.

When Should I Start Investing?

Yesterday. But if you haven’t started yet, today is a great second choice.

In general, you want to start investing as soon as you have a solid financial base in place. This includes having no high-interest debt, an emergency fund in place, and a goal for your investments in mind. Doing so allows you to leave your money invested for the long-term – key for maximum growth – and be confident in your investment choices through the natural ups and downs of the market.

Benefits of Starting Young

Compound growth requires time. The earlier you start investing, the more wealth you can create with fewer dollars.

When it comes to investing, time is your most powerful tool. The longer your money is invested, the longer it has to work to create more money and take advantage of compound growth. It also makes it far less likely that one harsh market downturn will negatively impact your wealth as you’ll have time to leave the money invested and recover its value.

Let’s look at an example:

Since 1928, the average return of the S&P 500 (a set of 500 of the largest public companies in the U.S. that is often used to approximate the stock market) is about 10%.

So, let’s say you’re 25 and put $5,000 in the S&P 500. You see a 10% increase in value each year, letting your money continue to grow. When you turn 65, you open your account to find you have over $226,000. An excellent retirement gift to yourself!

However, if you waited until you were 35 to start investing, your value at 65 would only be $87,000. Still impressive. But less than half of what you would have had if you started a decade earlier.

Pay Off High-Interest Debt First

View paying down high-interest debt as investing until you no longer have those debts. Every dollar towards principal earns you an instant return by eliminating future interest cost.

If you still have high-interest debt, such as credit cards or personal loans, you should hold off on investing. Your money works harder for you by eliminating that pesky interest expense than it does in the market. This is because paying off $1 of debt balance saves you 12%, 14%, or more in future interest expense. More than traditional investments can be expected to return.

Focus on getting out of debt as fast as you can, then dive into investing.

Have an Emergency Fund in Place

To reduce the risk of having to pull money out of your investments early, have an emergency fund to protect from life’s unexpected twists and turns.

Remember how we said time is the most powerful tool? To start investing, you have to be set up to let that money stay invested. Otherwise, you limit your time horizon and could force yourself to withdraw your money at the wrong time.

To protect yourself from unexpected expenses or job layoffs, save a sufficient emergency fund for your needs. Do not plan for your investment accounts to be a regular source of cash.

Starting Small is Okay

Sometimes people think they can’t start investing until they have a significant amount of money. But this means many people give up years of compound growth waiting until they feel rich enough. No matter how small, get your money working for you as soon as possible.

Consider our previous example of the $5,000 invested at 25- or 35-years-old. Pretend for a moment the 35-year-old didn’t have $5,000 to invest at age 25. But she did have $500. And she thought, maybe, she could scrape together $50 a month to add to her $500 investment.

If she invested $500 at age 25, and then $50 a month until she had put away a total of $5,000, she would have almost $174,000 at retirement age. Double what she would have had if she waited until she had $5,000 at age 35.

Starting small makes a significant difference, especially if it means you get in the market sooner.

Investing 101: Basic Investing Terms

The number one thing that scares off new investors is the jargon. The investment market has a ton of jargon. So, we’re going to give you the inside scoop to make it less intimidating.

What is a Stock?

A stock, also known as a “share,” is a tiny ownership stake in a business. Public companies allow anyone to buy or sell ownership shares of their business on exchanges.

If you own a stock, you are actually a part owner of the company. Go you! While owning a share of Walmart won’t give you the power to fire the slow cashier at your local store, you do have some rights. You can, for instance, vote on members of the Board of Directors.

What is a Bond?

A bond is debt of a corporation, municipality, or country.

By purchasing a bond, you are loaning money to one of these entities. For companies, bonds are typically segmented into $1,000 increments that pay interest every six months, with the full value paid back at “maturity,” i.e., the date the debt is due. Government bonds are typically known as “treasuries.”

What is a Portfolio?

How to Invest portfolio

A portfolio is a collection of all your investments held by a particular broker or investment provider. You may own some individual stocks, bonds, or ETFs. Everything in your account would be your portfolio.

However, your portfolio can also mean all your investments across all account types, as this gives a better picture of your entire exposure.

What Does Diversification Mean?

Just like you wouldn’t invest all your money in your friend’s idea for a pumpkin-spiced toothpaste business, you don’t want to only invest in one stock or bond. Diversification means owning a variety of different investments, so your success or failure isn’t dependent on just one thing.

To be properly diversified, you want to make sure your investments actually have variety. Owning three different clothing companies still means you’re facing all the same risks. An import tax on cotton products, for example, could crush the value of all three companies at once.

What is Asset Allocation?

There are three main asset classes for most investors: stocks, bonds, and cash. Asset allocation is how you split your investments across those three buckets.

Stocks offer greater long-term returns, but significantly greater swings in value. These swings, sometimes north of 20% up or down in a given year, can be a lot to stomach. Bonds are safer but provide lower returns in exchange for that security.

You determine your asset allocation by considering the length of time until you need your money, your risk tolerance, and goals.

What are ETFs?

ETFs, or exchange-traded funds, allow you to buy small pieces of many investments in one security.

An ETF is a fund that holds numerous stocks, bonds, or commodities. The fund is then divided into shares which are sold to investors in the public market.

ETFs are an attractive investment option because they offer low fees, instant diversification, and have the liquidity of a stock (they are easy to buy and sell fast). Buying a stock or bond ETF gives you access to numerous investments, all held within that ETF.

Stock Funds

A stock ETF often tracks an index, such as the S&P 500. When you buy a stock ETF, you are purchasing a full portfolio of tiny pieces of all the stocks in the index, weighted for their size in that index.

For instance, if you purchased an S&P 500 ETF, you are only buying one “thing”. However, that ETF owns stock of all 500 companies in the S&P, meaning you effectively own small pieces of all 500 companies. Your investment would grow, or decline, with the S&P, and you would earn dividends based on your share of the dividend payouts from all 500 companies.

Bond Funds

A bond ETF owns a basket of bonds, often tracking an index, just like the stock ETFs.

These funds could own a mixture of government bonds, high-rated corporate bonds, and foreign bonds. The most significant difference between holding an individual bond and a bond ETF is when you are paid interest. Bonds only make interest payments every six months. But bond ETFs make payments every month, as all the bonds the fund owns may pay interest at different times of the year.

Types of Investment Accounts

If you’re ready to buy stocks, bonds, or ETFs, you may be wondering where these types of investments are held.

There are a few different types of accounts in which you can hold investments. But they can’t live in your standard bank account. Here are your options.

Retirement Accounts

Saving for retirement is most people’s biggest long-term goal. With the average person retiring at 62, either by choice or due to layoffs and health issues, most Americans face 20 years or more of retirement in which they need assets to support themselves.

To help you prepare for this massive goal, the government offers tax incentives. However, if you invest in these accounts, your access to your funds is limited until 59 ½. In some cases, there are penalties for withdrawing your money earlier.

Here are the type of accounts that offer tax savings.

Employer-Sponsored Accounts

Employer-sponsored retirement accounts such as 401(K)s, 403(B)s, 457s, and more, allow employees to save for retirement directly from their paycheck. Some employers offer contribution matches as a perk to double-down on your retirement preparation.

Typically, you put “pre-tax” money into these accounts, which means you don’t pay income tax on those dollars. Any money invested grows without tax until you ultimately withdraw it for living expenses in retirement. As you withdraw funds, you will pay income tax on the withdrawals. However, most people are in a lower tax bracket in retirement so pay lower rates.

As of 2019, you can contribute up to $19,000 in a given year to one of these accounts, not including any employer contribution. If you are 50 years or older, you can contribute up to $24,500 a year.

Traditional vs. Roth IRA

If you don’t have access to an employer-sponsored retirement account or have already maxed out your contribution, you can also open an Individual Retirement Account (IRA) to invest.

There are two types of IRAs: Traditional and Roth.

A Traditional IRA works the same way as employer-sponsored plans when it comes to taxes. Any money contributed will be treated as “pre-tax” and reduce your taxable income for that year.

A Roth IRA, on the other hand, is funded with post-tax dollars. This means you’ve already paid your income tax, so when you withdraw it in retirement, you don’t pay income or capital gains tax. The money is all yours. Roth IRAs offer excellent tax benefits but are only available to certain income levels. If you make more than $135,000 a year as a single filer or over $199,000 as a married filer, you aren’t eligible for a Roth IRA.

As of 2019, you can contribute up to $6,000 per year to an IRA. If you are 50 years or older, you can contribute up to $6,500 a year.

Related: Traditional vs. Roth IRA: Which One is Better For Me? 

529 College Savings Plans

These accounts, offered by each state, provide tax benefits for parents saving for college. Operating like a Roth IRA, contributions are made post-tax, but all withdrawals are tax-free as long as the funds are used for higher-education expenses.

Your state may offer tax benefits or contribution matches for investing in your local 529 plan, but you can utilize any state’s 529. Since each state has different fees and investment options, be sure to find the best 529 for your money.

Brokerage Accounts

Brokerage accounts offer no tax benefits for investing but operate more like a standard bank account to hold your investments. There are no limits on annual contributions to these accounts, and you can access your money at any time.

Cash or Cash Equivalents

Since investing should only be undertaken for the long-term, you may need to hold onto cash while saving for shorter-term goals. In that case, a traditional bank account might not do the trick. Checking and savings accounts offer incredibly low interest rates, if any at all, which means you are entirely at the mercy of inflation.

Luckily, there are cash accounts that pay higher interest:

A CD, or Certificate of Deposit, is a savings account that restricts access to your cash for a specified period (6 months, 12 months, 24 months, etc.). There is a small penalty if you want to withdraw your money before the term is up, but these accounts typically offer a higher interest rate in exchange for the lack of access.

High-yield online savings accounts are the middle ground between CDs and traditional savings accounts. They pay higher interest than a conventional savings account but still allow a few transactions a month so you can access your cash if you need it. Many online high yield savings accounts have no deposit minimums or fees.

Money market accounts are very similar to high yield savings accounts, but with slightly higher interest rates and higher deposit requirements. For instance, CIT Bank’s money market account offers a 1.85% interest rate but requires a $100 minimum deposit.

In any of these accounts, your cash deposited is not at risk. FDIC insurance guarantees you your money back, even if the bank that holds your account goes bankrupt.

Related: 10 Best Online Savings Accounts with High Interest Rates

Where to Focus First

When first starting to invest, it can be hard to choose between the multiple types of investment accounts. As you begin, remember to focus where you see the most value.

First, contribute enough to your employer-sponsored retirement plan to get the full value of any match the company offers. This is free money and an instant return on your investment. If you aren’t sure if your employer offers a contribution match, reach out to HR for the most up-to-date policies.

Second, max out contribution limits on your tax-advantaged accounts – if you are primarily saving for retirement or a child’s college. The tax benefits in these accounts save you money that you don’t want to turn over to Uncle Sam unnecessarily.

Finally, invest any excess capital in brokerage accounts. This will help you save for long-term goals like buying that vacation house in ten years.

Note: The above assumes that you have paid off all high-interest debt and have a solid budget in place. If you haven’t done those things yet, get them squared away before you start investing.

7 Golden Rules for Investing Money

You may be a rookie investor, but that doesn’t mean you need to make costly rookie mistakes. Follow these seven golden rules and you’ll be on the path to success.

Click here to see the whole infographic.

1. Play the Long Game

Never invest for the short-term. The market moves up and down in natural cycles that can’t be timed. Investing for less than three to five years doesn’t give you enough time to rebuild asset value if you hit a downturn at the wrong time.

2. Don’t Put All Your Eggs in One Basket

Don’t put too much of your money in any one stock or bond where one issue could destroy your wealth. Diversify with low-cost, index ETFs and avoid stock picking.

3. Make Investing a Monthly Habit

Despite headlines continually calling a market top or bottom, no one can accurately determine where we are in the cycle at any given time. The best way to guarantee that you buy at the right times is to make investing a monthly habit. Invest each and every month, regardless of headlines or market performance.

4. Invest Only What You Can Afford to Lose

Investing is risky. While the long-term trend has historically been upwards, there are also years of deep declines. If you need money in the near-term, or the thought of seeing your account balance drop 20% makes you sick to your stomach, don’t invest those funds.

5. Don’t Check Your Portfolio Everyday

Investing is the one place where a “head in the sand” strategy might be the smartest method. Set up auto deposits into your investment accounts each month and only look at your portfolio once every three to six months. This reduces the likelihood of panic selling when the market falls or piling in more money when everything seems like rainbows and butterflies.

6. Keep Your Fees Low

Mutual funds and ETFs have expense ratios. Many brokerages charge trading fees. And investment providers from financial advisors to robo-advisors charge management fees. All these fees eat away at your wealth over time.

Sticking to index funds and ETFs keeps your fees low while guaranteeing you see the performance of the market so that you can keep more money in your pocket.

7. Listen to Warren Buffet’s Investing Advice

Warren Buffett is possibly the most famous investor in history. He’s created a multi-billion-dollar net worth in just one generation. Learn from his advice to invest for your own future.

“Someone is sitting in the shade today because someone planted a tree a long time ago.”

“I never invest in anything I don’t understand.”

“If you don’t find a way to make money while you sleep, you will work until you die.”

“The stock market is a device for transferring money from the impatient to the patient.”

“It is not necessary to do extraordinary things to get extraordinary results.”

How to Start Investing Today

An easy way to start investing today from your phone or laptop is by opening an account with Acorns.

Acorns is a micro-investing app ideal for beginner investors. The basic plan, Acorns Invest, starts at just $1/month with a free $10 sign-up bonus for new users.

When you make a purchase with a linked debit or credit card, Acorns rounds up to the nearest dollar and invests your spare change. You can boost your Round-Ups by 2x, 5x, or 10x.

In addition to Round-Ups, you can set up recurring daily, weekly, or monthly investments to your Acorns portfolio. Their Found Money service will also find cashback opportunities from 200+ partners and automatically invest your savings when you make a purchase.

It only takes a few minutes to set up an account. Once you complete your profile, Acorns suggests one of their five portfolio options based on the information you provided. However, you have the option to override their suggestion if you prefer a portfolio with more or less risk.

The platform automatically rebalances your portfolio and reinvests all dividend payments to continue growing your investments.

Acorns is a smart option for hands-off investors and those just getting started. As your account grows, the $1-3 monthly fee stays the same, effectively making the service cheaper over time.

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What is a Financial Plan and How Do You Make One?

What is a Financial Plan and How Do You Make One?

Chances are you have some goals you’d like to tick off in your lifetime.

Maybe you want to visit three dozen countries, buy a house, retire by the time you’re 55, or start a family and send your children off to college.

Chances are also good that you won’t be able to achieve those goals — unless you have a plan. Specifically, a financial plan.

A financial plan is a document that allows you to map out the life you want and how to get there.

It sounds complicated, but don’t worry. We’ll break it down so you know exactly what to expect when making your own financial plan.

The Benefits of Creating a Financial Plan

A recent study by CapitalOne found that half of Americans don’t have a long-term financial plan. Not having a plan to reach your goals is like taking a road trip without a map and hoping you reach your destination.

The biggest benefit of a financial plan is that it provides actionable steps to achieve what you want out of life. It’s up to you to put in the work, but that’s easier when the steps are laid out in front of you.

Financial plans also allow you to examine where you’re at and what you can work to improve. If you don’t have enough money saved for retirement, a financial plan can identify this. Then you can take steps to address the problem before you hit retirement age.

What is a Financial Plan?

At its core, a financial plan is just a document that outlines your goals and how to eventually afford them.

“A financial plan is going to look different depending on what financial planner you work with,” said Katrina Welker, a Certified Financial Planner™ (CFP®) with Rooted Planning Group. “At one firm, we printed a 30-50 page report that was bound and presented to clients. I found this overwhelming for many people.”

As a result, Welker now uses a more streamlined online interface with clients. The interface is also interactive, so clients can see how small changes have big effects on their future goals.

What Does a Financial Plan Include?

According to Patrick Logue, a CFP® with Prudent Financial Planning and an Adjunct Professor who trains other CFP®s at Boston University, every financial plan should include some of the following.

1. Financial Health

This section should provide an overview of your current standing. It may include details like your net worth (your total assets minus your total debt), your budget, and your cash flow.

2. Risk

This section outlines the hidden dangers that could prevent you from reaching your goals, and what you can do to protect yourself against them. In other words, insurance, including life, disability, health, renters, homeowners, and any other kind of coverage you might need.

3. Investments

According to Logue, “This section would dive into portfolio performance and topics such as risk, reward, correlation, stress tests, taxation issues, investment options, risk tolerance, portfolio risk score, and risk needed to reach goals score.”

4. Retirement

Although similar to the investing section, here we take a deeper dive into your retirement planning. Are you saving enough to reach your retirement spending goals? How much do you need to retire? What are the best accounts to save in order to minimize your tax bill? Should you roll over your 401(k) to an IRA?

5. Taxes

You may not realize it, but a large chunk of your income goes towards your tax bill before any money enters your bank account. Financial planners use this section to shrink your tax burden so you have more money left over to reach your goals.

6. Estate Planning

It’s a bit morbid to think about end-of-life planning and what happens to your assets after you die, but doing so now can save a lot of heartache in the future.

“Estate planning documents must be drawn up by legal professionals,” says Logue, “but financial planners can help quarterback the process.”

7. Education Planning

Are you planning on returning to school to change careers, or do you want to send your kids to school so they graduate debt-free? If so, you’ll need to start planning now. That’s where this section comes in handy.

Financial Plan

5 Steps for Creating a Financial Plan

Ready to get started with your own financial plan? Here’s how to do it.

1. Find a CFP®

It’s possible to DIY your financial plan, but there are advantages to hiring a professional if can afford it. A CFP® can guide you through this entire process and provide you with an objective analysis of how likely you are to reach your goals. They can also advise you in creative and technical ways a layperson might not think of.

It’s easy to forget all the little things, like having a power of attorney and designating your beneficiaries. A financial planner can help you remember. Working with a financial planner also means you’re more likely to follow through with the plan since you’ve already invested money into it. A CFP® can help hold you accountable for the duration of your financial journey.

Not sure where to begin? See how to find a financial advisor that meets your needs.

2. Gather Your Information

You’ll need a complete picture of your entire financial situation in order to create a solid plan. This includes documenting:

  • Your current monthly cash flow and budget
  • Your current retirement savings, allocations, monthly contributions, and plans available to you
  • The amounts and premiums of any insurance plans you have
  • The beneficiaries of all your accounts
  • Other relevant financial documents

You need to look at every little piece of information because these are the tools you have to work with — and the obstacles you’ll face along the way. Spend some time detailing the whole picture.

3. Decide on Your Goals

Now for the fun part. What do you want to do in your lifetime?

At what age would you like to retire? Do you plan to pay for your children’s education? What type of legacy do you want to leave for your loved ones?

Taking the time to sit and really think about which goals are most important to you is key to the process. You’re basically picking out the destination you’re heading to on a map.

4. Evaluate Your Financial Situation

Here’s the moment of truth. You have your end destination in mind, and you know what tools you have available to get there. So is it enough? If not, what will it take to get there? What changes do you need to make in order to reach your goals? Or do you need to adjust the goals themselves?

This part of the process involves a lot of number crunching. You need to take stock of, among other things, when you want to retire, how much you want to live off during your retirement years, how much money you’re currently saving, and how much you have invested to see if you’ll be able to reach your goals.

This is where having a financial planner can make all the difference. They’ll be able to crunch all the numbers with complex tools you might not have available to you. They’ll also be able to show you whether or not you’re heading in the right direction.

5. Stick to the Plan

This is where the rubber meets the road. Now that you know where you’re heading and how to get there, it’s time to actually put the plan into place.

For example, you’ll need to make sure you follow your budget. You’ll also need to make appointments with other financial professionals, such as attorneys, investment brokers, insurance brokers, and your employer’s HR department to fully implement the plan.

Financial Plan FAQs

Beyond creating your financial plan, remember to consult an expert for assistance and check in on your progress regularly.

Do I need a financial planner to make a financial plan?

There are many advantages to working with a financial planner. The only disadvantage is cost, which can be prohibitive for some people.

For the best results, find a fee-only financial planner with a CFP® designation. That way you know they’ve received the right training and aren’t working on commission, so they’re far less likely to try and sell you products you don’t need.

How often should I make a financial plan?

You may only need to “make” your financial plan once. After that, it’s a good idea to check in at regular intervals as circumstances change. For example, if you start a family, get a new job, or decide to switch up your financial goals, you’ll need to tweak your plan.

“I encourage you to look at your plan at least annually,” said Welker. “We have clients we meet with quarterly to stay on top of changing situations and to make sure we have time to look at different topics throughout the year.”

What’s the difference between a budget and a financial plan?

A budget is a plan for spending your money each month. A financial plan is more comprehensive and provides a road map to reach your financial goals.

“If someone just has income and expenses, they can probably get by using Mint or a similar software to help them with their budget,” says Logue. “But, if someone wants to really understand how the decisions they make impact the chance of reaching their financial goals, they could probably benefit from a comprehensive financial plan.”

Why a Financial Plan is a Necessity

If you don’t have any goals in life beyond waking up each morning, going to work, and coming home to sleep, you may not need a financial plan. But most of us have bigger dreams than that, like retiring, saving for a vacation home, or paying for kids to go to college. If you want to make those dreams a reality, a financial plan is the first step.

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How to Find a Financial Advisor That Meets Your Needs

I used to be skeptical of financial advisors.

I figured that as a personal finance writer and self-proclaimed money expert, I knew everything I needed to know about my investments. Everything else, I assumed, was icing on the cake.

But after some friendly chiding from a colleague, I decided to consult with an advisor to make sure I was properly diversified. After an hour in his office, I was already scheduling another appointment for the next quarter.

What I learned in that short meeting has stuck with me ever since – I may be an “expert” in some areas, but there’s a difference between a layman’s knowledge and the expertise of a Certified Financial Planner™.

My advisor was able to point out the blind spots I never knew existed, examine the areas I needed to improve on, and give me a concrete strategy for the future. Since I started working with an advisor, I’ve never been more confident in my portfolio.

If you’re in the market for a good financial advisor, don’t pull the trigger just yet. Here’s what you need to know first.

Table of Contents

  • How to Find a Financial Advisor That’s Right for You
    • 1. Know What You Need from Your Financial Planning Company
    • 2. Understand the Financial Advisor Business Model
    • 3. Hire a Certified Financial Planner™
    • 4. Make a List of Questions
    • 5. Look for a Financial Advisor
  • How to Find a Financial Advisor: Don’t Settle

How to Find a Financial Advisor That’s Right for You

Finding the right financial advisor is about more than shopping for quality service. It’s about establishing a relationship with someone you can trust.

Even if you decide to go with an automated robo advisor, you need to feel like your financial future is safe in their hands. That means knowing what you need, what to look for, and what to avoid.

1. Know What You Need from Your Financial Planning Company

Financial planning companies can help in a few different ways. You can hire a planner from the company on a monthly basis to monitor your accounts and provide feedback if anything changes. Many people go over their accounts with a planner on an annual or a quarterly basis. Think of it as financial spring cleaning.

A financial planning company can be especially helpful if your money situation changes drastically. For example, a 22-year-old who inherits $200,000 when their parent dies should see a planner to determine the best way forward.

How often you need to see a financial planner depends on how comfortable you are with investing and how complicated your financial situation is. Someone who’s interested in learning more about retirement accounts, index funds, and the difference in their IRA vs. 401(k) might not need to see a planner as often as a consumer less interested in investing.

It’s also helpful to find a financial advisor who’s familiar with your particular situation. For example, if you’re divorced, look for a financial planner who specializes in divorces and blended families. They’ll be able to point out particular blind spots that a general financial planner could miss. You might also want an advisor close to your age because they’ll understand your specific concerns in a more personal way.

2. Understand the Financial Advisor Business Model

There are three main ways that advisors get paid: commission-based, fee-based, and fee-only.

Commission-based advisors receive compensation when a client purchases a product based on their recommendation. If you buy an advisor-recommended life insurance policy, they’ll get paid from the life insurance company. Clients don’t pay commission-based advisors directly.

It’s generally best to avoid commission-based advisors because their recommendations, such as annuities and whole life insurance policies, are often costly.

Fee-based advisors can get paid directly from the client, but can also earn a commission if the client buys one of their recommendations. Be cautious of financial planners who earn money based on a commission of any kind. This model encourages planners to pick investments that make them more money, even if they aren’t right for the client.

The most unbiased pay structure for a financial planner is the fee-only model. Fee-only advisors may be paid hourly, as a flat fee, or as a percentage of assets under management (AUM), depending on their business model.

For example, if you invest $1 million with a financial planner who charges 1% AUM, you’d pay $10,000 per year. With a flat-fee financial planner, on the other hand, you may pay a one-time fee of $2,000 for a comprehensive financial plan.

A qualified fee-only planner should give you an estimate of how much they’ll charge beforehand. I’ve paid between $500 to $750 for one financial planning session, where I got specific investment recommendations based on my current accounts.

3. Hire a Certified Financial Planner™

There’s no accreditation needed to refer to yourself as a financial planner or advisor. If you don’t do your research, someone claiming to be a financial planner could swindle you or prescribe products that don’t work for your situation.

The best kind of financial planner is a Certified Financial Planner™ (CFP®). This designation means they’ve passed a complicated exam with topics ranging from insurance to budgeting to taxes. A CFP® also has a fiduciary duty, which means they have to recommend investments and other products that are in the best interest of their client, regardless of whether or not they receive compensation for doing so. This is the highest ethical obligation a financial planner can have.

4. Make a List of Questions

You should always investigate a financial planner before you hand over any money. Here are some good questions to ask:

  • Are you a Certified Financial Planner™?
  • What qualifications do you have?
  • Do you have a fiduciary duty to your clients?
  • How long have you been in business?
  • Do you have any reviews or testimonials?
  • What is your average client like (age, income, etc.)?
  • What kind of situations do you specialize in?
  • How do you charge your clients?

5. Look for a Financial Advisor

There are two main types of financial advisors to consider: robo advisors and human advisors. It’s important to consider which type of advisor is best for you before taking the plunge.

Robo Advisors

If you’re ready to learn how to start investing but not up for the commitment of paying for a full-fledged financial planner, a robo advisor could be your best option.

Robo advisors are financial companies that use tried-and-tested algorithms to provide advice based on a user’s specific financial situation. Most robo advisors charge low fees and have little or no minimum deposit requirement.

Robo advisors pick where you should invest and take care of all the nitty-gritty details. You set up a retirement account directly with a robo advisor and they handle buying the funds. They can even suggest how much you should save for retirement based on your goals, income, and age.

Some robo advisors offer access to human advisors who can answer more specific questions. This is often only available if you have a certain amount of assets invested with the company or if you pay an extra fee.

A robo advisor is a good alternative if you can’t afford a traditional financial planner but still want expert help in picking investments and deciding how much to save for retirement.

3 Robo Advisors to Consider

Blooom is a robo advisor focused on 401(k)s, 403(b)s, and other company-sponsored retirement accounts. Users sync their employer-based retirement accounts and the app suggests what you should be investing in.

Blooom will examine each fund’s fees to minimize those expenses. This robo advisor has two options – a free, simple analysis and a comprehensive plan for $120 a year. To learn more about this robo advisor, check out our Blooom review.

Betterment works with employer-sponsored accounts, IRAs, and taxable brokerage accounts. There is a .25% fee for all accounts and no minimum deposit. You can sync all your external accounts with Betterment and create a Betterment IRA or taxable account. Our Betterment review covers all the details you’ll want to know.

Wealthfront is another well-respected robo advisor. Investors can either open a Wealthfront-based account and allow the app to choose what they invest in or link all their current investment accounts to Wealthfront and allow them to make recommendations. The app chooses low-cost funds to minimize fees. Wealthfront charges a .25% advisory fee for all accounts, and there’s a $500 minimum deposit.

Human Advisors

Finding a human financial planner is easy. Finding a qualified financial planner that you can trust with your money is another story. Here are some networks you can mine to a planner that meets your needs.

XY Planning Network: This network of planners is designed for Generation X and millennials looking for affordable, professional help. All of the advisors listed are fee-only Certified Financial Planners™ who have a fiduciary responsibility to their clients. You can find an advisor based on location or specialty.

National Association of Personal Financial Advisors (NAPFA): Advisors accredited by NAPFA need to have at least three years of experience, be fiduciaries, and be approved by a peer review. NAPFA advisors specialize in areas including LGBT couples and families, professional athletes and entertainers, socially responsible investors, among others.

The Garrett Planning Network: Anyone in this network has to be a Certified Financial Planner™ or working toward their CFP® license, have a fee-only payment structure, and charge on an hourly or retainer basis. You can search for local options or virtual advisors who can do phone or video consultations.

How to Find a good Financial Advisor: Don’t Settle

A financial planner is like a mechanic. Picking the right one can mean the difference between driving your car for 15 years or breaking down on the side of the highway. Don’t settle for a planner who’s condescending, too busy, or seemingly unconcerned with your needs.

If you’re not sure how to choose between a robo advisor and a financial planner, make a list of the pros and cons. You can also try out both to see which experience you prefer.

Remember, the best option is the one you’ll actually do. If you can’t stomach the cost of a financial planner, just use a robo advisor. If human interaction is a priority, pick a financial planner. The important thing is to feel comfortable, confident, and secure in your financial future.

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How Much Should I Invest and Where Should I Invest It for the Greatest Return?

How Much Should I Invest

“How much should I invest and where should I invest it?”

The question may be straightforward, but the answer isn’t quite so cut and dry. How much any person or family should invest depends on several factors, including their income, goals, and current financial stability.

However, there are some good practices for investing that you can work to implement regardless of your budget.

Should I be investing 10% of my income?

Many experts say that a good rule of thumb is to invest 10-15% of what you earn. While that’s a great starting point, personal finance is never as simple as a one-size-fits-all formula.

New investors often wonder about the balance between saving vs. investing, asking questions like “How much of my savings should I invest? Should I invest all my money, or should I split my excess income between savings and investments?”

In order to answer those questions, we first have to look at the differences between saving and investing.

Savings Account Investment Account
Typically lower return Money is liquid, meaning it can be withdrawn at any time without tax penalties or fees. Much higher potential return Less liquid. Funds in the account may not be available for immediate withdrawal, and there may be taxes or fees incurred if funds are withdrawn before a specific date.

With those differences in mind, your first course of action should be to build up an emergency fund in a traditional savings account. That way, you’ll have money available in case something happens, like your car breaks down or you have to replace the refrigerator in your home.

If you’re paying off high-interest debt, such as credit cards or private loans, then a $1,500 to $3,000 emergency fund is a good place to start. Once you’ve at least paid off your high-interest debt, aim for an emergency fund of 3 to 6 months worth of your living expenses.

How much should I invest in my 401(k)?

How Much Should I Invest

Once you have an emergency fund, the next place you should focus your investment efforts is your 401(k). Many employers offer to match employee 401(k) contributions up to a certain percent.

For example, a 2% match means that if you contribute 2% of your salary to your 401(k) account, your employer will throw in an additional 2%. However, if you continue to add to your account, your employer will not match contributions above the set limit.

Say you make $50,000 with a 2% 401(k) match. If you contribute $1,000 to your 401(k) — 2% of your annual salary — your employer will add an additional $1,000. If your current employer offers a 401(k) match, then you’re turning down free money by not contributing to your account.

However much your employer offers to match in 401(k) contributions is the minimum you should invest in that account. If it’s 1% of your salary, then you should be contributing a bare minimum of 1%. If it’s 3%, you should contribute at least 3%.

Employer matching in a 401(k) is literally free money for your future and an immediate 100% return on your investment. If you can’t afford to contribute the maximum amount your employer matches, find places to make cuts in your budget and increase your contributions.

Talk to your boss or the human resources department for details on your company’s 401(k) program.

How much should I invest in stocks and other accounts?

How Much Should I Invest

Once you have an emergency fund and you’re maxing out your employer match for your 401(k), what comes next?

This is where the hard-and-fast rules end. The next step varies depending on your situation, goals, and where you are on your financial journey. There’s no right answer for everyone.

At this point, you might want to consider opening an individual retirement account (IRA). When it comes to IRAs, there are two types to choose from.

A Traditional IRA works much like a company 401(k) in terms of taxes. In other words, you don’t pay taxes on the money you contribute today. You’ll only pay taxes once you withdraw the funds in the future.

A Roth IRA is the opposite. You pay taxes on your contributions today, but then you withdraw money tax-free in the future. This is ideal if you expect to be in a higher income tax bracket later on. Since income tends to increase with age and experience, that’s often the case.

You can open an IRA online or at your local bank in just a few short minutes. Keep in mind, there are limits to how much you can contribute to individual retirement accounts per year. Once you’ve reached this limit, you might want to consider opening a brokerage account and investing in the stock market.

While there’s no one right amount to invest, it can be helpful to set goals in terms of a percentage of your income. For example, let’s say your goal is to invest 10% of your annual salary. If you make $50,000 per year, you would aim for $5,000 towards your investment accounts.

However, you always have the option to increase this number. Once you’re comfortable investing 10% of your income, challenge yourself to invest 13%, then 15%, 20%, and so on. The more you invest now, the faster you’ll reach your financial goals.

How much should I risk with my investments?

The amount of risk you should take depends on your goals, risk tolerance, and investment timeframe.

For example, a 24-year-old who plans to retire at 60 has 36 years to invest. Since they won’t need their money for several decades, they can afford to take on more risk today. On the other hand, someone who is 55 has a much shorter investment timeframe. Therefore, they’ll want to take on less risk in order to protect their money.

Regardless of your age, one of the best ways to protect your investments is to create a diversified portfolio. In other words, you’ll want to own a variety of different types of investments. That way, your success isn’t dependent on just one thing.

For example, you wouldn’t want to invest entirely in software companies because they each face many of the same risks. A swing in the technological landscape could wipe all of your investments off the map.

How Much Should I Invest

A diversified portfolio means investing in companies across a variety of industries.

In addition to the types of investments you choose, you’ll also need to decide how much to invest in each type of asset. The three main asset classes are stocks, bonds, and cash.

Each one comes with its own set of risks and potential returns. Generally speaking, however, greater risk equals greater reward.

If you’re younger and have more time to build up your savings before retirement, you might prefer an asset allocation of 85% stocks and 15% bonds. As you get older, your allocation will likely shift to fewer stocks and more bonds to shield against drops in the market.

Is investing 10% of my income really enough?

Again, the amount you should invest depends on your current financial situation and goals.

Thanks to the snowball effect of compound interest, the earlier you start investing, the less you’ll need to save overall. Saving 10% of your income could be plenty if you start investing early enough. On the other hand, if you waited to invest and are catching up, you may need to save 15% or more in order to reach your goals.

Should I invest monthly or yearly?

Whether you invest monthly or yearly comes down to personal preference. For most people, however, monthly is the better option. That way, you can build investing into your monthly budget.

Investing monthly also gives your money more time to work for you. If you start setting money aside in January, but only invest it once yearly in December, the money you save in January, February, March, and so on won’t earn a return until after December when it’s invested.

The exception is if you plan to receive and invest a lump sum, like a holiday bonus or tax return. Even so, it’s still a good financial practice to build saving into your monthly budget.

How Much Should I Invest? That Depends on You.

Knowing exactly how much to invest can be tricky. Like everything in personal finance, it depends on your budget, goals, and financial situation. The most important takeaway is that it’s never too early to start investing. If you haven’t started already, now is the perfect time.

Even if you can only swing a few dollars a month, you can begin to build a habit that will change the rest of your life.

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