Saving money over time is an absolute must for personal finance. However, the accounts in which that money sits can make a difference in the long run. Savings accounts, even high-yield accounts, offer notoriously low rates of return compared to investment accounts. While you should always keep an emergency savings on hand, holding an investment account is an excellent financial decision.
When deciding how much money goes to each account, it’s recommended to follow the 50/30/20 budget rule for your money. Under this mode, 50% of your salary should go to needs, 30% should go to wants, and 20% should be split between savings and investments.
What is Investing?
For starters, investing is the process of buying or selling assets, with the goal being to buy an asset at a lower price and selling it later for a higher price. Stocks, bonds, commodities, and even homes are all examples of investments. In some cases, certain assets may pay dividends, or profits from ownership, that can be reinvested.
When investing money, there is always the risk that you will lose the money you put into an asset. This means you should never invest more money into an asset than you are willing to lose.
Benefits of investing money
- Your money can grow at a higher rate of return in the long run
- You don’t need to be a genius to invest your money
- Very little money is needed to start investing
- Your money can be accessed very easily
Drawbacks of investing money
- Returns are never guaranteed
- It takes a large amount of time for wealth to accumulate
- You could potentially lose all of your money if you don’t invest smart
If you’ve never invested money before, it is recommended that a person reach out to a certified financial professional for investment guidance. Beyond this, be sure to avoid the following most common investing mistakes that affect beginners who are just starting out .
7 Common Investment Pitfalls to Watch Out For
1. Not diversifying investments
Diversification is one of the keys to success when it comes to investing. This refers to the practice of investing in different assets, ideally uncorrelated with each other, so that negative price movements of one do not affect the others. For example, in addition to stocks or bonds, consider evaluating the best crypto index funds available so that you hold multiple asset classes.
2. Chasing trends, rather than following data
If you mainly make your investment decisions by using what you hear on social media or other similar outlets, you likely aren’t going to be successful. By the time any major hype reaches your ears, it’s already too late to capitalize on it in most cases. Look at historical data trends and follow the news for certain assets to try and predict what the price will do.
3. Not researching investments
Half of investing is about researching the investments you are considering ensuring they are reliable. After all, if an investment is based on a product that doesn’t actually exist, it isn’t a good investment. Always research before investing money into a certain asset.
4. Not having clear investment goals
All investors need to have some type of goal in mind when they start putting money into an account. Whether you are a long-term or short-term trader, develop an effective investment strategy right off the bat to increase your chance of success.
5. Relying on social media for investment decisions
As mentioned previously, you should never rely on trends to make your investment decisions. If you see a group on Twitter talking about an investment opportunity, as an example, don’t throw money at it without verifying the investment itself.
6. Waiting to eventually break even
Oftentimes, when investors lose money on an asset they will simply try and wait until it returns to the price, they bought it at to sell. In some cases, though, the price will never return to an abnormal high, especially if that high was due to public hype, and taking the loss by selling will be the best bet.
7. A lack of patience
Investing is a long-term game if you want to achieve the maximum amount of success. Short-term traders often lose more money than they put in because they are attempting to predict the price of complicated assets that show no pattern. Prepare yourself for the long-term, rather than expecting gains to be immediate.
Improve your financial situation today
Only around 50% of adults are invested in the stock market in the United States, which goes to show how few people understand the importance of investing. Consult with a financial professional in your area if you want to get started with investing but have no idea what to do with your first dollar.