Investing Basics Made Simple
You’ve probably heard, “Start saving for college as soon as possible.”
Easier said than done, right? Life is full of things you should do. It’s understandably intimidating to start saving for something when you don’t have a clue how you should go about doing it. However, remember when you first learned how to do something new (cook, waterski, SCUBA dive) — you weren’t perfect at it at first, but you got the hang of it over time?
The hardest part is getting started. Keep these tips in mind:
- It doesn’t have to be complicated. (It really doesn’t!)
- You can choose the right portfolio based on your time horizon — in other words, you can choose the right investments based on your age or amount of time before you need the money.
- You’re exposed to more risk when you invest — but you’re more likely to benefit because there’s potential for more reward.
- It’s easy to get started investing for college with UNest.
So, if you’re just learning to get the hang of waterskiing, what do you learn first? You learn the basics: Put your skis on in the water, tuck your knees up, grab the ski ropes… Go!
Let’s take the same approach to learning how to invest!
What is Investing?
First, let’s go over the difference between investing and saving.
- Saving: Saving (stuffing your money into a savings account or under your mattress) doesn’t involve risk and you encounter a lower potential for growth. Saving is excellent for short-term goals and your money is accessible.
- Investing: Investing involves purchasing assets you expect to earn a profit from in the future. That could refer to putting your money in stocks and bonds that you believe will rise in value.
Let’s throw one more term in there:
- Trading: Trading means you buy with short-term profits in mind. You buy shares quickly and sell them quickly as well — sometimes within an hour. (You may have heard of the word “day trading” — that’s what this means.)
Types of Investments
It’s likely that you’ve heard about specific investment types — stocks, bonds, mutual funds — but what does each type of investment really mean? Let’s dive in.
A stock is an investment in a specific company. You buy one share of a company’s earnings and assets when you buy a stock. Companies sell shares of stock in their businesses to raise cash. Stocks, while riskier than some investments, can also result in high returns.
- You can sell stocks for profit once the value of the stock goes up.
- Some stocks pay dividends, which means you, the investor, get a portion of the company’s earnings.
When you buy a bond, you lend money to a company or government. Purchasing a bond allows the bond issuer to borrow your money and pay you back with interest.
Bonds offer lower returns but do come with the risk that the bond issuer could default on its payments. (However, bonds are typically very safe investments.)
- Issuers pay investors in regular installments and the total principal is paid off at the bond’s maturity date.
- U.S. government bonds are backed by the “full faith and credit” of the United States, so they’re the least risky bond type.
- State and city government bonds are the next-safest, followed by corporate bonds.
Mutual funds work as a pool of investments — you can purchase a large number of investments in one transaction. You pay a professional manager to invest your money in stocks, bonds or other assets.
- Mutual fund risk depends on the types of assets in the mutual fund. If your mutual fund contains more bonds than stocks, for example, it’ll be more risk averse.
- Mutual funds earn stock dividends or bond interest and distribute a proportion of that to you, the investor.
- Like individual stocks, once the value of the fund increases, you could sell it for a profit.
- You’ll pay an expense ratio to invest in a mutual fund.
An index fund is a type of mutual fund. However, the difference is that an index fund tracks an index. This means you don’t pay a money manager to pick and choose investments for you. All S&P 500 index funds follow the performance of the S&P 500 by holding stock of companies within that index.
- Index funds are usually always less expensive because you’re not paying the middleman (your money manager) to manage the funds.
- Risk depends on the investments within that fund.
- Index funds may earn dividends or interest, just like stocks and mutual funds, which you receive as an investor.
- Also like stocks and mutual funds, once the value of the index increases, you can sell your index fund shares for a profit.
Exchange-traded funds (ETFs) are a type of index fund because they track an index. Like index funds, they are not actively managed. That means they’re cheaper.
The difference between index funds and ETFs is that ETFs trade on an exchange like a stock — you can buy it throughout the trading day as its price fluctuates. Mutual funds and index funds, on the other hand, are priced once at the end of each trading day.
- ETFs may also pay out dividends and interest to you, the investor.
- Just like mutual funds and index funds (and stocks as well), once the value of the ETF goes up, you’ll be able to sell it for a profit.
Certificates of Deposit (CDs)
A certificate of deposit (CD) means you give your bank money that’s “locked up” for a specific amount of time. When that time period is over, you get the amount you originally invested back, in addition to a prespecified amount of interest. The longer the loan period, the higher your interest rate.
- CDs are safe — they’re FDIC-insured up to $250,000, which means that you’d get your money even if your bank closed.
- You must make sure you won’t need the money during the CD’s term because you’ll pay penalties for early withdrawal.
How to Start Investing
We’ve outlined six simple steps you can take to get started investing.
1. Determine Your Goal.
It’s true that it may be a challenge to determine your goal if you’re not sure which direction you’re supposed to take. However, it’s a great idea to think about what you want for your life.
- What are your values?
- Your hopes and ambitions?
- Do you want to own a vacation home on a lake?
- Save for retirement?
- Put your money toward your child’s college education?
Determine those goals and write them down! Writing down your goals — and even taking one small action toward them within 48 hours makes it more likely that you’ll make them happen. For example, if one of your goals is to save for your child’s college education, one small action you can take is to download the UNest app.
2. Figure Out Your Timeline.
How much time do you have to achieve those goals? Take a look at the goals you wrote down, then put a timeframe right next to each goal. It can look something like this:
- Vacation home on Lake Santeetlah: Achieve within the next 15 years
- Save for college: Save as much as possible over 10 years
- Retirement: Plan to retire in 20 years with at least $1 million
Writing out your timeline for each goal you have will help you understand which types of investments to go for.
3. Understand Your Risk Tolerance.
You may have no idea what your risk tolerance is. However, it can kind of be summed up like this. How do you feel when someone suggests you could risk a large portion of your money? Do you get squishy, icky feelings? Or do you think about losing money with a more optimistic mindset — or approach it as a learning experience?
How well you embrace risk will determine your investing method. For example, let’s say you’re extremely risk tolerant and prefer to tackle high-risk investments. You might want to consider stock trading, options trading or forex trading. (Not for the faint of heart.)
Maybe you want more risk but not that much risk. You might opt to invest in stocks — not day trading or scalping. On the other hand, if you’re interested in more conservative investing, you may want to put your money in bonds. If you have zero risk tolerance, you’d put your money in a savings account, CD or money market account.
However, remember that more risk usually equals more reward. You won’t earn much interest on your money and keep up with inflation if you keep it in a savings account or money market fund.
4. Find a Financial Advisor (or Do It Yourself)
It’s possible to get help from a financial advisor, but you can also go the DIY route and open investment accounts with a broker or robo-advisor.
How to Find a Financial Advisor
More comfortable with a financial advisor? Get the best financial advisor for you. Ask around! Check with your family and friends to find the best financial advisor in your area. Make sure your financial advisor will help you achieve your goals. Ask these questions:
- Are you a fiduciary? (Are you obligated to work in my best interest?)
- How do you get paid?
- What are my costs, including taxes?
- What certifications or qualifications do you hold?
- How do you take my risk tolerance, time horizon and other needs into consideration?
- Will we meet often to discuss my portfolio?
- How do you measure success in your clients’ portfolios?
- What brokerage do you use?
You could also find an online broker like Vanguard or Fidelity and hire an advisor through those larger companies.
You may prefer hands-off, automated investing, and if you’re interested in doing your own research or flying solo, certain brokerage accounts gear toward beginning investors, including Robinhood.
5. Choose Diverse Investments.
You always want to have a balance in your portfolio. Just like it isn’t a good idea to eat only ice cream for every meal, you don’t want to invest in just one thing. For example, if you put all your money into one stock, that may not be a good idea. What if the company you buy into gets hit by a pandemic (imagine that!) and folds? You’d lose all your money. That’s why it’s important to diversify your investments — invest in a combination of securities, including bonds, stocks and more. That’s why mutual funds or index funds are so popular. Choose one of those and you’re instantly diversified!
Your brokerage should be able to help you find the right types of investments. Robo-advisors give excellent advice on diversification and risk tolerance because most of them ask you to sign up and describe your risk tolerance. Robo-advisors automatically plug you into diverse investments.
For example, you might opt for a mutual fund that contains a mix of stocks and bonds. That’s perfect diversification.
6. Make it Automatic.
Perhaps one of the most important steps in the investing process is to make everything automatic. That means that you whisk money out of your account so you get used to it — and with any luck, you may not even realize it’s gone. A few automatic investments:
- Retirement accounts (401(k)s, Roth IRAs, SEP IRAs, 403(b)s, etc.)
- Emergency fund accounts — do you have at least six months’ worth of money stashed in a low-risk emergency fund?
- Short-term savings
- College savings through UNest
How Much Money Do You Need to Start Investing?
Many people believe they need money to start investing — but using UNest’s simple college savings calculator, you can start with as little as $25/month.
A broker may have a specific amount you need to contribute to a stock, mutual fund or ETF — take a look at the minimum investment and also take a look at the fees involved.
It’s hard to pin down a specific amount — every broker is different.
Investing for College
Can you invest in stocks for college? Sure! Just like you can invest in regular mutual funds, bonds and more investing options we’ve listed.
However, the advantage of investing with UNest is that you get tax benefits. This means your earnings are tax-deferred and withdrawals are tax-free as long as the money is spent on qualified higher education expenses.
Establish a monthly contribution plan using UNest’s simple college savings calculator, plug in your future goal and choose a monthly amount that’s right for you.
You can easily view the account balance, change contribution plans and manage transactions, all from your mobile phone. It’s a quick win for college savings!
Invest for Your Future — and Your Child’s
“Start saving for college as soon as possible” is great advice — and you can tackle your goals in so many different ways. Determine which path is best for you and your family (don’t forget to consider the tax advantages of investing with UNest!) and get started on your investment journey.
Looking for other convenient ways to invest and save?
I get it, it’s 2020 and we are all looking for ways to make things more convenient. We’re at the height of a digital age and what could be better than having your investments at your fingertips? While UNest is the only app on the market dedicated to helping parents save for their kids futures, there are other apps out there that you may have heard of.
- Robinhood – A website and mobile app allowing people to invest in stocks, exchange-traded funds (ETFs), and cryptocurrency.
- Acorns – A mobile app specializing in micro and robo-investing, offering an automated savings too and financial literacy.
- Stash – A moblie app with a more hands on approach to helping guide your investment decisions. Stash allows access to a banking services as well.
- Public – A mobile app offering a wide array of accessibility to fractional investments.
While each offers their own array of services, none of them offers standalone products for parents, built by parents, with the goal of helping parents quite like UNest.
You’ll be amazed by what you can accomplish.