Maybe you just landed your first full-time job. Or maybe you’re finally ready to cross it off your to-do list. Whatever your reason, here’s how to start investing to build wealth.
Investing is an essential part of any financial plan that aims to build your wealth. And if you haven’t begun investing yet, the best time to start exploring it is now.
An investment is a long-term strategy that will compound over time. It can help build your wealth and set you up for life’s major financial moments, such as buying a home or retiring.
Before you get started, it pays to reflect on what you’d like to get out of investing your money. Whatever your goal is, there are investment tools to help you.
What to consider before investing your money
Investing brings risks as well as potential rewards, so the first thing to do is check in on your financial situation. If you answer “no” to any of these questions, address them before you start investing.
- Do you have an emergency fund in place?Your emergency fund should be enough to cover three to six months of your living expenses.
- Have you paid down any high-interest debt?High-interest debt can include credit card debt and personal loans.
- Do you have extra money after you pay your expenses each month?There’s risk to investing your money, and it’s a long-term strategy, so be sure you could live without the amount of money you plan to invest.
Build an investment strategy that works for you
Investing to build wealth isn’t a one-size-fits-all activity. How you approach investing depends on a variety of factors, including your risk tolerance, your investment goals and even your values. For example, if you’re investing to build a nest egg for retirement, your time horizon will be longer than if you’re investing your money to save for a down payment on a home.
How to determine your risk tolerance
Why you should start investing as early as you can
The earlier you start investing, the more time you’ll have to take advantage of the power of compounding growth to build wealth. Compound growth is when you earn money on the growth (or interest) you earned previously, and you don’t have to lift a finger.
Compounding explained
Discover your investment options
Now let’s review your investment options, each with its own growth, risk and diversification considerations. We’ll also look at the different ways of investing your money, whether that’s mostly on your own or through a financial professional.
Retirement accounts vs. non-retirement accounts
Depending on your investment goals, you can choose from a range of investment account types. Diversifying your investment accounts may help reduce the amount of taxes you’ll have to pay over time. (Learn more about this here.)
- Retirement accountsinclude 401(k)s and individual retirement accounts (IRAs), including traditional and Roth IRAs.
The difference between a 401(k) and an IRA - Non-retirement accountsinclude 529 savings plans, health savings accounts (HSAs) and brokerage accounts.
Guide to non-retirement investment accounts
The different types of investment vehicles
Depending on your investing strategy, there are several investment vehicles to choose from that can help you build wealth. A portfolio with a diversified asset allocation—one that invests in a range of investment vehicles—helps you spread out and manage overall portfolio risk.
Some commonly used investment vehicles include:
- Stocks:A share of ownership in a company. These are also called equities.
- Bonds:A loan that you make to an entity, such as a government or corporation. Types of bonds include corporate, high-yield, municipal and mortgage.
- Mutual fund:A pool of money from many investors that is used to invest in securities. Types of mutual funds include equity funds, fixed-income funds and money market funds.
- Exchange-traded fund (ETF):A type of security that tracks a stock market index, a specific sector or a commodity.
- Real assets:An investment in something tangible, such as real estate, commodities, land and precious metals.
Why your portfolio should have diversified assets—and risks
Choose how to invest your money
Finally, how you invest will look different based on your investing aptitude and your comfort level with technology. Of the options listed below, each has different requirements as far as how much you need to invest to get started:
- Self-directed investingusing mobile apps.
- A robo-advisorthat uses algorithms and a degree of human direction.
- Working directly with a financial professional.
How to start investing now with any amount
Learn how to maintain your investments to build long-term wealth
In most cases, investing isn’t a set-it-and-forget-it activity. Your portfolio may take some work to maintain, such as if it requires further diversification or if the market changes significantly. Or you may experience a major change in your lifestyle that justifies an adjustment to your portfolio.
Dealing with market volatility
You’ve probably seen these words before: Investments can go down as well as up. Market volatility is a fact of life, so keep in mind that you’re in it for the long haul. A financial professional can be a good sounding board in rocky situations. They can give you a clear perspective and help you understand your options.
How to handle market volatility
Understanding how inflation affects your investments
Most people understand that inflation increases the price of their groceries or decreases the value of the dollar in their wallet. But inflation affects all areas of the economy—and over time, it can eat into your investment returns.
The effects of inflation on investments
Adapting your investment strategy to life events
Even if you prefer to be a hands-off investor, there are times when you’ll need to play an active role in realigning your assets to build wealth. This is known as portfolio rebalancing. It can be triggered by life events such as:
- Starting a family
- Buying a house
- Receiving an inheritance
- Nearing retirement
When to rebalance your investment portfolio
Quiz: The best investing options for you
Feel ready to begin investing? This quiz, offered by U.S. Bancorp Investments, will give you actionable insights into what type of investing suits your financial goals and preferences.
Take the quiz
