Recognize this dilemma? You keep hearing the terms 401k or investments or stocks, but you have no idea what these terms actually mean?
Or, worse, you know what these terms mean and know you should be considering your financial health, but you’re not.
Learning how to invest money online can feel overwhelming, but it’s essential for your future! We’re here to provide a straightforward guide to get you on your journey today. We promise you don’t need a ton of money to start, either!
Let’s get to it!
Make Sure You Have an Emergency Fund
Before you start to invest money online, you need to make sure that you have a substantial nest egg.
Investing money inherently requires some risk (as in, you could potentially lose money). As a result, you don’t want to invest money online if you don’t have a cushion to safeguard you in case an emergency happens.
As a general rule of thumb, experts recommend saving 3-6 months of living expenses. If you have children depending on you or you are the sole provider for your family, consider saving up to 12 months.
Set this money aside in a high-yield savings account and DO NOT TOUCH IT! You will be using this money for worst-case scenario events like losing your job or major car repairs.
Determine Your Investing Style
We all have different money styles, and we all have different levels of risk.
You need to consider the following: are you someone who loves to live on the edge and potentially win big? Or, are you someone who likes to play it safe, even if it means less reward? Or, are you somewhere in between?
Are you someone who wants to actively manage your own accounts? Or, do you want a computer (or someone else) to do the work?
Are you interested in trading routinely and staying up-to-date with investing trends? Or, do you want a more laid-back, long-term, hands-off approach to your money?
Not sure? There are many online quizzes you can take to determine your investing style. Or, better yet, consult with an accountant and see if they can help you determine your preferences with you.
It doesn’t really matter what your personal preferences are, but knowing what they are will help you determine how you invest money online.
Assess Your Financial Goals
You can invest money online in several different ways, but it will typically break down into two goals:
Short-term goals: These refer to goals you want to achieve within the next five years. For some, short-term goals may be putting a down payment on a home, paying for college, or planning a trip.
Long-term goals: These refer to goals that you hope to achieve after five years from now. For most, the ultimate long-term goal is saving for retirement. However, it can also be saving up for kids’ college, purchasing real estate, or simply having a substantial inheritance.
Determine the timeline for your goals. In doing this, you will have a better orientation towards how you will invest money online.
Learn the Different Investment Options
There are many different investment options. Here are some of the most common ones:
Bonds: A bond allows a company to borrow your money to finance other debt or take on a business project. These are fixed-income investments and typically garner regular interest payments to investors. In general, bonds are some of the safest forms of investments you can buy.
Stocks: Stocks refer to the individual company shares you purchase (with the hopes that the company will increase in financial value).
Real estate: Although many people associate real estate with buying a home or rental property, there are other financial options available. REITs, for example, represent a form of funding for real estate.
Funds: Funds can be used to purchase a varied collection of stocks, bonds, and funds in one lump fee. These can come in the form of index, mutual, or exchange-traded funds. You can professionally or actively manage funds.
Many people have a mix of different investments, and again, your mix will depend on your risk tolerance and investing style.
For example, if you have the long-term goal of saving for retirement and you intend to retire in 30 years, you’ll probably want a portfolio that mostly contains stocks.
Know the Different Investment Accounts
Just like there are many different investment options, you also can invest money online in many different kinds of accounts.
Here are some of the most common ones:
Many workplaces offer 401k plans to help employees fund their retirements. What’s better? Many companies offer matches to those who contribute (translation- free money!).
Those who own their own businesses may be eligible to open a Solo 401k. You can currently contribute up to $18,000 in your 401k each year.
Once reaching age 59 1/2, you can start withdrawing from your 401k without being subjected to any early withdrawal penalties.
IRA (Roth or Traditional)
Many people contribute to an IRA in addition to or instead of a 401k.
If you open a Roth IRA, you can deduct the taxes on your contributions after tax, and the money will grow tax-free throughout your contribution.
If you open a Traditional IRA, you can deduct the taxes on your contributions, but your retirement withdrawals will be taxed as standard income.
You can currently contribute $5500 for both Traditional and Roth IRA ($6000 if you are over age 50).
Health Savings Account (HSA)
An HSA combines a high deductible health insurance plan with a tax-advantaged savings account.
You can contribute to your account without being subject to federal income tax. Moreover, you can withdraw your funds tax-free when using them for a verified and qualified medical expense.
You can currently contribute $3400 for individuals and $6750 for families to your HSA account.
529 College Savings Plans
College can be expensive, right? Fortunately, the 529 plan option allows for tax advantages when saving for college.
Each state offers its own plan and funding options, and earnings are not subject to federal tax when used for qualified education expenses.
Currently, there are no annual limits on 529 college savings plan investments. You can contribute periodically or deposit large lump sums at a time.
These accounts are the most flexible because they are not designated for a specific reason. However, they also do not carry the same tax-advantages that the previous accounts offer.
Unlike traditional retirement accounts, taxable accounts do not have any rules on contribution limits. You can also withdraw money at any time.
Many financial experts and accountants recommend funding your tax-advantaged accounts (such as your 401k and Roth IRA) before dipping into taxable accounts.
Open Your Investment Account
Today, there is no shortage of investment account options. You will need to choose your provider. In general, you can choose from an online broker or robo-advisor.
An online broker allows you to manage your account individually. You will be responsible for buying and selling your investments. If you are a hands-on, DIY investor, this is the option for you.
If you want to invest money online without the hassle of doing all the work, you can pay a nominal fee for the service and use a robo-adviser. Fees vary, but they will typically range between 0.25% to 0.50% of your portfolio.
Once opening your account, you will need to make your initial deposit. Some companies have minimum limits. Others do not.
Consider Mobile Apps
We’re in the technology age, and many financial companies are turning to apps for ways to invest money online.
Top apps on the market currently include:
With Acorns, you can use your spare change to invest. Every time you make a purchase, acorns rounds it up to the nearest dollar. It deposits the change into your investment account.
This app allows you to buy and sell stocks for free. It’s user-friendly and provides necessary information tools for beginning investors.
With Wealthfront, you receive a risk score and suggested investment portfolio. It will help you invest your money and even show you if you’re on track to meet your specific goals.
Final Thoughts on Ways to Invest Money Online
It can feel overwhelming to learn how to invest money online. With that said, it’s important to take care of your financial health.
Financial freedom is one of the best gifts you can give your present and future self! Get started on your journey today!