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Budgeting for Investment: The Basics

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Investing is often at the bottom of most people’s priorities, as there are far more pressing needs to worry about. For some people, figuring out how to invest is a daunting prospect. For others, it feels too difficult to part with money now that might not be touched for years.

The good news is investing isn’t as difficult as it seems. It’s also possible to do when on a modest budget. All it takes is a little knowledge and discipline.

The sooner you start, the better it is for your long-term future. Getting in at the earliest time possible and continuing to invest over the years will guarantee big returns with very little effort. Here’s how to go about it.

Start at Work

The easiest way to start saving for retirement is if your work offers a 401K with a match. It’s essentially free money that requires tiny effort on your part. Choose how much of your paycheck you want to be deducted, and then your company will throw in a percentage of what you contribute.

The money is deducted automatically from your paycheck, so you can adapt to making slightly less money. Your tax burden is also lowered since the money being invested is pre-taxes.

Most employers work with a fund management company to handle 401Ks, so you might have a few different options of where to put in your money. The easiest thing to do is to pick one of their funds that correspond with your retirement years. It’ll likely have something like 2055, 2060, etc., in the name. These types of funds start off fairly aggressive and then become safer as you near retirement.

This money can’t be touched until you hit retirement age unless you want to play a hefty penalty, so just put the money aside and forget about it.

Set a Goal

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The work 401K is a useful tool, but it’s best to consider other options on top of that. To begin with, think about how much you can afford to set aside knowing you won’t be touching it for a while. Setting up an emergency fund would be prudent as it’ll help you get by without forcing you to dip into your retirement funds.

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An important thing to consider is long-term vs. short-term investment. Just like in other industries, such as construction, long term vs. short term investment weighs heavily on the minds of business owners and consumers alike, as there’s no across-the-board answer. You have to choose your strategy based on your personal situation and finances. If you choose the long term, then it’s best to go with safer stock options. If you’re only putting the money aside for a year or two before moving it on to bigger and better things, you’ll have to do much more research to ensure you’re investing in the right places.

Keep Your Investments Boring

Did you know some of the most brilliant minds in finance are fairly useless when it comes to investing? These smart, well-paid investors can’t compare with the boring index funds that lump all the stocks together. In a famous bet, billionaire investor Warren Buffet showed the S&P 500, an index of 500 large companies, outperformed hedge funds by a significant margin.

This means we don’t need to spend endless hours looking into company’s financials in the hopes of making the right bet. We can just put our money in a boring ETF (exchange traded fund) or mutual fund that takes the entire stock market into account. It’s not as excited as the alternative, but it is a lot safer and smarter.

Get an IRA

Once you’re on firm financial footing and have money to spend, consider opening up an IRA. These retirement accounts allow you to invest up to $5,500 with tax benefits each year. These accounts can be opened online through a number of financial institutions.

The money can be taken out once you hit retirement age, but there are also some exceptions for withdrawal. Medical expenses are one of the allowed reasons to withdraw, as is taking out money to help pay for your first home.

Both Roth IRAs and Traditional IRAs are great supplements to your employer’s 401K. If you don’t have a 401K at all, then an IRA is a decent alternative, providing you’re able to contribute to it.

You’ll have to choose how to invest your money. A safe bet is to choose one of those boring ETFs or mutual funds that are either based on your projected retirement age or take a large swath of the stock market into account, like the S&P 500.

Ask Questions

If you’re ever confused or uncertain, don’t hesitate to ask advice. Do research online, ask knowledgeable friends and don’t feel bad about having to ask the most basic questions. There are endless resources out there, so do a little research and see what’s out there before taking the plunge and actually spending some of your money. There’s no rush to begin investing when you’re starting off, but the sooner you start, the better.

If you would like to know how to make your investments more efficient, contact Orbex!

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