Many people imagine investments are something reserved for the rich. There is a belief that you need a lot of money to grow wealth, but this isn’t the case. Disposable income is a privilege, but you can spare a little money to invest if you have any income.
Why should you invest?
Within the current economic climate, it seems more logical to save rather than invest. You may be stuck in a cycle of debts, taking small loans to repay debts and survive. Whenever you may make any extra income, you redirect it to paying debts, buying essentials or setting up an emergency fund. However, you can use a little money to create wealth for yourself where possible.
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Starting an investing journey with a low income or just when getting into the job market is daunting. You also need sure bets because you can’t afford to lose any money. What’s important is finding safe investments that you can make a habit of and grow a nest egg.
What you should consider before investing
You need to determine your goals before beginning your investment journey. Are you saving for retirement or to become a homeowner? Figuring out if your goals are short or long-term. If you’re saving for retirement, a low-risk investment like money market funds is best for you. If you want to go on holiday, saving may be a better option. You can also get the way forward by attending free investment advice seminars to know what to do as a beginner.
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Your risk tolerance is also something to consider. If you aren’t averse to some risks, you can opt for stocks rather than a high-yield savings account. When you’ve made some money, you can diversify your investment portfolio and invest in more options.
Best investments for beginners
1. Certificates of Deposit
This savings account offers a higher annual percentage yield than a regular savings account. With a CD, you deposit a lump sum of funds for an agreed time frame with your banking provider. You can’t access the funds unless under a penalty. Once the CD matures, you can withdraw the amount or deposit the money into a new CD. They can last between half a year and 5 years. The longer the term, the higher the yield.
Pros and Cons Of Certificate Of Deposit Accounts
2. Mutual funds
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This is a group of investments you buy a share of, and then a manager decides where to invest. This helps you diversify your investment portfolio. When you’re younger and without many dependents, such as children, you may opt for higher-risk investments such as stocks, but when closer to retirement age, you may prefer low-risk investments such as bonds. Mutual funds help you grow enough investments that morph depending on your needs and the risks you’re willing to take as you grow older.
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3. Money Market Funds
Banking institutions offer these accounts where you can invest with minimal starting funds. It’s managed by a professional money manager who invests your money in the MMF. The money is placed in different asset classes. You can also get a debit card or a chequebook against an MMF account. The yields are usually higher than a traditional savings account.
4. High-yield savings account
This is a perfect opportunity to invest your money if you want a no-risk option. HYSAs offer higher returns than regular savings accounts. It gives you limited access to your account. Some banks have access capped at four times a year. HYSAs enable you to have limited gains on your money without the risks of investing.
The best foot forward is to look for multiple options. Check which banks offer the most minimal annual fees and the lowest minimum balance for a suitable HYSA.
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5. Retirement funds
Some companies offer retirement and pension plans as part of their benefits. If it’s an option for your company, ensure you sign up for it. Some retirement plans are taxed when you finally collect your pension, while others are taxed during every deposit made by your company. In such instances, you won’t owe taxes when you reach retirement age. In other plans, your employer matches what you contribute to your pension yearly.
You can make direct deposits to the pension plan if you’re self-employed. Usually, these have lower deposits than those of employed workers.
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6. Index funds
These are similar to mutual funds, but instead, the money is invested in a specific market index. An index fund finds stocks to invest in within a specific market index, like the 500 best-performing companies within a country’s stock exchange. Different brokerage firms offer various perks, with some enabling you to earn money just by opening an index fund account.
This is a Savings and Credit Cooperative Organisation where members volunteer to join and pool their savings. Most SACCOs are formed to lift people out of poverty. They allow more autonomy and independence for members compared to other financial institutions. Each SACCO has a committee to oversee the running of the organisation and members get to democratically vote on what the SACCO should do. They usually have a minimum fee that members contribute periodically to enable to SACCO to invest or run a company. Some cooperatives are formed from people within the same industry such as dairy farming, transport or teaching.
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Some insurance policies can help people grow wealth. For example, life insurance, which is a policy paid out to beneficiaries upon the death of the policyholder, can assist families pay debts and survive better. There are different types of life insurance policies. Term life insurance is the most affordable option. The other policies are whole life and endowment insurance. Term life offers coverage for a set period of time while whole life offers coverage for an entire life until the death of the policyholder. Endowment life insurance helps you save money for a specific goal with a death benefit added to the policy. Life insurance premiums are also usually tax-deductible and death benefits are tax-free.
You can also consider insurance pension plans which are long-term plans where you can accrue money that you then claim upon retirement. Some insurance companies offer also offer friendly investment rates and an opportunity to grow capital.
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