So, you’ve been good about budgeting, got some money set aside in your savings account, and now you’re wondering what to do next. Saving is important, but at a certain point, you need to start thinking longer-term about making your money work for you. It may be time to transition at least some of your funds from basic savings into investments.
Making this shift can definitely feel daunting when you’ve gotten comfortable with your savings strategy. But investing wisely doesn’t have to be complicated, and it opens up more potential to steadily grow your net worth. Here’s a step-by-step guide to smoothly transitioning some of your finances from saving mode into investing mode:
Evaluate Where You Are Now Financially
Before diving into investments, take stock of your whole financial situation since it will impact how aggressive or conservative you want to be with investing.
- Map out your income, expenses, assets, debts, and financial goals. What does your monthly cash flow look like? How much do you have set aside for emergencies versus longer-term goals? Are you contributing enough to retirement funds?
- Ensure you have a robust emergency fund of 3-6 months’ worth of living expenses before investing, as this provides a buffer for unexpected expenses.
- Pay down any high-interest debts first before putting additional money into investing, as debt drains your cash flow.
When you have a clear view of your financial situation, you can decide how much you can afford to start investing while maintaining a healthy level of savings and cash on hand.
Educate Yourself on Investing Basics
Since knowledge is power, spend some time learning investing fundamentals, so you understand how to grow your money wisely. This will make you more confident in your investing strategy.
- Learn about asset allocation and how to diversify your holdings across different securities to balance risk and returns. Target date funds and robo-advisors make diversification easy.
- Understand compound interest and how consistent investing over long timeframes lets even modest upfront investments grow substantially. Time in the markets is generally more advantageous than timing the markets.
- Research active versus passive investment approaches. Passive index funds provide broad market exposure at low costs for hands-off investors.
- Brush up on the types of accounts available, like IRAs, 401ks, HSAs, and taxable brokerages, along with their respective pros and cons.
Equipped with more investing knowledge, you can craft a personalized plan aligned with your risk tolerance and goals.
Start Investing Incrementally
When first getting started with investing, the options can feel overwhelming. Maintain investing momentum by taking it step-by-step:
Contribute to Retirement Accounts First: Take advantage of tax-advantaged space by funding workplace retirement plans and IRAs. Target contributing 10-15% of income.
Open a Taxable Brokerage Account: This gives added flexibility to invest for other goals beyond retirement. Robo-advisors make opening and managing accounts simple.
Assemble a Diverse Low-Cost Index Fund Portfolio: Index funds like those tracking the S&P 500 provide instant diversification. Blend stock index funds with some bond index funds.
Automate Contributions: Set up recurring monthly transfers from your bank account into your investment accounts. Automation keeps money steadily invested over time.
Reinvest Dividends for Compounding: Let the power of compounding amplify your
investment gains by reinvesting all dividends.
Hold Investments Long-Term: Leave invested funds alone for 5+ years for the best growth potential without panic selling in down markets. Time in the market smooths volatility.
Ramping up investments incrementally makes the habit easier to stick with long-term. Investing small sums consistently over the years still leads to great growth.
Reevaluate and Rebalance Your Allocation
As you gain more investing experience, revisit your original asset allocation to see if adjustments are needed.
- Review if your investments remain properly aligned with your risk tolerance as life circumstances evolve. Adjust if needed.
- Rebalance periodically back to target allocations, selling appreciated assets to buy underweight ones. This systematically sells high and buys low.
- Shift to a more conservative asset mix over time. You may want higher-income asset mixes as retirement nears.
Check-in on your portfolio at least annually or when major life events happen to reconfirm or adjust your investment strategy.
Transition Support Accounts to Match Goals
The final step is to align your various savings and investment accounts with specific financial goals, which differ in timeframe. This division of purpose helps customize accounts.
Emergency Fund Savings: Stashing 3-6 months of living expenses in boring old savings accounts may seem silly, with stocks booming all around, but job losses and surprise bills happen. Keep cash for emergencies handy in safe accounts, even if they barely earn interest. You’ll sleep better at night knowing it’s there if needed.
Retirement Investment Accounts: Long-term growth should be the goal for retirement accounts. Unlike emergency cash, your IRA and 401k can ride out stock market ups and downs over decades. Don’t let volatility scare you away from stocks for this money you won’t touch for 30 years or more. Time smoothes out risk.
Shorter-Term Investment Goals: Need some money soon for a house or car? Limit bond risks in these shorter-fuse accounts. Ambitious as your inner day trader may be, play it safe with investments aimed at near-term use. You don’t want an unexpected loss right when you need the cash in hand.
Organizing accounts by goal helps match investing decisions to each one’s unique needs and timeframe.
Conclusion
Shifting some of your finances from pure saving to investing opens the door for your money to grow towards long-range goals rather than just accumulate. But investing is still new territory for many of us not raised learning about markets, compound interest, and building net worth.
By first getting finances in order, learning investing basics, starting small with index funds, and revisiting strategy periodically, steady investing habits become second nature, too. Transitioning at your own pace while asking questions reduces anxiety about investing. Eventually, investing clicks and feels comfortable.
Staying disciplined about regular investing instead of speculation, understanding reasonable returns to expect, focusing on what you can control, and letting time and compounding go to work, sets you up for investing success. Before you know it, you’ve moved from saving to steadily growing your money.
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