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Precious metals have captured the attention of investors for centuries, not only for their alluring beauty but also for their potential as a valuable asset. Whether you’re intrigued by the gleam of gold, the sheen of silver, or the rarity of metals like platinum and palladium, the world of precious metals investing offers a diverse and captivating landscape to explore.
While investing in precious metals may seem intimidating at first, understanding the basics can help you make informed decisions about your investment strategy. From the different types of precious metals available to the various investment vehicles and strategies, this beginner’s guide will provide you with a solid foundation to begin exploring this captivating investment opportunity.
Precious metals have held an allure for thousands of years, treasured not only for their beauty but for their unique physical properties. The high economic value of these metals, coupled with their distinct characteristics, makes them essential in various sectors, including the jewelry industry, electronics, industrial products, and the computer industry.
Gold
Gold is perhaps the most well-known precious metal, treasured by civilizations across history for its malleability, beauty, and resistance to tarnish. Today, gold is not only used in jewelry but also in electronics and other industrial applications due to its excellent conductivity.
Silver
Silver, while less expensive than gold, is highly valued for its unique properties. It has the highest electrical and thermal conductivity of all the elements, making it indispensable in the electronics industry. Silver is also used in solar panels, batteries, and various industrial applications.
Platinum and Palladium
These are part of the platinum group metals, prized for their exceptional resistance to heat, chemical attack, and electrical erosion. They are used extensively in the automotive industry, jewelry making, and numerous industrial applications.
Investing in precious metals provides several potential benefits, making them an enticing addition to any personal finance strategy.
Hedge against Inflation: Precious metals, particularly gold, have been used as a hedge against inflation for centuries. When fiat currencies are losing value due to inflation, gold prices often rise, preserving the purchasing power of the investor’s capital.
Wealth preservation: Precious metals, being tangible assets, have been used for wealth preservation across history. Unlike paper money, physical gold or silver cannot be devalued by government actions or economic downturns, making them a valuable asset in times of economic uncertainty.
Market volatility buffer: Precious metals often move counter to the stock market, making them an ideal investment for mitigating risk during times of turbulence.
Investing in precious metals can provide balance to your portfolio, potentially offering protection and positive performance during periods of economic stress.
There’s more to investing in precious metals than buying gold bars or silver coins. Here are some of the ways you can add precious metals to your portfolio:
Physical Bullion
Physical bullion includes gold and silver coins, bars, and rounds. When you buy physical precious metals, you’re making a direct investment and gaining ownership of a tangible asset. This option appeals to many investors who appreciate the security of holding their wealth in a physical form that has intrinsic value.
However, owning physical metals comes with considerations such as storage and insurance costs. You’ll need to secure your investment either in a home safe or a deposit box at a bank or private facility, each option with its advantages and disadvantages.
Precious Metal ETFs and Mutual Funds
Precious metal exchange-traded funds (ETFs) and mutual funds offer a way to gain exposure to the precious metals market without the need to physically store the metals. These funds typically track the price of a specific metal or a group of metals.
Mining Stocks
By buying shares in a mining company, you’re investing in the operation that extracts the precious metals from the ground. Mining stocks can offer higher potential returns than investing in physical metals or metal-tracking funds, but they also come with greater risk.
These risks include operational risks at the mining site, geopolitical risks in the countries where mines are located, and market risks related to fluctuations in the prices of the underlying metals.
Futures Contracts and Other Financial Instruments
Futures contracts allow you to buy or sell a specific amount of a precious metal at a predetermined price at a set date in the future. These instruments can be used to hedge against price fluctuations or to speculate on future price movements.
Other financial instruments, such as options and certificates, can also be used to invest in precious metals, but these can be complex and are typically recommended for more experienced investors.
Buying and Storing Precious Metals
When it comes to buying precious metals, the process can be as simple as visiting a local coin shop or making a purchase online. However, there are several key factors to consider:
Choosing a Dealer
Reputation is critical when choosing a dealer for your precious metals purchase. Look for businesses with a long track record, positive customer reviews, and a commitment to transparency in their pricing. Keep in mind that while precious metals themselves are not subject to counterfeiting, the products made from them can be, so it’s essential to buy from reputable sources.
Understanding Premiums Over Spot Price
When you buy precious metals, you’ll often pay more than the current market price, or “spot price,” of the metal. This difference is known as the “premium” and covers the dealer’s expenses and profit margin. Premiums can vary depending on the product; for example, a gold bullion coin may have a higher premium than a gold bullion bar of the same weight due to the additional cost of minting the coin.
Buying Process
Depending on the dealer, the buying process may involve placing your order online or over the phone, followed by payment through bank transfer, check, or credit card. Be aware that using a credit card may involve additional fees. After payment, the dealer will ship your precious metals to you, with the shipping method and insurance coverage varying by dealer.
Storage Options
If you’re investing in physical precious metals, you’ll need to consider where to store them. At home, a high-quality safe can provide protection, but it may also make your home a target for thieves. Storing your precious metals in a bank deposit box provides an extra level of security, though access to your metals is limited to the bank’s hours, and the contents of the box may not be insured by the bank.
Private storage facilities, sometimes called private vaults or depositories, offer another option. These facilities offer high-security storage for precious metals, often with 24/7 monitoring, insurance coverage, and the option to visit and inspect your holdings.
Selling Precious Metals
Knowing when and how to sell your precious metals is just as important as knowing how to buy them. Here are a few points to keep in mind:
Timing Your Sale
While there are many theories about the best time to sell precious metals, the reality is that the optimal timing depends on your individual circumstances and financial goals. It can be helpful to set a target price or return percentage at which you’ll sell your metals and to review this strategy regularly based on market conditions and your financial situation.
Finding a Buyer
Most precious metals dealers also buy metals, and selling to a dealer can be a convenient option, particularly if you’re selling a common product like a gold coin. However, dealers will typically offer to buy your metals at below the spot price, as they need to account for their costs and a profit margin when they resell the metals.
Online marketplaces and auction sites can offer another way to sell your metals, potentially allowing you to reach a larger pool of buyers and secure a higher price. However, these platforms also involve fees and potentially longer transaction times.
Tax Implications
In many jurisdictions, selling precious metals can trigger capital gains tax implications. The tax treatment can depend on several factors, including the type of metal, the form of the metal (coin, bar, etc.), how long you’ve held the metal, and your total gain or loss on the sale. It’s essential to consult with a tax professional to understand the potential tax implications of your sale.
Risks and Challenges in Precious Metal Investment
While investing in precious metals can offer several benefits, it also comes with its own unique risks:
Price volatility: Like other commodities, precious metals can experience significant price fluctuations. While these fluctuations can offer the potential for high returns, they can also lead to substantial losses.
Lack of cash flow: Unlike stocks that may pay dividends or bonds that pay interest, precious metals do not generate cash flow. Any return on your investment will come from selling the metal at a higher price than you paid for it.
Storage and insurance costs: If you choose to invest in physical precious metals, you’ll need to consider the costs of storing and insuring your metals. These costs can eat into your returns, particularly if you’re investing a small amount.
Counterfeit products: Although it’s rare, there is a risk of counterfeit products in the precious metals market. This risk can be mitigated by purchasing from reputable dealers and having your metals tested by a professional if you’re unsure of their authenticity.
Despite these challenges, many investors find that the potential benefits of investing in precious metals make them a valuable addition to a diversified investment portfolio.
Precious Metals in Portfolio Diversification
Precious metals can play a key role in a diversified investment portfolio. Their tendency to move independently of other asset classes can provide a buffer against market volatility. While the percentage of precious metals in a portfolio can vary greatly depending on individual investment objectives and risk tolerance, some financial advisors suggest an allocation of between 5-15% towards precious metals.
It’s important to remember that diversification does not ensure a profit or protect against a loss, and past performance of precious metals is not indicative of future results. It’s always a good idea to consult with a financial advisor to help determine the most appropriate asset allocation for your individual circumstances.
Precious Metals and Global Industry
The demand for precious metals extends beyond individual investors and central banks. These metals play a crucial role in various industries globally.
Gold, for instance, is highly valued in the electronics industry for its excellent conductivity and resistance to tarnish. Silver’s unique properties make it indispensable in the production of solar panels, batteries, and various industrial applications. Platinum and palladium are critical in the automotive industry for their use in catalytic converters, helping to reduce harmful emissions.
As technological advancements continue, the industrial demand for precious metals may potentially increase, influencing market prices.
Precious Metals and Retirement
Precious metals can also play a role in retirement planning. Certain types of Individual Retirement Accounts (IRAs) allow for the inclusion of physical precious metals, known as “Gold IRAs” or “Precious Metals IRAs.”
These IRAs can provide a way to gain the potential benefits of precious metals while enjoying the tax advantages of an IRA. However, there are specific rules and regulations regarding which precious metals can be included in these IRAs, and how they must be stored.
Before adding precious metals to a retirement account, it’s important to understand the potential risks and rewards and to consult with a financial advisor and a tax professional.
Final Thoughts
Investing in precious metals can be a valuable part of your overall financial strategy. As with any investment, it’s crucial to do your research, understand your investment objectives, and consider consulting with a financial advisor.
In the ever-evolving world of precious metals, continual learning and staying abreast of market trends is key. While no investment is risk-free, these rare metals, with their rich history and diverse industrial uses, offer unique opportunities for those willing to pursue their lustrous allure.
Whether it’s the glint of gold, the shine of silver, or the rarity of other metals like platinum and palladium, the precious metals market offers a fascinating way to diversify your portfolio. And they can potentially protect against volatile markets and inflation, and invest in a tangible asset with enduring value.
In the end, the choice to invest in precious metals is a personal one. It’s about understanding the market, acknowledging your risk tolerance, and aligning your investment strategy with your financial goals. The key to investing in anything successfully lies in knowledge, diversification, and patience.
No matter your interest rates or cash flow, your retirement account or your credit risk, the world of precious metal offers a robust platform for investment purposes. Remember, past performance is not indicative of future results, and every investment strategy comes with its own unique risks. But with careful planning and wise decision-making, you can make the most of what precious metals have to offer.
Whether you’re buying gold bars, investing in mining companies, tracking the gold industry, or just diversifying your portfolio with a valuable asset, there’s a place for you in the world of precious metals investing.
From gold coins to silver prices, from market volatility to economic uncertainty, the precious metals sector offers a world of opportunities. And as the world continues to evolve, so too will the role of precious metals in our lives and in our portfolios.
Investing in precious metals is not just about protecting against potential economic collapse, but also about participating in the growth and technological advancements of global industries. It’s about owning a piece of history, a tangible asset that has served as a symbol of wealth and power for thousands of years.
So, as you contemplate whether to invest in precious, remember the words of ancient Greek playwright Aristophanes, “Gold bestows honor, gold inspires deeds, gold characterizes the highest.” May your journey into investing in precious metals be a golden one.
Contrary to popular belief, starting an investment portfolio doesn’t require a large sum of money. In fact, with just $500 or less, you can easily kickstart your investment journey in the stock market.
12 Best Ways to Invest $500
If you’re looking for other ways to invest, but don’t have much cash, here are twelve of the best ways to invest $500 or less.
1. Micro-Investing
With micro-investing, even those with limited disposable income can join the game, starting with as little as $5. Ideal for college students or novice investors, there are a multitude of micro-investing apps available, many requiring an initial investment of $500 or less.
These user-friendly platforms offer a simple way to dip your toes into the investment world. Check out these five top micro-investing apps to start your journey today.
Robinhood
If you’re a beginner investor, Robinhood is an excellent choice. Unlike many other platforms, Robinhood has no minimum balance requirement and doesn’t charge any fees for trading.
It is also very easy to use the app. Additionally, Robinhood stands out among micro-investing platforms, offering the ability to trade in a wide range of assets, including full stocks, mutual funds, options, and cryptocurrencies.
To find out more, read our comprehensive review of Robinhood.
Stash
Stash accommodates the needs of a diverse range of investors. Upon signing up, you’ll take a quick survey to assess your risk tolerance, allowing you to determine the amount and frequency of your investments.
With Stash, you also have the power to select the industries and companies you want to invest in. For example, if you’re passionate about sustainability, you can easily choose to invest only in eco-friendly organizations.
Acorns
Investing made simple and affordable – that’s what Acorns offers. Signing up is a breeze, with no minimum balance required, and the low monthly fee of just $1
Once you’ve joined, simply connect your Acorns account to your credit or debit card. Every time you make a purchase, the app will round up the amount to the nearest dollar and automatically invest that change once it reaches $5.
Betterment
For those who want to be hands-on with their micro-investing, Betterment may be the answer. The platform takes care of the investing for you, while also giving you the option to work with a financial advisor and have a say in your investment portfolio.
Signing up is easy, with no minimum balance required for its basic plan. However, it’s important to note that Betterment charges a 0.25% monthly fee on your investments.
2. Exchange-Traded Funds (ETFs), Mutual Funds, or Index Funds
For those looking to invest $500, exchange-traded funds (ETFs), mutual funds, and index funds are all great options. ETFs offer a basket of securities that can be exchanged on the market, just like a stock. You can find plenty of online brokers that offer a wide selection of commission-free ETFs.
Mutual funds are managed by a professional broker and aim to beat a given stock market index, while index funds are designed to match the index and grow from there.
All three types of investments have low expense ratios, low fees and commissions, and offer broad, diversified exposure to the stock market.
See also: ETFs vs. Mutual Funds: What’s the Difference?
3. Buy Bitcoin
For some, investing in cryptocurrency may be too risky and volatile for their taste. However, Bitcoin has had an average growth of over 100% per year for the past 12 years! In fact, if you had invested $500 in Bitcoin five years ago, you’d have approximately $90,000 today.
If you’re interested in getting into crypto, Coinbase is a great place to start. They’ll give you $10 in free Bitcoin when you buy or sell $100 or more in crypto. Coinbase also offers ways for you to earn up to $32 worth of crypto for free.
See also: 5 Best Ways to Buy Bitcoin With a Bank Account
4. Open a Roth IRA
It’s never too late to start planning for retirement, and a Roth IRA might be the way to go. With this retirement savings plan, you contribute after-tax money to an investment account, which you can then withdraw tax-free when you reach retirement age.
However, there are a few things to keep in mind before opening a Roth IRA. An individual retirement account (IRA) is meant for long-term savings and withdrawing the money before you turn 59 and a half may result in penalties. If you anticipate needing to access the funds sooner, consider exploring alternative options.
5. Start an Online Business
If you’re looking for an unconventional way to invest your money, why not try starting an online business? Traditional brick-and-mortar businesses require a lot of capital to get up and running, but the same cannot be said for an online business.
You won’t need office space, a warehouse, or expensive equipment. In all likelihood, you won’t need to invest $500. It will cost much less than that. Here are some popular online business ideas:
Starting and monetizing a blog
Selling things on eBay or Craig’s List
Selling services like freelancing writing, editing, or graphic design
Opening an e-commerce store
Buying items and flipping them for profit
6. Use Robo-Advisors
Investing your money with a robo-advisor might be a smart choice. A robo-advisor is a user-friendly online investment platform that creates a tailored and diversified portfolio for you based on your answers to a questionnaire.
Although robo-advisors have limited services compared to working with a financial advisor and do not offer personalized advice, they have low fees and make investing with as little as $500 in the stock market accessible. Additionally, robo-advisors offer multiple investment options, including:
Roth IRAs
Traditional IRAs
Solo 401(k)s
Taxable accounts
7. Open a High-Interest Savings Account
If you’re still exploring your options and not ready to invest yet, consider opening a high-yield savings account. The best high-interest savings accounts currently pay about 3% to 5% in interest.
While the returns may not match the potential gains of the stock market, having a savings account serves as a solid backup plan and provides peace of mind for the future. Don’t let your funds go to waste – take advantage of this secure and profitable opportunity.
8. Open a High-Yield CD
A high-yield certificate of deposit (CD) is a low-risk investment option that offers a higher rate of return compared to traditional savings accounts. CDs work by allowing you to deposit a fixed amount of money for a set period of time, typically ranging from a few months to several years. In exchange for this commitment, the financial institution offering the CD agrees to pay you a higher rate of interest compared to traditional savings accounts.
Opening a high-yield CD with $500 or less is a straightforward process that can be done through a bank or credit union. You simply choose the term length and deposit amount that works best for you, and the institution takes care of the rest. As your money grows over time, you’ll earn a higher return on your investment compared to traditional savings accounts.
Just remember that CDs typically have early withdrawal penalties. So, make sure you’re comfortable with the term length and the amount you’re depositing before opening an account.
9. Invest in Real Estate Crowdfunding
Investing in real estate is not limited to traditional methods, even with just $500. A prime example is real estate crowdfunding via platforms like Fundrise.
Fundrise provides investment opportunities in both commercial and residential properties with a minimum investment of just $10. This eliminates the requirement for a large capital investment, making real estate investment accessible to a wider range of individuals.
Check out our in-depth Fundrise review.
10. Pay Down Your Debt
Reducing debt is a sound investment for securing your future, particularly concerning high-interest credit card debt. The Federal Reserve reveals that the average credit card interest rate can be as much as 15% or higher, with a low credit score only driving the APR to even more astronomical heights.
Think about it, if your APR is at its highest, you may be shelling out hundreds of dollars each month just in interest charges. But by focusing your efforts on paying down your debt, you stand to save yourself not just money, but countless headaches in the coming year. With the possibility of freeing up thousands of dollars, it’s an investment worth making.
11. Try Peer-to-Peer (P2P) Lending
Peer-to-peer lending offers a unique twist on conventional lending methods. Rather than seeking loans from traditional banks, borrowers turn to platforms such as Prosper, connecting with investors like yourself.
By participating in P2P lending, you have the opportunity to generate a steady monthly income by lending funds to individuals or businesses. The added bonus? The money you earn is deposited directly into your account, providing a convenient and hands-off approach to investing.
12. Invest in Your Financial Education
Investing in your financial literacy may be the most valuable investment you’ll ever make. For a nominal fee of just $5 to $15, you can access top-notch personal finance books or audiobooks that can transform your financial future.
Take “Rich Dad Poor Dad” for example, available on Amazon for as low as $6.82 for the Kindle edition or $11.36 for the paperback. And if audiobooks are more your style, a month of Audible membership costs only $14.95.
You can expand your knowledge on real estate investing, stock investment strategies, and fundamental money management skills to help you get out of debt and attain financial independence.
And if reading isn’t your preferred method of learning, there are plenty of affordable online courses available. With so many options, it’s remarkable how much financial education you can gain for less than $500.
Frequently Asked Questions
What is the best way to invest $500?
The best way to invest $500 depends entirely on your personal financial status and objectives. If you’re just starting out investing, consider investing in a low-cost and diversified mutual fund or ETF. These investment vehicles offer the advantage of spreading your funds across a range of stocks and bonds, mitigating the risk associated with any single investment.
Other options to ponder include setting up a Roth IRA or investing in a high-yield savings account. The choice that works best for you ultimately hinges on your risk appetite, investment timeline, and financial aspirations.
Is it possible to invest $500 in stocks?
Absolutely! With just $500, you can venture into the world of stock investing. Micro-investing apps provide the opportunity for you to invest in individual stocks or opt for an ETF that follows a particular index.
It’s crucial to conduct thorough research and seek the guidance of a financial advisor to determine the best investment strategy that aligns with your unique circumstances.
Is it worth investing $500 in a robo-advisor?
Investing your $500 via a robo-advisor can be a wise decision. These digital platforms leverage algorithms to manage your investments, offering a more passive investment strategy.
Furthermore, robo-advisors tend to be more economical than human financial advisors, making them a fantastic choice for individuals seeking to initiate their investment journey.
What are the risks of investing $500?
Starting your investment journey with just $500 can be a smart move. However, it’s important to keep in mind the inherent dangers that come with investing.
Remember, no investment is entirely risk-free and there’s always a chance of losing your funds. To ensure you make an informed decision, conduct thorough research and consult a financial expert who can guide you towards the best option suited for you.
Bottom Line
We hope that this article has demonstrated to you that investing can be simple and accessible, even with a limited budget. You can start investing immediately with a modest amount of funds. If you’re not quite ready to invest, consider paying off high-interest credit card debt, increasing your income, and establishing an emergency fund.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:
Learn investment and tax strategies to help you achieve financial security and prepare for a prosperous retirement.
How can you balance saving for emergencies and investing for the future? What strategies can you employ to maximize your tax benefits and build a secure financial future? NerdWallet’s Kim Palmer and Alana Benson discuss investment strategies and tax planning to help you understand how to navigate your financial journey effectively. They begin with a discussion of investment strategies, with tips and tricks on understanding different investment accounts like 401(k)s and IRAs, leveraging compound interest, and the importance of starting investments early. Then, Alana discusses tax planning and filing in-depth, covering the intricacies of different tax forms like W-4s and W-2s, the significance of estimated taxes for freelancers, and strategies for managing capital gains taxes.
Kim and Alana delve into retirement planning and the challenges of active versus passive investing. They provide a framework for prioritizing your finances, emphasizing the creation of an emergency fund, taking advantage of employer 401(k) matches, and understanding the role of asset allocation based on age and risk tolerance. Additionally, they tackle the decision-making process in personal finance, such as choosing between paying off debt and investing, and the pros and cons of having a financial advisor.
Check out this episode on your favorite podcast platform, including:
NerdWallet stories related to this episode:
Episode transcript
This transcript was generated from podcast audio by an AI tool.
Sean Pyles:
Hey listener, we’ve got a special episode in store for you today. Our investing and tax Nerds recently hosted a webinar going deep into how you can level up your investing and tax strategy. So we packaged that up into a podcast episode for you. The Nerds talk about what you need to know about different investing accounts, how to get help with your taxes and more. So here’s the webinar.
Kim Palmer:
Welcome everyone. I am Kim Palmer. I’m a personal finance writer at NerdWallet where we help people make smart decisions. One important note, we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. NerdWallet Inc is not an investment advisor or broker and does not provide personal financial advisory services. Today we are excited to talk to you about the basics of investing and taxes and we think we have some helpful info to share with you. You can always find more at nerdwallet.com or on the NerdWallet app. Our goal today is to kick off a helpful discussion about investing and tax information and tools. Alana Benson writes about investing topics including stocks, funds, and ethical investing. And now I will hand it over to Alana.
Alana Benson:
Thanks Kim. Hi everyone. Thank you for joining us today. So before we start, I just want to say a couple of things that often get forgotten when we’re talking about investing. So first, investing usually comes second to some other goals. If you’re having a hard time paying for necessities or you don’t have an emergency fund, it’s really important to focus on those things before we even start worrying about investing. Second, instead of scrimping, try to increase your income. So I didn’t start investing until I was in my late 20s, and that’s because one, I didn’t work at NerdWallet yet, so I literally didn’t know anything. And two, I was making around $25,000 a year, so I didn’t have much expendable income. And when you don’t have extra income, it’s really hard to prioritize investing and it just might not even be a good idea to do that.
When I started making more money, it was suddenly a lot more possible for me to invest for retirement. So if it’s possible for you and you want to be investing more, look for jobs that will pay you more or look into side hustles, but cutting back on your streaming services probably will not save you enough money for retirement. And finally, if you don’t have the money to invest now, that’s totally fine. Some people have serious money anxieties and others just don’t have the cash. Whatever your reason is, don’t stress too much about it. Just keep learning and when you’re able to, you can start investing. So why do we invest? What is the point of all this? And the answer is that it’s because we like money and that’s okay. There’s no shame in admitting it, I like money, most people like money. It’s because money isn’t just money. It’s not like Scrooge McDuck diving into pools of money and buying Maseratis. It’s not that.
It’s about not being stressed about your money all the time and it’s about being able to buy everything that you need and some stuff that you want comfortably without having money stress take up all of your energy. Money allows us to thrive instead of just survive and investing helps you make more money than you could ever possibly make just by working at a job. So okay, what actually is investing? This whole process is very strange. Okay. Investing is the process of money that you already have making additional money for you. And this works through what’s called compound interest. Compound interest means that your gains get a little bit bigger every year and that’s also why starting when you’re younger gives you a huge advantage and more money in the long run. So for example, you just start at that little number one in the box up there. Say you buy an investment for $100, if it goes up the average stock market return of 10%, it could then be worth $110, meaning that you’ve made $10.
Then that $10 that you earned also starts earning compound interest on top of the $100 you initially invested. That doesn’t sound like much of a profit, but imagine if you were doing it with way larger amounts of money over a way longer period of time. Now that 10% is an annualized rate, which means that you’re not going to get 10% every single year. In all likelihood, some years you’re going to finish up, some years you’ll finish down. But over the course of decades when you average all that out, you tend to get about 10%. The way you actually start investing is through an investing account. And there’s a couple of different types, but the type of investment account you have is actually really, really important because a lot of them have some pretty significant tax benefits that you want to take advantage of. So you’ve got your 401(k)s and these are offered through your employer. You add money to it and sometimes your employer matches it. So it’s basically free money. If you have a 401(k), you’ll likely choose your investments from a pre-selected list or a fund that will automatically adjust itself over time.
So this means 401(k)s are typically very hands off. IRAs on the other hand are investment accounts that you open up yourself. IRAs can be opened online through brokerages and actually at a lot of large banks, they also do that. So it’s likely you can open up an investment account just through your bank. Unlike with a 401(k), IRAs you’ll have to choose your own investments in those accounts. You may have heard about a thing called a Roth IRA or a Roth 401(k) and it’s good if you know the difference. So with a Roth, you pay taxes on your money now just like any other money that you earn and then the money you have invested inside that account grows tax-free and you can take it out tax-free in retirement. With a traditional IRA or 401(k), the money you contribute today is pre-tax.
So that is you get to deduct it from your income taxes this year. So it’s like a nice little treat this year, but then when you cash it out in retirement, you’ll owe income taxes on it. This is really, really important. I’ve seen a lot of people make this mistake. Your investment account is not an investment, so a Roth IRA, a 401(k), not an investment. So if you have a Roth IRA, that’s great, but that doesn’t mean you’re actually invested in anything. So you fund your investment account and then you buy investments from there. But I’ve heard of people opening a Roth IRA, putting in a bunch of money and then wondering why it didn’t grow over the last 10 years. So you have to purchase investments for your money to actually grow and if you don’t do it, you’ll miss out on all of those years of growth, so very important.
And there’s a couple different types of investments that you can choose from once you open and fund your investment account. So you’ve got stocks, I’m sure everyone’s heard of that, these are shares of ownership in companies and the way you make money from them is if they go up in value and some pay you a cut of the company’s profits on a regular basis. Then you’ve got bonds. This is when you loan money to companies or the government and they pay you interest. Funds, now these are very exciting because they’re basically just baskets of stocks and bonds that you buy all at once. So a fund is still a stock or bond based investment depending on the type of fund that you get. And there’s a lot of different kinds such as index funds or exchange traded funds and mutual funds, but they’re all collections of investments that you buy at one time.
And I think funds are pretty awesome because if you own a stock and that company goes out of business, you lose all of your money. But if you invest in a fund that covers 100 stocks and that same stock goes out of business, your investment is buoyed up by the other 99 companies. So again, all of these investments, stocks, bonds and funds, you buy them from your investment account and then you own them in there. All right, so let’s talk about the stock market, it’s this weird nebulous term that’s hard to understand. But the stock market is just where people buy and sell investments, but now people just trade investments online. So the stock market is made up of several what are called market indexes. Now these are basically just predetermined lists of companies and the performance of that overall list can tell us a lot about the health of the US economy.
So for example, the S&P 500, something you probably have all heard of, that’s just the list of 500 of the largest publicly traded companies in the US and it includes companies like Apple and Amazon. So when we say the stock market is down today, that means that on average most of those companies aren’t doing well. And you can’t invest in the literal stock market, but you can invest in funds that include all the same investments. So these are called index funds because they track a market index. So again, if you have an S&P 500 index fund, it should perform pretty closely to how the S&P 500 itself is actually performing. The S&P 500 goes up 10% a year on average and 6.5% after inflation. And this is just an average, so some years the market goes up more, some years it goes down less, but when done well, investing can potentially mean doubling your money every few years for doing basically nothing, which is my favorite way of earning money, by doing nothing. It’s great.
So let’s talk strategy. This is all about the way that you invest, when you put your money in and when you take your money out. So passive investing is where you buy that S&P 500 index fund and you keep adding money into it until you retire. It’s very boring, but it’s effective. So it can give you that 10% return on average over the long haul, but a lot of people want to make more than that 10%, and they do so by actively buying and selling stocks, crypto options and other high risk investments. They try to predict when they’ll be low, then they buy them and then they turn around and try to sell them when they’re high. So these people are called active traders or day traders. Only 20% of active traders make money over a six-month period. That is not a lot of people.
There have been a lot of studies over the years that show that active investing is a way less lucrative fashion than boring old passive investing with that index fund. Plus active investing is a lot more work, you have to do all kinds of research and you keep an eye on the markets and you can hypothetically earn more by actively trading versus passively earning the same amount as that historical return of 10%. But most people end up making less when they actually try it, and that’s because people are really bad at predicting things. And in order to make money on the overall stock market over the long term, you have to be really good at predicting things all the time. So maybe you make it big on one stock, but the odds of that happening again and again are very low. So let’s put all of this information together, the accounts, the actual investments and the strategy.
Here’s how financial advisors suggest you prioritize your money when you’re starting to invest. So the first thing you want to do is you’re not actually going to invest at all. The first thing is that you’re going to have an emergency fund. So this is money that you won’t actually put in the stock market, and that’s because when your money is invested, its value can change day by day. So say you have $1,000 and you want to use it for an emergency fund, but you invest it, when you have to fix something on your car suddenly, you go to check your money and its value could be $600 instead of $1,000 and that’s not good. If you put it in a high yield savings account, you can access that money at any time without risking its value. Plus right now the interest rates are really high.
So your money could be earning 4 to 5% just by sitting there. So next, you want to get that 401(k) match if it’s available to you because it’s free money. After that, it’s a good idea to look into IRAs. Both IRAs and 401(k)s have what’s called a contribution limit, which is just the maximum amount of money you can put in each of them every year. If you’re able to max out an IRA, then it’s a good call to move back to your 401(k). And the reason you switch around like that is because of the way the tax benefit works. So it’s likely more beneficial to invest in an IRA over a 401(k) if you’ve already gotten your match, if you have to choose between the two. Then if you max out your 401(k), you can move to a standard brokerage account. And this is not a list of everything you have to be doing right now.
You might be thinking, “Whoa, maxing out an IRA is $6,500, I cannot afford that”, and that is totally fine. So I like to picture it as a waterfall. So when you fill up your emergency fund, then you can start working on getting that 401(k) match. Only after that bucket is full should you then move on to investing in an IRA and so on. And wherever you’re at in your bucket filling journey is okay. It’s just nice to know what to do next when you’re ready for it. So we already talked about what accounts to invest from and the investments you can buy, but then do you just start buying a bunch of index funds or stocks or bonds? How do you know how much of each investment to get? And that is all about risk tolerance. And to understand that we have to understand how risk works over time.
If you’re investing for retirement and you’re in your 20s now, that means you have a ton of time for your investments to grow and then drop dramatically and then rise back up. So financial advisors would say you can afford to take on a bit more risk, AKA invest in riskier investments, because you have time for your investments to bounce back. Now, if you’re investing for your retirement and you’re 65, you don’t want to risk all the money you’ve been investing for years and years because you’re going to actually need to use it to pay for stuff in retirement pretty soon, so you want to protect it. And figuring out how much of each investment you should have is a fancy term called asset allocation, but it just means how much of your portfolio is in which of these investments.
And age is just a number, but typically when you’re younger, you may be able to afford to take more risk because you have more time for the stock market highs and lows to even out. So stocks, and okay, remember index funds and mutual funds are often made up of stocks so those count too, but those tend to carry more risk than investments like bonds. And an example of a 20-year-old’s investment portfolio, which includes all of your accounts so your 401(k), your Roth IRA, all of that together, that could be 100% stocks. And that’s fairly risky, but those 20 year olds are not going to retire for a long time. Now, a 65-year-old might have way more bonds because they don’t want to risk all that money they’ve earned over time. And one thing some investors do to mitigate risk is to slowly shift their asset allocation from high risk investments to low risk investments over time.
And again, I’m not a financial advisor and this is not personalized investment advice, but how much of each investment it’s good to have will usually depend on how much risk you are willing to take. And an investment portfolio can be really simple or really complicated. So you could have that one S&P 500 index fund and you purchase it from a Roth IRA, and that’s just all you do. Just if you want to keep it really simple or you can make it more complicated. So maybe you explore several stock-based funds such as international stocks and healthcare stocks and technology stocks, and you could invest in those types through a fund. So instead of buying 30 technology stocks, you just have one technology stock fund, then a small slice in bonds, and then an even smaller slice is crypto or other high risk investments. Though financial advisors have varying opinions on the safety of crypto.
So keep in mind, this is just an example and not necessarily what you should do personally, but it is really helpful to look up asset allocation portfolios through an online brokerage and see what they recommend for your specific age and when you plan on retiring. You can also talk with a financial advisor who can help guide you through those decisions. And investing is great because it can help you earn wealth, which you could spend on a boat, but more than likely one of your biggest investing goals will be retirement. And the sad truth is that in some things like retirement, they just cost so much that you’ll probably never afford them just by putting money in a savings account. And that’s why we say we have to invest for retirement. And the truth is that most people just aren’t saving enough for retirement.
So you’ll probably have a lot of expenses and you have to pay for that in retirement and some of it’s necessary like food or housing or medical care and some of it is travel or bucket list stuff, but you may not be working anymore or at least not as much as you were. And once you factor in inflation, it’s likely that a dollar today will be worth way less when you’re in retirement. And saving for retirement has gotten even more difficult because you can’t necessarily afford to live on social security. Medicare doesn’t always pay for your health needs and pensions aren’t really as common as they used to be. And because of all this, it’s really important to start investing for retirement sooner rather than later.
And if you’re early in your career, it might seem silly to worry about retiring right now, but if you start investing sooner, you actually spend less on retirement than if you start investing later in life overall and that’s because of compound interest. So our retirement calculator shows that if you start putting away $100 per month, that could grow to nearly $400,000 in 35 years. And it’s always good to know how much you should be trying to invest. When you have a long-term goal in mind, you want to know what that number is. So a retirement calculator can be a big help to figure that out, including NerdWallet’s retirement calculator. No shame, I’m going to plug it, but some financial advisors recommend saving 15% of your pre-tax income for retirement. So okay, let’s break that down. What does that look like?
So if you make $100,000 a year, again just because easy math, that would be $15,000 annually that you’re trying to save for retirement. But if you had a 5% match on your 401(k), you’d already be saving $10,000 a year between the $5,000 you make and the $5,000 your employer puts in. And then if you contributed another $5,000 to your Roth IRA, you’d already meet your target goal of saving $15,000 a year for retirement. You should also think about how much you can make during those peak earning years. If you’re younger, what career are you looking to have? You can look up what those wages tend to look like on a site like Glassdoor or ask someone in your life who is in that career path, and maybe do that tactfully because you’re asking about money. But figuring out what you want to be when you grow up may not be something you want to think about right now.
But to be honest, I studied English in college and no one told me about my job prospects. I figured that I would have to write a super famous book or be a teacher and you don’t have to have everything figured out now, but it doesn’t hurt to see how much a potential field could earn and figure out what careers are open to you. And just keep in mind that relationship between your earnings and investing like we talked about in the beginning. And if you’re later in your career, it is harder to take advantage of compound interest, but some of those investment accounts have those catch up contributions that we talked about so you’re able to contribute more after a certain age. Thank you all so much for listening to me talk very fast for a long time, and now I will hand it back over to Kim to talk about taxes. Thanks so much.
Kim Palmer:
Great, thank you so much, Alana. That was great. Someone actually asked in a pre-submitted question, “Why do I have to pay taxes?” Well, here is why. Taxes are used to pay for a lot of different things like clean water, roads, schools, healthcare, and the military. And your tax return is due every year in mid-April to the IRS. We’ll talk a little bit later about what to do if you need an extension, but in general that is the deadline. But first, let’s back up a little bit. When you file taxes, there is so much paperwork. One really important one is the W-4. That is the document that your employer asks you to fill out when you start a new job. And it plays a really big role in telling your employer how much in taxes to take out of each paycheck. It asks you things like your filing status, dependents, how much tax to withhold, and if you get a really big tax bill or a big refund, then you might want to go back and revisit your W-4 just to make sure you’re withholding enough but not too much.
There’s also the W-2, which is a document that your employer sends you to summarize how much in total they took out of your paycheck the previous year, and you’ll need to reference all those numbers when you file your tax return. If you are self-employed or you work a side hustle, then taxes won’t be automatically withheld from your paycheck, and that means you might have to pay something called estimated taxes, which is typically four times a year. In January, you’ll get something called a 1099 form that outlines how much money any company paid you, and then you’ll use that information when you file your return. And then finally, the 1040 is the main form you use when you file taxes, and we’ll drop a link in the chat for more about that. Okay, so you have all of your forms set. How do you actually file your taxes?
You can do it yourself through the IRS. You can use an online tax prep software or you can use a tax professional like an accountant or a tax preparer. If you do it on your own, you can either use paper forms or get access to brand name tax prep software through an IRS service called Free File. But it’s important to know that only people who make below a certain income qualify for the Free File program. If you use tax software like TurboTax, H&R Block or NerdWallet Taxes powered by Column Tax, many of these providers use a Q&A style to help you do your taxes and some even offer paid upgrades that connect you directly to a tax professional. If your finances are really complicated and you want some extra help, then you can also work with a tax preparer such as a certified public accountant.
You do want to make sure to ask them lots of questions and check their credentials before you agree to share your financial information. And you also want to check to see if they have a prepared tax identification number, which is an ID that’s required for anyone who files tax returns for compensation. The US does not have a flat tax system, and that means that portions of your income can be taxed at different rates. There are currently seven tax rates for federal income taxes that run from 10% to 37%. And which tax rate applies to you depends on your income and your filing status. So you might hear people say, “I’m in the 12% bracket” or “I’m in the 22% bracket”, but being in a tax bracket doesn’t mean you pay that tax rate on everything you make. And in reality, people’s income can fall into several different tax brackets depending on how much they make.
Portions or chunks of your income are taxed at different rates and some of those different taxes are then added together. So for example, some of your income could be taxed at a rate of 10%, another chunk could be at 12%. The more you make, the higher the tax rate might be on some of your income. And depending on the state where you pay your income taxes, you might pay a flat rate or a progressive rate similar to the federal structure. A small handful of states have no state income tax. If you want to pay less, you can look for tax breaks. Tax credits and tax deductions are two tools that can help you potentially minimize your tax bill, but they do work in different ways. Tax deductions reduce your taxable income. As a simplified example, a $25,000 tax deduction on $100,000 of taxable income means that only $75,000 of that income will get taxed.
Tax credits directly reduce your tax bill by the value of their credit. So this means if you owe $2,000 in taxes and you’re eligible for a $1,000 tax credit, you’ll end up owing $1,000. Tax credits tend to be more valuable because they have the potential to pack a bigger punch, so you definitely want to try to take all the tax credits you qualify for, and you could even get money back if a credit is refundable. Common tax credits include the earned income tax credit, the child tax credit, the lifetime learning credit, and the American opportunity credit and savers credit.
All right, I alluded to this at the beginning, but what happens if you’re not going to be ready by mid-April? What do you do? If you know you won’t be able to file on time before tax day, you can file for a free extension with the IRS and that gives you until mid-October to file your return. But you want to make sure that at least 90% of what you think you’ll owe in April is covered by an estimated tax payment or your withholdings. Otherwise, the IRS can hit you with a penalty for late payment. The failure to pay penalty is really no joke. It’s 0.5% of your unpaid taxes each month your payment is late plus interest. If you file late and you did not file an extension, you could also get hit with a failure to file penalty, which is 5% of your unpaid taxes each month that your payment is late. There is some good-ish news, if you file late but you don’t owe anything, you won’t get penalized but that doesn’t mean you’re not still obligated to file.
If you don’t, the IRS could file a return on your behalf and you might miss out on a refund if you’re owed one. And if your tax bill is so high that you can’t pay it off, you do have options. You can set up a long-term or short-term payment plan with the IRS.
I know that was a whole lot of information and taxes can seem scary, but we break down lots of popular tax questions and terms on nerdwallet.com. We have some time to address some pre-submitted questions from the audience ranging from about Roth IRAs to the pros and cons of having a financial advisor. And I do want to give a reminder here as we answer these questions that we are not tax or investing advisors. We are writers who focus on these fields and what we say is not investing or tax advice. So with that said, let’s dive into these questions. A question that came to us in an email was: how do you choose between paying off credit card debt and investing in saving for emergencies?
I really love this question because I think it speaks to some of the biggest challenges of personal finance, navigating these choices. And the answer is it’s really up to you. Many financial advisors say that the first step is to create a starter emergency fund, and you can read more in our article that we’ll link to, Should I Pay Off Debt Or Save? And you’ll see most people think about saving $500 to $1,000 first and then after that to consider contributing enough to a workplace retirement plan if they have access to one, and then contributing 3% to 5% of income to an IRA or a Roth IRA. And then financial advisors say people can consider focusing on paying off high interest debt and amp up investing efforts once they have paid that off. And now Alana, I’ll turn over to you. Perhaps you can answer the questions about Roth IRAs.
Alana Benson:
Absolutely. So a couple folks were wondering, before we went over everything, what a Roth IRA is and how does it work and when is it worth it to open one? So we already covered this a little bit, but again, it’s an individual retirement account and it lets you contribute money that you’ve already paid taxes on. So think about when you get your paycheck. That money has already had taxes taken out of it. So once you hit age 59 and a half and you have held the Roth IRA for at least five years, you can withdraw your contributions and any earnings, which is a fancy word for money that you earn from investing, without paying taxes again. And whether it’s worth it is up to you, especially if you’re trying to decide between a Roth IRA and a traditional IRA because it’s about when you pay those taxes and if you have a traditional IRA, you do get that tax break right now.
So that’s a personal decision. But you can also take out money tax-free from your Roth IRA later in life. So if that’s something that you are really trying to parse out, it might be good to talk to a financial advisor because they can help you with that question. We had two other questions. The first one is: how do you calculate how much money to put in your Roth IRA if you make over the maximum amount? So we didn’t actually cover this, so Roth IRAs do have income limits, but there is something called a Backdoor Roth that lets you contribute money first to a traditional IRA, pay taxes on it and then roll that money into a Roth IRA. And then our last question is: what are the pros and cons of having a financial advisor and how do you find one?
This is such a good question. The pros and cons really depend on your situation. The catchall term ‘financial advisor’ is used to describe a wide variety of people and services, including investment managers, financial consultants, financial planners. First and foremost, you always want to verify a financial professional because financial advisor doesn’t require people to be vetted. Certain things like a certified financial planner or a CFP, those actually have a very high level of education and have a certification that you can verify online. So anyone that you are talking about money with, you want to make sure that you are vetting them. And some of these people can just talk to you about your finances and some of them can actually manage your investments for you if you want that. Financial advisors, depending on the kind that you choose, can be pretty expensive. A robo-advisor is like an AI version of a financial advisor.
You just set up an account for one and then they charge you a pretty modest fee. And based on your age and your risk tolerance, it will manage your investments for you. An online financial advisor can offer more services and you can actually talk to a human being, but those do tend to cost a little bit more. And then you could go to an in-person financial advisor, depending on their credentials, that might cost even more, but sometimes it’s really nice to talk to somebody that you know and you can grow that relationship with them over time.
Kim Palmer:
Great. Thank you, Alana. And I think, actually, I can squeeze in one more question that we received. How do taxes work with investment accounts? How much do we set aside so we aren’t surprised by a tax bill? Which is a great question. If you’re selling stocks from a brokerage investment account, then you should be aware of three words, capital gains taxes. Those are the taxes you’ll pay when you sell assets for profit. Assets that you have owned for more than a year are subject to long-term capital gains tax, and the capital gains tax rate is 0%, 15% or 20% on most assets. Capital gains taxes on assets held for a year or less are subject to short-term capital gains. If you regularly trade stocks or other investments, you might be subject to short-term capital gains.
Those profits are taxed as ordinary income based on your tax brackets, which we went over before. Your final tax bill depends on a number of different factors. If you don’t want to be surprised, estimate what you’ll owe using tools such as a tax calculator or IRS worksheets. If needed, consider setting aside enough to cover the tax bill or paying estimated taxes and as always, your specific situation will differ and we are not tax professionals. We hope that you enjoyed this webinar and learned something today. If you’d like to get even more clarity on your finances and continue learning with NerdWallet, consider signing up for an account with us at nerdwallet.com. Thank you so much for joining us.
Sean Pyles: And that’s all we have for this episode. To send the Nerds your money questions, call or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected]. Here’s our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This webinar episode was produced by Alikay Wood, Sheri Gordon, and me. We had editing help from Liz Weston, Sara Brink mixed our audio, and a big thank you to NerdWallet’s editors for all their help. And with that said, until next time, turn the Nerds.
If you had $20,000, how would you spend it? One of the smartest things you could do if you suddenly came into an extra $20,000 – or managed to save that much money over time – would be to invest it. But where? And how?
The right answer differs for everyone and depends on your financial objectives, comfort level with risk, and time horizon. This guide illuminates 10 ideal ways to invest $20,000 and maximize your returns.
Set Your Investment Goals and Assess Your Risk Tolerance
Establishing clear financial objectives and measuring your tolerance for risk should serve as the cornerstone of your investment decisions. For instance, if you’re eyeing retirement, long-term investments like stocks or real estate might be right up your alley. Conversely, if your goal is to accumulate funds for a house down payment in five years, safer options like a high yield savings account may be more appealing.
Risk tolerance plays an equally critical role. If the thought of market volatility unsettles you, safer options with lower returns might suit you better. But if you can handle a higher level of risk for the prospect of higher returns, you might explore riskier ventures like individual stocks or even cryptocurrencies. A consultation with an in-person financial advisor can help you decipher your financial goals and risk tolerance.
10 Best Ways to Invest $20K
As you prepare to grow your $20k investment, an array of options awaits. Your financial goals, risk tolerance, and timeline will guide you to the ideal choice. Here are 10 ways to strategically invest your $20k:
1: High-Yield Savings Accounts
High-yield savings accounts are a low-risk, steady-growth choice for those looking to invest $20k. They offer more competitive interest rates than traditional savings accounts, meaning your money works harder for you. The Federal Deposit Insurance Corporation (FDIC) protects these accounts, offering an additional layer of security and peace of mind.
This investment route is particularly beneficial if you prefer having your emergency fund accessible, or if you’re saving for near-term goals. Despite the returns being lower than riskier investment options, the safety and stability they provide make high-yield savings accounts an attractive option for many investors.
2: Bitcoin
Bitcoin has emerged as a prominent player in the investment world, offering a high-risk, high-reward dynamic that appeals to some investors. The value of Bitcoin is notoriously volatile, yet its remarkable growth cannot be ignored.
Over the past decade, Bitcoin has experienced gains exceeding 5,700%, significantly outpacing traditional markets like the NASDAQ, which had a gain of 336% over the same period. Even within a five-year timeframe, Bitcoin still came out ahead with a 96% increase compared to the NASDAQ’s 69%.
Given its digital nature and decentralized structure, investing in Bitcoin can be complex and fraught with unique risks. Unlike traditional currencies, Bitcoin operates independently of a central bank. Furthermore, its value is susceptible to sharp fluctuations influenced by a variety of factors, including market demand, investor sentiments, regulatory news, and macroeconomic trends.
Ready to dive into Bitcoin investing? Consider Swan Bitcoin, where you can easily set up recurring buys or make instant purchases right from your bank account.
3: Stock Market Investing
Stock market investing is a viable path for those seeking to grow their $20k investment, especially for long-term financial goals. Today’s investing apps make it easy to start investing with as little as $1 and to diversify your investments with fractional shares if you desire.
When considering individual stocks, potential returns can be substantial, but they often come with a higher level of risk. By holding a variety of stocks across different sectors and regions, a diversified portfolio can help mitigate these risks, providing a buffer against market volatility.
As an investor, it’s important to remember that past performance doesn’t guarantee future results. The stock market has demonstrated remarkable growth over time, but it’s not immune to periods of downturn. Staying resilient and maintaining a long-term perspective can help you deal with these fluctuations.
4: Mutual Funds and Exchange-Traded Funds (ETFs)
Mutual funds and ETFs offer investors an easy way to diversify their portfolios. These funds allow investors to buy a stake in a wide range of stocks and bonds, spreading the risk and potentially improving the returns over time.
Financial institutions manage mutual funds and ETFs, charging management fees for the expertise they provide in managing and selecting the assets within the funds. While mutual funds often require a significant initial investment, ETFs are more accessible for investors, as most brokerage firms offer a wide variety of ETFs with no minimum investment requirements.
Index funds, a subtype of mutual funds or ETFs, aim to replicate the performance of a specific market index, such as the S&P 500. These types of funds are a popular choice among passive investors due to their typically lower management fees compared to actively managed funds. The strategy of mimicking the market rather than attempting to outperform it allows investors to enjoy broad market returns while keeping costs low.
5: Bonds and Treasury Securities
For more conservative investors, bonds and Treasury securities offer a safer, lower-yield alternative. When you purchase a bond, you’re essentially loaning money to a corporation or government entity. In return, you receive interest payments over a specified period and the return of the principal amount at the bond’s maturity.
Treasury securities are a type of bond issued by the U.S. government, widely regarded as one of the safest investment vehicles. For broader exposure, bond ETFs and bond mutual funds allow you to diversify across different types of bonds, reducing the impact of any single bond defaulting.
6: Robo-Advisors
For those who prefer a hands-off approach to investing, robo-advisors can be an excellent option. These digital platforms create and manage your investment portfolio using sophisticated algorithms, taking into account factors such as your risk tolerance, investment goals, and time horizon.
Robo-advisors typically charge lower fees than traditional financial advisors, making them a cost-effective choice, especially for beginners or those with simpler financial situations. They offer a straightforward path to diversification and automatic portfolio rebalancing, reducing the need for constant monitoring and manual adjustments. It’s an appealing solution for those looking to invest $20k while minimizing time and effort spent on investment management.
Most robo-advisor platforms offer exposure to stocks, bonds, ETFs, and mutual funds.
7: Real Estate Investing
Real estate has proven to be a lucrative asset class for many investors. Income-producing real estate, like rental properties, can generate a steady flow of rental income, with potential property appreciation over time. However, property management can be time-intensive and comes with additional costs such as maintenance and property taxes.
If the idea of becoming a landlord doesn’t appeal to you, you might want to consider investing in real estate investment trusts (REITs). These publicly-traded companies own, operate, or finance income-producing real estate, allowing you to dip your toes into real estate without the hassle of managing properties.
8: Peer-to-Peer Lending
Peer-to-peer lending, an alternative form of investing, involves lending money to individuals or small businesses through online platforms that match lenders with borrowers. As an investor, you can potentially enjoy higher returns than those offered by traditional savings or money market accounts. However, this approach comes with its own set of risks, including the risk of borrower default.
To safeguard against potential losses from defaults, it’s wise to diversify your lending across different borrowers. This practice, similar to diversification in a stock portfolio, can help spread the risk, increasing your chances of overall success.
9: Investing in a Small Business or Start-up
Investing in a small business or a start-up offers an opportunity to potentially reap significant returns. However, it is a high-risk venture and typically requires becoming an accredited investor. As an accredited investor, you’ll need to meet specific income and net worth criteria, emphasizing the fact that this investment option is not for everyone.
Due to the inherent risk, this investment path should only be considered if you’re financially secure enough to withstand potential losses. Remember, while investing in a burgeoning business can be lucrative, it could also result in losing your entire investment.
10: Education and Skill-Building
Often overlooked in investment discussions, investing in yourself through education and skill-building can offer meaningful long-term returns. Whether it’s advancing your current job skills, earning a new certification, or exploring a new field, enhancing your knowledge base and skills can lead to increased earning potential and greater job satisfaction.
While the returns may not be immediate or easily quantifiable like other investments, investing in your personal and professional growth can open doors to new opportunities and provide long-lasting benefits. This is a valuable investment that you can make, regardless of market conditions.
What to Consider Before Investing
Before you venture into investing, it’s crucial to have an emergency fund, ideally three to six months’ worth of living expenses, set aside. Additionally, paying off high-interest debt, like credit card debt, should be a priority. The average credit card account interest rates often outpace the returns you’d earn from investments.
Consider the tax implications of your investments. Some investments, like taxable brokerage accounts, are subject to capital gains tax, while others, like Roth IRAs, offer tax-free income in retirement.
Finally, diversification is a key strategy to manage risk. By spreading your money across different types of investments (stocks, bonds, real estate), you can better weather market fluctuations.
Conclusion
Wisely investing 20k requires careful consideration of your financial goals, comfort level with risk, and investment timeline. Whether you choose high-yield savings accounts, the stock market, real estate, or another option, the goal is to grow your wealth over time and move closer to achieving financial freedom.
Regardless of your chosen path, remember that investing involves risks, including potential loss of principal. So, it’s crucial to review any investment strategy periodically to ensure it still aligns with your financial objectives. Consider seeking advice from a financial planner or other professionals to help guide your investment journey.
Understanding how interest works is crucial for managing your personal finances effectively. In this article, we will dive into the two main types of interest—simple and compound interest—and explore their differences, advantages, and disadvantages. We will also provide real-life examples and tips for maximizing your interest earnings.
What is simple interest?
Simple Interest Definition and Formula
Simple interest is calculated using only the initial principal balance. The formula for calculating simple interest is:
Simple Interest = Principal x Interest Rate x Time
Principal: The initial amount of money borrowed or invested.
Interest rate: The annual percentage rate (APR) applied to the principal.
Time: The duration for which the interest is calculated, typically measured in years.
Real-life Examples of Simple Interest
Car Loan
Let’s assume you take out a car loan for $10,000 at an annual interest rate of 5% for a 3-year term. Using the simple interest formula, you can calculate the total interest payable over the loan term:
Simple Interest = Principal x Interest Rate x Time
Simple Interest = $10,000 x 0.05 x 3
Simple Interest = $1,500
In this case, the total interest you’ll pay over the 3-year term is $1,500, making the total amount payable (principal + interest) $11,500.
Certificates of Deposit (CDs)
CDs are time-bound savings products offered by banks. They typically use simple interest, with the interest payments made at regular intervals or at maturity. For example, if you invest $5,000 in a 1-year CD with an annual interest rate of 3%, you would earn:
Simple Interest = Principal x Interest Rate x Time
Simple Interest = $5,000 x 0.03 x 1
Simple Interest = $150
At the end of the 1-year term, your investment would be worth $5,150, including the initial principal and earned interest.
Advantages and Disadvantages of Simple Interest
Advantages
Easier to calculate: The simple interest formula is relatively straightforward, making it easy to understand and apply in various financial situations.
Predictable payments: For borrowers, loans with simple interest usually result in predictable and consistent payments, making it easier to budget and manage finances.
Lower interest expense for short-term borrowing: For short-term loans, the total interest paid with simple interest is typically lower than with compound interest.
Disadvantages
Less growth potential: Compared to compound interest, simple interest doesn’t account for accumulated interest, resulting in lower overall returns for long-term investments.
Limited applicability: Simple interest is less commonly used in modern financial products, making it less relevant for most individuals’ financial planning and decision-making.
What is compound interest?
Compound Interest Definition and Formula
Compound interest is calculated on both the principal balance and the interest accrued from previous periods. The compound interest formula is:
Compound Interest = Principal x (1 + Interest Rate / Number of Compounding Periods) ^ (Number of Compounding Periods x Time)
Principal: The initial amount of money borrowed or invested.
Interest rate: The annual interest rate applied to the principal.
Time: The duration for which the interest is calculated, typically measured in years.
Number of compounding periods: The frequency at which interest is compounded, such as annually, quarterly, or monthly.
Real-life Examples of Compound Interest
Savings Account
Suppose you deposit $5,000 in a high-yield savings account with an annual interest rate of 2%, compounded monthly. To calculate the future value of your savings after 5 years, you can use the compound interest formula:
Step
Calculation
Result
1
Principal x (1 + Interest Rate / Compounding Periods)
1.0016667
2
(Result from Step 1) ^ (Compounding Periods x Time)
1.0016667 ^ 60
3
Principal x (Result from Step 2)
$5,000 × 1.1047
4
Final Compound Interest
≈ $5,520.53
In this example, after 5 years, your initial $5,000 deposit would grow to approximately $5,520.53, thanks to the power of compound interest.
Retirement Account
Consider a retirement account, like a 401(k) or IRA, with an initial investment of $10,000 and an average annual return of 7%, compounded annually. After 30 years, using the following formula, your investment would be worth:
Step
Calculation
Result
1
Principal x (1 + Interest Rate)
1.07
2
(Result from Step 1) ^ Time
1.07 ^ 30
3
Principal x (Result from Step 2)
$10,000 × 7.6123
4
Final Compound Interest
≈ $76,123.29
In this case, the power of compound interest has turned your initial $10,000 investment into $76,123.29 over 30 years.
Advantages and Disadvantages of Compound Interest
Advantages
Exponential growth potential: Compound interest allows your investment or savings to grow exponentially, as interest is continually added to the principal balance and earns interest itself.
Rewards long-term investing and saving: Compound interest takes the time value of money into account, encouraging long-term investing and saving strategies.
Disadvantages
Higher interest expense for borrowers: When borrowing money, compound interest can result in higher interest expenses compared to simple interest, especially for long-term loans.
More complex calculations: Compound interest calculations can be more complex than simple interest calculations, particularly when involving varying compounding frequencies or irregular payment schedules.
Comparing Simple and Compound Interest
Visualizing the Difference
One of the most effective ways to understand the difference between simple and compound interest is to visualize their growth over time. You can create graphs or charts to compare the accumulation of interest for both types in different scenarios, such as varying principal amounts, interest rates, and time horizons.
Factors to Consider When Choosing Between Simple and Compound Interest
When deciding between simple and compound interest, consider the following factors:
Time horizon: The duration of your investment or loan term will impact which type of interest is more suitable. Generally, compounded interest is more advantageous for long-term investments, while simple interest is preferable for short-term loans or investments.
Risk tolerance: Your risk tolerance should play a role in your choice. While compound interest offers greater growth potential, it may involve more risk, depending on the underlying investment.
Financial goals: Align your choice with your specific financial goals, such as saving for retirement, buying a home, or building an emergency fund.
Tips for Maximizing Interest Earnings
Choosing the Right Financial Products
To make the most of your interest earnings, consider the following financial products:
High-yield Savings Accounts
High-yield savings accounts offer competitive interest rates and use compound interest, making them an excellent choice for growing your savings over time.
Money Market Accounts
Money market accounts typically offer higher interest rates than traditional savings accounts and also use compound interest. However, they may have higher minimum balance requirements.
CDs
CDs can be a useful option for earning a higher fixed interest rate over a specified term. They often use simple interest, making them suitable for short-term investments with predictable returns.
Bonds
Investing in bonds can provide a steady stream of interest income, with some bonds offering either simple or compound interest, depending on their terms.
Diversification
Diversifying your investment portfolio helps to balance risk and return. Consider a mix of assets, such as stocks, bonds, and real estate, to optimize your interest earnings and capitalize on the power of compound interest.
Regular Contributions
Making regular contributions to your investment or savings accounts can help you maximize your interest earnings. By consistently adding to your principal balance, you can benefit from the exponential growth of compound interest.
Reinvesting Interest
Reinvesting the interest earned from your investments can significantly boost your overall returns. By allowing the interest to compound, you can accelerate the growth of your investments.
Simple Interest vs. Compound Interest: Common Misconceptions
Misconception 1: Simple Interest is Always Cheaper for Borrowers
While simple interest can lead to lower interest expenses for short-term loans, it’s essential to evaluate each loan on a case-by-case basis. Factors such as fees, loan terms, and additional charges can influence the overall cost of borrowing.
Misconception 2: Compound Interest Always Provides Higher Returns for Investors
Although compound interest can offer exponential growth potential, the underlying investment’s performance and risk factors must be considered. It’s also crucial to consider the historical performance, fees, and management of the investment before making a decision.
Impact of Different Compounding Frequencies
The frequency at which interest is compounded can have a significant impact on your investment’s growth or your loan’s interest expense. Generally, the more frequently interest is compounded, the higher the overall returns or costs.
Daily compounding: Interest is calculated and added to the principal balance every day.
Monthly compounding: Interest is calculated and added to the principal balance every month.
Quarterly compounding: Interest is calculated and added to the principal balance every three months.
Annual compounding: Interest is calculated and added to the principal balance once a year.
Historical Perspective
Simple and compound interest have played a vital role in the development of modern financial systems. The concept of interest dates back thousands of years, with civilizations such as the Babylonians, Greeks, and Romans using different forms of interest to facilitate trade and commerce.
The idea of compound interest gained prominence during the Renaissance, with mathematicians like Leonardo Fibonacci developing formulas to calculate compound interest. Over time, compound interest became a cornerstone of modern finance, shaping the way investments and loans are structured today.
Interest Rates and Economic Conditions
Interest rates are influenced by various economic factors, including inflation, unemployment, and central bank policies. Understanding the relationship between interest rates, economic conditions, and the performance of financial products that rely on simple or compound interest is crucial for making informed financial decisions.
Debt Management Strategies
Understanding the difference between simple and compound interest can help borrowers create effective debt management strategies, such as:
Pay off high-interest debts first: Focus on repaying loans with the highest interest rates, as they can quickly accumulate interest and increase your overall debt burden.
Refinancing loans: Consider refinancing high-interest loans to secure lower interest rates or more favorable terms, potentially saving you money in the long run.
Debt consolidation: Combining multiple high-interest debts into a single loan with a lower interest rate can simplify repayments and reduce overall interest expenses.
By understanding the differences between simple and compound interest, you can make more informed financial decisions and work towards achieving your financial goals.
Tips for Borrowers
When borrowing money, it’s essential to understand the implications of simple vs. compound interest on your loan. Here are some tips for borrowers:
Shop around: Compare loans with different interest structures and rates before committing to one. Don’t just look at the interest rate; consider the overall cost of borrowing, including fees, repayment terms, and penalties.
Negotiate: In some cases, you may be able to negotiate your loan’s interest rate, particularly if you have a strong credit score and a good relationship with your lender. Lower interest rates can save you money over the life of the loan.
Extra payments: Making additional or larger payments can help reduce your loan’s principal balance, lowering the total interest you’ll pay over time. However, be sure to check if your loan has any prepayment penalties.
Monitor interest rates: Keep an eye on interest rates in the broader market, as they can impact the cost of borrowing. If rates drop significantly, you may want to consider refinancing your loan to secure a lower interest rate.
Understand loan terms: Read and understand your loan agreement’s terms and conditions, including any interest rate adjustments, payment schedules, and fees. This will help you better manage your loan and avoid surprises down the line.
Conclusion
Simple and compound interest are fundamental concepts in personal finance, influencing everything from saving and investing to borrowing money. By understanding the differences between the two, you can make smarter financial decisions and work towards achieving your financial goals.
In summary:
Simple interest is calculated on the initial principal balance only, while compound interest is calculated on both the principal balance and any accumulated interest from previous periods.
Simple interest is generally easier to calculate and results in predictable payments for borrowers, while compound interest offers exponential growth potential for investors.
Choosing between simple and compound interest depends on various factors, such as your time horizon, risk tolerance, and financial goals.
To maximize your interest earnings, consider high-yield savings accounts, money market accounts, CDs, and bonds, along with regular contributions and reinvesting interest.
Understanding the impact of different compounding frequencies and the relationship between interest rates and economic conditions can help you make more informed financial decisions.
For borrowers, managing debt effectively involves comparing loan options, negotiating interest rates, making extra payments, and understanding loan terms.
By keeping these principles in mind, you’ll be well-equipped to manage your finances and make the most of your financial journey.
Looking for a real estate side hustle? Whether you are looking for passive income ideas or if you are looking for a part-time job (or more!), there are many different real estate side hustles. I have done a few different real estate side gigs, and I know many people who have side hustles in this…
Looking for a real estate side hustle?
Whether you are looking for passive income ideas or if you are looking for a part-time job (or more!), there are many different real estate side hustles.
I have done a few different real estate side gigs, and I know many people who have side hustles in this area as well. To get started in real estate, you don’t have to spend a lot of money – there are several real estate side gigs that can be started even if you are brand new or are on a budget.
Key Takeaways
Real estate side hustles have a range of options from income generating assets to freelance opportunities to office jobs.
You can supplement your income with both short-term and long-term real estate strategies.
Finding the right fit depends on your availability, investment capacity, and financial goals.
Best Real Estate Side Hustles
Here’s a quick summary of some of the different best real estate side hustles:
House hacking: Buy a property, live in one unit, and rent out the rest.
REIT investing: An easy way to start investing in real estate with less capital.
Airbnb rentals: Rent out a spare room or an entire property on a short-term basis.
Property management: If you’re organized and good with people, managing properties for others could be a perfect fit.
Long-term rentals: Becoming a landlord can generate steady cash flow.
Fix and flip: Buy properties that need work, renovate them, and sell them for a profit.
Below, you will read the full list and learn more about each one.
1. House flipping
Flipping houses can be a good real estate side hustle if you like real estate and enjoy fixing things up.
When you flip houses, you’re basically buying homes, making them better with repairs and upgrades, and then selling them to make more money.
The first thing to do for a successful house flip is to find a property that can be made better, such as by looking for homes in neighborhoods that are getting better or have room to grow. Think about things like where it is, what the market is like, and the condition of the property.
Before putting money into anything, it’s important to carefully look at the finances. You’ll want to figure out how much it will cost to buy, fix, and keep the property, and think about things like the cost of materials, paying workers, getting a loan, and the costs while you’re fixing things.
To flip a house well, you need to make smart changes that make the property better, without spending too much, by concentrating on important areas like the kitchen and bathrooms, and fixing any big problems with the structure or safety.
Recommended reading: 10 Best Books on Flipping Houses To Make Money
2. Investing in REITs
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-generating real estate. They are a way for you to invest in real estate without directly managing or owning properties.
An REIT is like a company that owns and takes care of real estate that makes money. They sell shares of this company to people, kind of like how stocks work.
When you invest in REITs, you can earn money from the real estate world without actually owning any property. So, if you don’t want to deal with being a landlord, this could be a good option. It’s way less work than owning property and handling it yourself.
You can even spread out your money and invest in different kinds of properties with REITs, like houses, offices, factories, and stores.
3. Getting a roommate
Getting a roommate in your home, whether that be a full-time roommate or renting out an extra room in your home short-term on Airbnb, can be a great real estate side hustle that doesn’t require very much work from you.
The earnings you can make from having a roommate depend on things like:
Where your home is (an expensive area? rural?)
The space you are renting to a roommate (for example, do they get their own bathroom? private entrance available?)
To find a roommate, you can share about it on your own Facebook page, put up an ad on sites like Craigslist, or make a rental listing on Airbnb. There are lots of places where you can let people know you’re looking for a roommate.
I have had many roommates in the past when I was younger and had a home with spare bedrooms. I would rent them out to long-term renters and people that we personally knew (such as friends and my sister).
Recommended reading: Tips For Renting A Room In Your House.
4. Airbnbs and vacation rentals
Turning your property into an Airbnb or other short-term rental can be a way to generate extra income. This is when you rent out your space, whether a full house, an apartment, or just a room, to travelers for short stays.
Before starting your Airbnb side hustle, be sure to:
Check local laws: Make sure short-term rentals are permitted in your area. There are many areas nowadays that are more strict when it comes to short-term rentals.
Understand the financials: Calculate potential earnings against expenses like mortgage, utilities, and maintenance.
Set up your space: Furnish and decorate to create a welcoming environment.
Market your rental: Use high-quality photos and create listings on rental platforms like Airbnb and Vrbo.
The amount you can earn can vary, with some hosts making around $5,000 to $10,000 a month or more, but this depends on factors such as location, rental type, and occupancy rates. Always plan for occupancy ebbs and flows – it’s part of the short-term rental business.
5. Real estate photography
If you’ve ever looked at a house listing and thought that the pictures looked awful, then this may be the real estate side hustle for you.
Real estate agents many times hire out for the photography side of selling a house, as they know and understand how important good pictures are.
Real estate photography is all about taking pictures of houses and spaces to grab the attention of people who might want to buy them. Real estate photographers might take pictures of the outside of a house, the backyard, the living room, attic, bathroom, and more.
You can start with the equipment you likely already have, like your smartphone, which can work well because phones these days have great cameras.
How you show a property can really impact a client’s chance of selling it. Your photos are not just pictures; they’re an important part of how the property gets advertised.
As you continue with this real estate side hustle, you might think about getting better equipment (like a real camera!), but for now, practice paying attention to details and getting better at taking pictures.
If you’re thinking about doing something extra to earn money in real estate, photography could be a great choice.
Recommended reading: 18 Ways You Can Get Paid To Take Pictures
6. Real estate drone photography
Drone pilots sell real estate photography services to help real estate agents showcase the properties they are selling.
When property listings include pictures from various angles and heights, it gives a different perspective compared to regular photos. This helps show aspects of real estate that traditional pictures might miss.
When you sell property photography services using your drone, you’re providing a valuable service to real estate companies that want to stand out in a crowded housing market.
Homes are increasingly being sold using drone photos, and it’s understandable because they can showcase the surroundings of a home. Also, potential home buyers can see the entire property and house through a drone picture, giving them a better understanding of what the home includes.
Recommended reading: How To Make Money With A Drone
7. Long-term rentals
A long-term rental is when you rent out a property for a long amount of time, usually six months to a year or even longer. An example would be renting out an apartment or house to a family to live in full-time.
Long-term rentals are different from short-term rentals like vacation homes or Airbnb listings. They are meant for people or families looking for a longer place to live.
A benefit of long-term rentals is the reliable and steady income they can give you. When you rent your property to tenants for an extended period, you set up a regular cash flow of rental payments. This stability can be especially nice for people who are looking for a dependable source of passive income.
Plus, it’s usually less work than a short-term rental, because you don’t have to clean the home every few days or find new people to rent out to.
Recommended reading: How This 34 Year Old Owns 7 Rental Homes
8. Buy and hold for long-term wealth
If you want to grow wealth through real estate, the buy-and-hold strategy is a way to achieve lasting growth. This means buying a property and keeping it for an extended period, benefiting from both its increasing value over time and the rental income it makes you over the years.
Some positives to think about with a buy-and-hold real estate side hustle include:
Appreciation: Over time, real estate often increases in value.
Rental income: It can provide a steady cash flow each month.
Tax advantages: Possible deductions can reduce your taxable income.
The buy-and-hold strategy requires patience and a willingness to handle market changes. It’s a long-term approach, not a quick one, but if you stay persistent, you can create an investment portfolio for future financial stability.
9. Notary services for real estate
If you want to get more into the real estate world without becoming an agent or broker, becoming a notary public can be a way to make extra money.
Many documents, including deeds, mortgages, and power of attorney, require notarization to be legally binding.
With a notarization license, you can provide an important service required for different real estate transactions.
Notaries are important because they help make sure that the people signing documents are who they claim to be to prevent fraud.
10. Rental arbitrage
Rental arbitrage is a way to make extra money in real estate without owning a property. You rent a place for a long time and then sublease it as a short-term rental using platforms like Airbnb.
Here’s how to get started:
Check local laws: You’ll want to make sure your city or state allows for short-term rentals.
Make sure the rental allows for you to do this: Not every rental will be okay with you renting it out. You will want to read your rental contract carefully.
Do market research: Understand the demand for short-term rentals in your target area, such as by looking for locations with high tourist traffic or business conferences.
Potential Benefits
Considerations
+ Strong cash flow potential
– Initial setup and furnishing cost
+ Low startup costs compared to buying
– Dependence on short-term rental market stability
Making money in rental arbitrage comes from the difference between the cost of the long-term lease and the income from short-term rentals. The bigger the gap, the more potential for profit. But remember to factor in the expenses of running the rentals, like cleaning and maintenance costs.
11. House hacking
House hacking is a strategic approach to real estate where you purchase a property with multiple units and live in one unit while renting out the others. This is a side hustle because it can help offset your living expenses through the rental income.
House hacking can be an easy starting point if you want to dip your toes into real estate investing with the added perk of reducing your personal living expenses.
Back when we were living in a traditional house, we house hacked for a little while and had a few different roommates live with us. The monthly rent we collected allowed us to lower our house payments and put more money in savings.
We house hacked with our first house, and it was really great for us. Being able to set more money aside even helped me get ready to quit my job to become a full-time blogger.
If you are looking for a good book on the subject of house hacking, then I recommend reading The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom by Craig Curelop.
Recommended reading: What Is House Hacking & How To Live For Free
12. Real estate agent
A real estate agent is a person who helps people, like you and me, find real estate to buy or sell. They usually earn their income through a commission, which is a percentage of the property’s sale price.
To become a real estate agent and start this real estate career, you only need a high school diploma and a professional license. As of 2021, the median pay, according to the U.S. Bureau of Labor Statistics, is $23.45 per hour, or $48,770 per year.
And, there are tons of real estate agents who make a lot more money than this.
13. Crowdfunding and peer-to-peer lending
If you want to learn how to make extra money in real estate, then crowdfunding and peer-to-peer lending are areas to look into.
Crowdfunding platforms allow you to invest in real estate deals with a smaller amount of money compared to purchasing property outright. This can provide you with passive income through rental returns or potential property value appreciation.
Peer-to-peer lending platforms enable you to lend money directly to borrowers. You can potentially earn higher returns compared to traditional savings accounts, but there is always the risk of a borrower not repaying the loan.
Both crowdfunding and peer-to-peer lending utilize technology to connect investors with individuals seeking funding.
14. Bird dogging
Bird dogging in real estate can be a side hustle where you help find potentially profitable properties for investors. Your skill in spotting undervalued or distressed properties is important.
Here’s what you usually need to do:
Conduct market research to locate properties that are flying under the radar.
Build a network with local real estate investors who are looking for deals.
Learn to use the Multiple Listing Service (MLS) to spot opportunities.
Typically, you’ll be on the lookout for foreclosures, bank-owned properties, and distressed homes due for a quick sale.
As a bird dog, your compensation usually comes from a referral fee after the investor decides to move forward with your find. Importantly, to perform this role, you don’t necessarily need any initial capital, just the time and skill to identify promising investment opportunities.
15. General contractor
General contractors handle the day-to-day activities on construction sites, overseeing tasks from residential remodels to constructing new homes.
This is typically more of a full-time job, but this can sometimes be done as a real estate side hustle.
As a general contractor, you can choose projects that match your schedule and interests, providing flexibility. Despite the responsibilities, this role allows you to play a central role in turning plans into actual buildings, giving you the potential to make extra money.
16. Flip raw land
Getting involved in raw land flipping is when a person finds and buys undeveloped land to sell later at a profit.
The main benefits include a lower initial investment and less complexity compared to traditional real estate investments, as it doesn’t involve renovation or improvements. There are no buildings, instead it may be a lot or acres of land.
Here’s a step-by-step guide on how to start:
Find raw land – Research areas with potential growth or upcoming developments that could boost land value.
Due diligence – Perform thorough checks on land titles, zoning laws, and road access to avoid legal issues.
Pricing strategy – Your selling price should be attractive enough for buyers yet ensure you make a reasonable profit margin.
Sell and negotiate – Use online platforms to reach potential buyers and negotiate the best deal.
17. Rent out your storage space
If you have unused land or space in your home, renting it out for storage space can be an easy way to make passive income.
People have a lot of stuff, and they will pay you to store their stuff in your unused spaces.
You can sell storage solutions for vehicles, boats, personal belongings, and more. You can rent out your parking space, closet, basement, attic storage, and more.
A site where you can list your storage space is called Neighbor and you can earn $100 to $400+ each month. This depends on the demand in your area and the type of storage space you are renting out.
Recommended reading: Neighbor Review: Make Money Renting Your Storage Space
18. Property manager
A property manager side hustle can be a great way to make extra money.
A property manager is a real estate professional who finds and oversees tenants, collects rent, and handles repairs and maintenance activities. It’s a side hustle that property owners pay for because they may not have the time or skills to effectively manage their own property.
Property managers can manage long-term rentals like apartments, short-term rentals like Airbnbs, and even commercial spaces as well.
I have a friend who is a property manager on the side of his full-time construction job – he manages many different types of properties, from second homes to vacation rentals to someone simply being out of town. He checks on their properties to make sure that everything is running smoothly.
19. Home stager
If you’re passionate about real estate and design, starting a side hustle as a home stager could be profitable for you. As a home stager, your job is to improve the appearance of a home before it’s listed for sale.
This often results in faster sales and higher prices, making your service valuable to sellers.
You can start by staging homes for friends or family, if possible, to build a portfolio. Before and after photos are powerful tools to showcase your work.
You can even provide consultations to homeowners who prefer to do the actual staging themselves. In such cases, your design style can be a more budget-friendly option for a do-it-yourself homeowner.
20. Home inspector
We recently bought a house, and our home inspector was actually a home inspector on the side – this was his real estate side hustle! I think he was a city inspector (or something similar) full-time, so he was very knowledgeable in the area.
Home inspection as a side job can be a strategic move if you’re interested in real estate. This job allows for flexibility since you can set your hours, such as by completing home inspections on the weekends or before or after your day job.
You’ll need to invest in proper training and get licensed, which is a process that can be completed relatively quickly.
The responsibilities of a home inspector include:
Inspecting homes for possible problems, like a leak or bad wiring.
Creating and delivering reports based on what you find during the inspection.
21. Real estate appraiser
Real estate appraisers determine the fair market value of a property, and this process is important in transactions, such as home sales and refinances.
Appraisers assess property values by taking notes on unique characteristics and comparing them with similar properties that have sold recently.
They then prepare reports, detailing findings and providing a valuation that banks and other institutions depend on for loans.
22. Real estate wholesaler
Real estate wholesalers are middlemen who find properties under market value, contract them with the seller, and then sell the contract to a buyer, often an investor. Their profit comes from the difference between the contracted price with the seller and the amount the buyer pays.
Here is a quick summary of what a wholesale real estate side hustle is:
Find a distressed property – Search for properties that can be bought below market value.
Evaluate the property – Determine the After Repair Value (ARV) and estimate repair costs.
Secure under contract – Enter into a contract with the seller, giving you the right to purchase.
Find a buyer – Locate an investor interested in buying the contract.
Assign the contract – Transfer your purchasing rights to the investor for a fee.
By becoming skilled at finding good deals and building connections with trustworthy investors, real estate wholesaling can become a profitable real estate side hustle.
23. Start a real estate blog
Starting a real estate blog (or even a real estate YouTube channel or social media account!) can be a good way to make extra money without having to spend a lot of money.
With a real estate blog, you can write about local market insights, home buying and home selling tips, property investment strategies, home improvement and DIY projects, and more.
I have been a blogger for years, and I really love it. I am able to create my own schedule, decide how I make money online, travel whenever I want, and more. And, it all started on the side of my day job – so I definitely think that a real estate blog can be started as a side hustle.
Learn more at How To Start A Blog FREE Course.
Frequently Asked Questions
Below are answers to common questions about real estate side hustles.
Can real estate be a side hustle? Is real estate a good side hustle?
Yes, real estate can be a lucrative side hustle. Many people do real estate activities on a part-time basis, which can include short-term rentals, getting a roommate, and more, with lower time commitments.
Is real estate worth it as a side hustle?
Real estate as a side hustle can be worth it if you are looking for more income streams and have an interest in the housing market or real estate. As you probably noticed above, there are many different kinds of side hustles, so the amount of money you can earn or the amount of time you will spend will just depend on the gig you choose.
How can realtors make extra money?
Realtors can make extra money by managing rental properties, taking part in real estate crowdfunding, selling real estate photography services, and more.
Is real estate a good side hustle for teachers?
Yes, real estate can be a good side hustle for teachers. There are many options that may work for a teacher.
For example, some teachers work as real estate agents on the side. This is possible because you can handle listing and selling homes during weekends, breaks, evenings, and over the summer. However, keep in mind that selling homes might pose challenges, as clients may require your full attention during the day, which could clash with your teaching commitments.
You can find more ideas at 36 Best Side Jobs for Teachers To Make Extra Money.
Which licenses might be required to pursue a side hustle in the real estate field?
Depending on the side hustle, certain licenses like a real estate license may be required. For example, to become a real estate agent or home inspector, you’ll need a specific license. However, if you’re looking into just getting a roommate, then you may not need a license. It all just depends on the real estate side gig you are interested in.
How to make money in real estate without ever buying any property?
As you learned above, you don’t need to personally buy or own real estate in order to make money in real estate. You can invest in REITs, become a notary for real estate transactions, include affiliate marketing for real estate products on a blog, and more.
Real Estate Side Hustles – Summary
I hope you enjoyed this article about real estate side hustles.
Picking the right side hustle gig in real estate might feel overwhelming because there are many choices.
Some people might like jobs where you have to do more, like fixing up houses or taking care of Airbnb rentals. Others might prefer making money without doing much, like through REITs or renting out a spare room.
Whatever you’re into or however much money you have to invest, there are probably real estate side business ideas that fit with what you have and what you want to achieve.
What do you think is the best real estate side hustle?
When it comes to investing for the future, the magic of compound interest can be a powerful tool. By placing your money in the stock market, you’re allowing it to grow over time with relatively little effort. However, understanding how to allocate your assets properly and diversify your investment portfolio can be a daunting task. That’s where exchange-traded funds (ETFs) and mutual funds come into play.
Both ETFs and mutual funds offer simple and effective ways to diversify your stock portfolio without having to buy individual stocks. They allow you to spread your investment across numerous stock options, reducing your overall risk and increasing your chances of growth.
In this article, we’ll dive deeper into the differences between ETFs and mutual funds, their pros and cons, and how to determine which one is right for your personal investment goals.
What’s the difference between ETFs and mutual funds?
At their core, both ETFs and mutual funds are pools of money invested in an array of stocks, bonds, and potentially other securities and assets. These investments are managed by third-party individuals or corporations, alleviating the need for you to perform extensive research and manual transactions to gain market exposure.
The Key Differences
While ETFs and mutual funds share similarities, there are several key differences that can impact your decision when choosing the right investment vehicle for your portfolio:
Active Management: Mutual funds (except for index funds) are actively managed by qualified financial professionals who monitor and adjust the fund’s assets based on market performance. This can provide a sense of security for long-term investors. ETFs, on the other hand, are typically passively managed and track a specific index or sector.
Trading Flexibility: ETFs can be traded on a daily basis, just like individual stocks, allowing investors more control over their investments. Mutual funds can only be bought and sold at the end of the trading day at their Net Asset Value (NAV).
Investment Minimums: ETFs generally have lower initial investment requirements than mutual funds, as you can often buy a single share at a relatively low price. Mutual funds typically have higher minimum investment thresholds.
Fees and Expenses: ETFs often have lower expense ratios and fewer fees compared to mutual funds. This can be attributed to their passive management style and lower operating costs.
ETF vs. Mutual Fund: Pros and Cons
To help you decide which type of investment is best for your goals, let’s dive deeper into the advantages and disadvantages of ETFs and mutual funds.
ETFs
Pros:
Lower start-up investments: With the ability to buy a single share, ETFs often have lower initial investment requirements compared to mutual funds.
Lower fees: ETFs typically have lower expense ratios, and fewer additional fees like marketing and distribution costs.
Greater transparency and flexibility in trading: ETFs can be traded like stocks throughout the day, and their holdings are usually disclosed daily. This offers more control and transparency for investors.
Tax efficiency: ETFs tend to be more tax-efficient, potentially resulting in lower tax liabilities for investors.
Cons:
Lack of active management: Most ETFs are passively managed, so investors looking for professional oversight may prefer mutual funds.
Potential trading costs: While ETFs generally have lower expense ratios, frequent trading could result in higher transaction costs, offsetting their cost advantages.
Mutual Funds
Pros:
No commissions on trades: Mutual funds can be bought and sold without paying additional commission fees, which may be beneficial for investors who trade frequently. Some brokerages also offer commission-free ETFs, but these may have higher expense ratios than other ETFs on the market.
Active management: Mutual funds are more likely to be actively managed by financial professionals, which can be appealing to investors seeking expert oversight and decision-making.
Automatic investments and withdrawals: With mutual funds, you can set up automatic transactions, making it easier to invest and withdraw funds on a consistent basis.
Cons:
Higher fees: Mutual funds typically have higher expense ratios and additional fees compared to ETFs, which can eat into your returns over time.
Less trading flexibility: Mutual funds can only be bought and sold at the end of the trading day at their NAV, offering less control and flexibility than ETFs.
Potential capital gains tax liabilities: Due to their structure, mutual funds may result in increased capital gains taxes and subsequently, higher tax obligations for investors.
Choosing the Right Investment Vehicle for Your Personal Portfolio
Ultimately, the best choice between an ETF and a mutual fund depends on your individual financial goals, risk tolerance, and investment preferences. Both options provide broad market exposure with relatively low effort and expense, but you may find one more appealing based on your unique circumstances.
Considerations for ETFs:
If you have limited funds to invest initially, ETFs may be a more accessible option due to their lower start-up investments.
If you prefer more control over your investments and the ability to trade throughout the day, ETFs offer the flexibility you’re looking for.
If tax efficiency is a priority, ETFs tend to have a lower overall tax liability compared to mutual funds.
Considerations for Mutual Funds:
If you value the expertise and oversight of financial professionals, actively managed mutual funds may be a better fit.
If you plan to trade frequently and want to avoid commission fees, mutual funds could be more cost-effective.
If you prefer the convenience of automatic investments and withdrawals, mutual funds allow for easy setup and management of recurring transactions.
A Balanced Approach: Combining ETFs and Mutual Funds in Your Portfolio
It’s important to note that you don’t have to choose exclusively between ETFs and mutual funds. Many investors find value in incorporating both investment vehicles into their portfolios to capitalize on the benefits of each. By combining the two, you can create a diversified, balanced investment strategy that caters to your individual needs and preferences.
For example, you might allocate a portion of your portfolio to low-cost, passively managed ETFs for broad market exposure and tax efficiency, while also investing in actively managed mutual funds for targeted growth opportunities and professional management. This approach allows you to take advantage of the unique strengths of each investment vehicle, potentially leading to better long-term returns and a more resilient portfolio.
Understanding the Mechanics of ETFs and Mutual Funds
To fully comprehend the differences, let’s take a look at their underlying mechanics and how they function within the investment landscape.
Creation and Redemption Process
ETFs:
ETFs are created and redeemed through a process involving authorized participants (APs) – typically large financial institutions. When creating new ETF shares, APs assemble a portfolio of underlying securities that mirrors the ETF’s composition and deliver it to the ETF issuer.
In exchange, the issuer provides the AP with ETF shares, which can then be sold on the open market. The redemption process is the reverse of this, with APs exchanging ETF shares for the underlying securities.
This creation and redemption process helps maintain an ETF’s market price close to its NAV. If the market price deviates significantly from the NAV, APs can capitalize on the arbitrage opportunity by creating or redeeming ETF shares, which in turn, helps bring the price back in line with the NAV.
Mutual Funds:
Unlike ETFs, mutual funds do not involve APs or the creation and redemption process. Instead, mutual fund shares are created and redeemed directly with the fund company at the end of the trading day, based on the NAV. As a result, mutual funds are not subject to the same intraday price fluctuations as ETFs and do not rely on an arbitrage mechanism to maintain a consistent market price.
Portfolio Management Strategies
ETFs:
The majority of ETFs are passively managed, meaning they aim to replicate the performance of a specific index or sector. This passive approach results in lower management fees and operating costs compared to actively managed funds. However, there has been a recent surge in the popularity of actively managed ETFs, which attempt to outperform their respective benchmarks through the expertise of portfolio managers.
Mutual Funds:
Mutual funds can be either actively or passively managed. Actively managed mutual funds rely on the expertise of a fund manager to select and manage the underlying securities in an effort to outperform the market.
This active management can lead to higher fees and expenses due to increased research, trading, and operational costs. Passively managed mutual funds, also known as index funds, seek to replicate the performance of a specific index or benchmark, resulting in lower fees and expenses.
Assessing Performance: ETFs vs. Mutual Funds
When comparing the performance, there are several factors to consider, such as historical returns, risk-adjusted performance, and consistency of results.
Historical Returns
While past performance is not necessarily indicative of future results, analyzing historical returns can provide valuable insight into how an investment vehicle has performed over time. Comparing the average annual returns of ETFs vs. mutual funds over various time horizons (e.g., 1-year, 3-year, 5-year, and 10-year periods) can help you gauge their relative performance.
It’s important to remember that individual ETFs and mutual funds can vary significantly in their returns based on their underlying investments, management strategies, and fees. Therefore, it’s crucial to analyze the performance of specific funds that align with your investment objectives rather than relying solely on broad industry averages.
Risk-Adjusted Performance
To effectively compare the performance of ETFs and mutual funds, it’s essential to consider the level of risk associated with each investment. Risk-adjusted performance measures, such as the Sharpe Ratio, can help you evaluate an investment’s return relative to its risk. A higher Sharpe Ratio indicates a better risk-adjusted return, allowing you to compare investments with different risk profiles more accurately.
When comparing mutual funds and ETFs, consider the risk-adjusted performance of each to determine which investment vehicle offers a more favorable balance between potential returns and associated risks.
Bottom Line
When it comes to deciding between ETFs and mutual funds, there’s no one-size-fits-all answer. By understanding the key differences, pros and cons, and how each investment vehicle aligns with your personal financial goals, you can make an informed decision that best suits your needs.
Remember to continually evaluate your investment strategy and make adjustments as needed. As your financial goals and circumstances change, your ideal mix of ETFs and mutual funds may also evolve. By staying informed and adaptable, you’ll be well-equipped to keep up with the ever-changing world of investing and work towards a successful financial future.
Investing has become much easier over the years thanks to the popularity of robo-advisors. Rather than working with a human financial advisor, a robo-investing uses algorithms to make a wealth management plan for each investor.
There are many advantages to using these services. Robo-advisors are typically less expensive than hiring a financial advisor. They allow you to start investing in the stock market even if you don’t have much money to start with.
So if you’re looking for an easy, inexpensive way to get started with investing, a robo-advisor could be a great option for you.
10 Best Robo-Advisors: Uncovering the Standout Performers
Here is an overview of our top picks for the best robo-advisors, as well as a brief explanation about what we like about each one:
1. Personal Capital
Key Features:
Hybrid robo-advisor with access to human financial advisors
Advanced investment strategies including tax optimization
Comprehensive financial planning tools
Retirement and savings goal tracking
High minimum balance requirement
Who it’s best for:
Personal Capital is ideal for more advanced investors with higher account balances, as well as those who seek a combination of automated investing with human financial advisor support.
Its comprehensive planning and retirement tracking features make it a powerful platform for long-term wealth management.
2. Wealthfront
Key Features:
Diversified portfolios with 11 different asset classes
Tax-loss harvesting for all investment accounts
High-interest cash account
Automatic rebalancing and portfolio optimization
College savings plan (529) support
Who it’s best for:
Wealthfront is a strong option for investors seeking a fully automated robo-advisor with a focus on tax efficiency and diversified investments.
Its high-interest cash account and college savings plan support make it an attractive choice for those looking to cover various financial goals.
3. Betterment
Key Features:
Goal-based investing tailored to personal milestones
Automatic rebalancing and tax-efficient strategies
Socially responsible investing options
Access to human financial advisors (with premium plan)
No minimum account balance
Who it’s best for:
Betterment is a great choice for beginners and experienced investors alike, who want a goal-oriented approach to investing.
With its socially responsible investing options and access to a licensed advisor (with the premium plan), it provides a well-rounded platform for a variety of investors.
4. Ally Invest
Key Features:
Low account minimum and no trading commissions
User-friendly online platform
Various research-based tools
No advisory fees for managed portfolios
Integration with Ally Bank for seamless banking and investing
Who it’s best for:
Ally Invest is an excellent option for new investors looking for a low-cost, user-friendly platform with no trading commissions.
Its integration with Ally Bank makes it a convenient choice for those who want to manage their banking and investing under one roof.
5. Vanguard
Key Features:
Hybrid robo-advisor with access to Vanguard personal advisor services
Low-cost, diversified investment options
Retirement and college savings plans
Strong reputation and established history
Higher minimum investment compared to other robo-advisors
Who it’s best for:
Vanguard Digital Advisor is ideal for investors seeking a trusted, established provider with a focus on low-cost, diversified investments.
Its hybrid model offers the benefits of automated investing along with access to a human advisor, making it a strong option for those with larger account balances.
6. M1
Key Features:
Fractional share investing
Customizable portfolios or pre-built expert portfolios
No management fees or commissions
M1 Borrow feature allows borrowing against your portfolio
M1 Spend feature integrates banking and investing
Who it’s best for:
M1 Finance is well-suited for investors who want a high level of customization with their portfolios, allowing them to create their own investment “pies” or choose from pre-built expert portfolios.
As a cost-effective solution, it appeals to budget-minded investors who appreciate the opportunity to leverage their portfolio through borrowing or take advantage of integrated banking services.
7. Ellevest
Key Features:
Focus on socially responsible investing
Gender-specific investment advice
Goal-based investing approach
Access to career coaching and financial planners
Low fees
Who it’s best for:
Ellevest is an excellent choice for investors who prioritize socially responsible investing and seek a platform tailored to the unique financial challenges faced by women.
Its goal-driven approach, coupled with access to career coaching and financial planners, makes it a comprehensive platform for value-oriented investors.
8. Facet
Key Features:
Comprehensive financial planning services
Access to dedicated Certified Financial Planner (CFP)
Flat-fee pricing model
No account minimums
Not fully automated
Who it’s best for:
Facet Wealth is ideal for individuals who want personalized investment management services but can’t afford the fees associated with traditional financial advisors.
Its flat-fee pricing model and access to a dedicated CFP provide a high level of personalization and support, making it a valuable option for those seeking a more hands-on approach to wealth management.
9. SoFi Automated Investing
Key Features:
No management fees
Low minimum balance requirement
Automatic rebalancing
Access to certified financial planners
Robust customer service
Who it’s best for:
SoFi Automated Investing is an excellent option for investors seeking a low-cost, accessible platform with strong customer support.
With no account fees and a low balance requirement, it’s a great choice for those just starting their investment journey or those who want access to financial planning resources without paying high fees.
10. Blooom
Key Features:
Focus on retirement savings (401(k)s and IRAs)
No minimum account balance requirement
Flat yearly management fee
401(k) analysis and optimization
Auto rebalancing and investment recommendations
Who it’s best for:
Blooom is a standout option for investors looking to optimize their retirement savings, specifically in 401(k)s and IRAs.
With its flat yearly management fee and no minimum account balance requirement, it’s an accessible platform for those who want to improve their retirement investment approach and maximize their long-term returns.
A Side-By-Side Comparison of the Best Robo-Advisors
Listed below is a side-by-side overview of what each robo-advisor has to offer.
BROKER
FEES
PROMOTION
ACCOUNT MINIMUM
Ally Invest
0.0%
No promotions offered
$100
Personal Capital
0.49%-0.89%
No promotions offered
$100,000
Wealthfront
0.25%
$5,000 in assets managed for free
$500
Betterment
0.25%
A year of free management
$0
FutureAdvisor
0.50%
Three months of free management
$10,000
Vanguard
0.30%
No promotions offered
$50,000
Bloom
$10 per month
$10 off first year
$0
M1 Finance
0.0%
No promotions offered
$0
Ellevest
0.25%
Possible $750 cash bonus
$0
Facet Wealth
$480 per year or more
No promotions offered
$0
SoFi Automated Investing
0.0%
Free career counseling and loan discounts
$100
Wealthsimple
0.40%-0.50%
$10,000 in assets managed for free
$0
How do robo-advisors work?
A robo-advisor is a specialized software that provides automated investment portfolios based on your goals and risk tolerance. Your risk tolerance is based on your answers to the questions provided.
Robo-advisors use algorithms to choose the right asset allocation based on your risk tolerance, investment goals, and time horizon, providing a customized and efficient approach to portfolio management. Some services give you access to human advisors as well.
Robo-advisors are a viable option for anyone who wants to start investing but can’t afford a portfolio management firm. Or if you just want a hands-off approach to investing, robo-investing is a great choice for diversifying your investments. These services typically have low management fees and require low account minimum balances.
So if you don’t have tens of thousands of dollars at your disposal but still want to start building an investment portfolio, using a robo-advisor has a much lower barrier to entry. There are many online services available on the market, but the ones listed above stand out from the pack.
How to Choose the Right Robo-Advisor for Your Needs
Selecting the right robo-advisor requires considering your investment goals, risk tolerance, and personal preferences. Here are some factors to help guide your decision-making process:
1. Determine your investment goals
Before choosing a robo-advisor, it’s essential to outline your financial goals. Are you saving for retirement, building an emergency fund, or working towards another specific milestone? Understanding your objectives will help you find a robo-advisor that aligns with your needs and offers relevant services.
2. Assess your risk tolerance
Risk tolerance refers to your comfort level with the potential fluctuations in the value of your investments. Some investors prefer a conservative approach, while others may be willing to take on more risk for potentially higher returns. Choose a robo-advisor that offers investment options aligned with your risk tolerance and provides suitable recommendations based on your preferences.
3. Compare fees and account minimums
Fees and account minimums are crucial factors to consider when selecting a robo-advisor. Some platforms charge a percentage of your assets under management, while others may have a flat fee.
Additionally, account minimums can vary widely, ranging from no minimum to tens of thousands of dollars. Choose a robo-advisor with a fee structure and minimum investment requirement that suits your financial situation.
4. Review available investment options
Different robo-advisors offer varying investment options, including individual stocks, bonds, ETFs, and mutual funds. Some platforms may also provide access to socially responsible investments or other specialized options. Ensure the robo-advisor you choose offers options that align with your goals and values.
5. Consider additional features and services
Many robo-advisors offer added features and services, such as automatic rebalancing, tax-loss harvesting, and access to human advisors. Some platforms may also provide banking services or wealth management tools. Assess which additional features are important to you and select a robo-advisor that meets your requirements.
6. Evaluate the user experience
The user experience, including the platform’s ease of use, customer support, and educational resources, is an essential aspect of choosing a robo-advisor. Look for platforms with intuitive interfaces, responsive customer service, and helpful resources to guide you through the investment process.
7. Read reviews and testimonials
Researching reviews and testimonials from current users can provide valuable insight into a robo-advisor’s performance, customer satisfaction, and any potential issues you may encounter. Look for reviews from reputable sources and users with similar objectives and investment preferences to ensure the robo-advisor is the right fit for your needs.
What should you look for in a robo-advisor?
When researching robo-advisors, it’s crucial to know what features and qualities are essential for a successful investment experience. Here are five things you should keep in mind when you’re considering different services.
Management fees: Most robo-advisors will charge an annual fee. This is usually calculated as a percentage of your total assets. You should make sure you understand the management fee structure because this will cut into your earnings.
Types of accounts offered: You should make sure you have a general understanding of the different accounts offered. For instance, retirement accounts like Roth IRAs and 401(k)s will have limits on how much you can contribute each year. Make sure you understand the difference between a taxable investment account and tax-deferred or tax-free accounts offered and how they benefit your financial goals.
Investments: It’s a good idea to familiarize yourself with the types of investments offered. For instance, many robo-advisors offer low-cost index funds, mutual funds, and ETFs. You should make sure that you like the accounts being offered and that they are fairly low cost.
Rebalancing: Since your investment portfolio will fluctuate, over time, it’s easy for it to become out-of-sync with your overall investing goals. You should look for a company that offers automatic portfolio rebalancing.
Access to financial advisors: And finally, one of the benefits of using a robo-advisor is that it’s a hands-off approach to investing. But some robo-advisors offer access to financial planners, and this offers many benefits. Having a financial planner involved brings a human element to your portfolio and makes it more personalized.
An Explanation of the Different Investment Options Available through Robo-Advisors
Robo-advisors provide investors with a variety of investment options to create a well-diversified portfolio tailored to their risk tolerance and financial objectives. Understanding the different options available can help you make informed decisions about your portfolio. Here are some of the most common options offered by robo-advisors:
1. Exchange-Traded Funds (ETFs)
ETFs are a popular investment option among robo-advisors due to their low costs and broad diversification. An ETF is a collection of securities, such as stocks, bonds, or commodities, that tracks a specific index or sector. ETFs trade on stock exchanges, just like individual stocks, and offer investors exposure to a wide range of asset classes, industries, and regions.
2. Index Funds
Index funds are mutual funds that track the performance of a specific market index, such as the S&P 500 or Nasdaq Composite. Like ETFs, they provide broad diversification and have low management fees. By investing in an index fund, you’re essentially buying a small piece of every company within that index, reducing the overall risk in your portfolio.
3. Mutual Funds
Mutual funds pool the investments of multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are less common in robo-advisor portfolios due to their higher fees compared to ETFs and index funds, some robo-advisors still include them as an investment option, particularly for specific sectors or strategies.
4. Bonds
Bonds are debt securities issued by governments, corporations, or other entities to raise capital. When you invest in a bond, you’re essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at the bond’s maturity. Bonds are typically considered less risky than stocks and can provide a steady income stream, making them a popular choice for conservative investors or those nearing retirement.
5. Real Estate Investment Trusts (REITs)
REITs are companies that own, operate, or finance income-producing real estate properties. They allow investors to gain exposure to real estate investments without the need to buy or manage properties directly. REITs can provide diversification and income potential to a portfolio, as they typically pay regular dividends from the rental income generated by their properties.
6. Socially Responsible Investing (SRI) and Environmental, Social, and Governance (ESG) Funds
SRI and ESG funds focus on investments in companies that meet specific ethical, environmental, social, or governance criteria. These funds allow investors to align their investment portfolios with their values and support businesses that have a positive impact on society and the environment. Some robo-advisors offer SRI and ESG options to cater to the growing demand for responsible investing.
7. Target-Date Funds
Target-date funds are designed to simplify long-term investing, particularly for retirement planning. These funds automatically adjust their asset allocation over time, gradually shifting from higher-risk investments like stocks to more conservative investments like bonds as the target retirement date approaches. This helps investors maintain an age-appropriate risk level in their portfolios without needing to make manual adjustments.
Tips for Monitoring and Adjusting Your Investment Strategy with a Robo-Advisor
While robo-advisors are designed to automate much of the investment process, it’s essential to periodically review your investment plan and make adjustments as needed. Here are some tips for monitoring and adjusting your strategy when using a robo-advisor:
1. Regularly review your risk tolerance and investment goals
Your risk tolerance and investment goals may change over time due to personal circumstances or market conditions. Ensure you update your robo-advisor profile to reflect any changes, as this will help the platform adjust your portfolio to align with your current objectives and risk appetite.
2. Monitor your portfolio performance
Keep an eye on your portfolio’s performance and compare it to relevant benchmarks or other investment options. This will give you an idea of whether your robo-advisor is effectively managing your investments and meeting your expectations. If your portfolio consistently underperforms, it may be time to consider other investment strategies or try a different robo-advisor.
3. Rebalance your portfolio as needed
While many robo-advisors automatically rebalance your portfolio, it’s still a good idea to review your investments periodically. If you notice significant deviations from your target allocation or if your investment goals change, you may need to adjust your portfolio accordingly.
4. Stay informed about market trends and developments
Even though robo-advisors handle most of the investment decisions for you, it’s essential to stay informed about market trends and developments. This will help you better understand your portfolio’s performance and make more informed decisions about any adjustments you may need to make.
5. Evaluate the robo-advisor’s features and offerings
Periodically review the features and offerings of your robo-advisor to ensure they still align with your needs and preferences. Some robo-advisors may introduce new investment options, tools, or services that could benefit your investment strategy. If you find a different robo-advisor that better suits your needs, don’t hesitate to switch.
6. Consider seeking professional advice
If you have concerns about your investment approach or need help understanding complex financial situations, consider consulting a certified financial planner or other financial professional. While a robo-advisor can be an excellent option for many investors, there may be times when personalized advice from a human advisor is necessary.
Bottom Line
Robo-advisors are an excellent solution for investors seeking a low-cost, user-friendly approach to growing their wealth. They provide the advantages of professional portfolio management and access to diverse investment options without the hefty fees typically associated with traditional financial advisors.
As you embark on your investment journey, remember to consider your long-term goals, risk tolerance, and personal values when selecting a robo-advisor. Make sure to evaluate management fees, account types, and available investment options to ensure your chosen platform aligns with your investment strategy.
Keep an eye on your portfolio and leverage the tools and features offered by your robo-advisor to maximize returns, optimize asset allocation, and stay on track to achieve your financial goals.
By understanding the full potential of robo-advisors and making informed decisions about your investments, you can confidently take charge of your financial future and reap the rewards of a well-managed, diversified portfolio.
If you’ve ever tried to crowdsource an answer to an obscure question or find cool stuff to do in a random city, you’re probably familiar with Reddit. The internet forum may feel reminiscent of a ‘90’s chatroom, but the site has a strong internet presence, an influential base of users (GameStop, ever heard of it?), and now, a path to becoming a public company.
In Dec. 2021, Reddit announced it had confidentially filed its IPO paperwork with the Securities and Exchange Commission (SEC), but it held off on actually going public
. Now, Reuters is reporting the social network is planning to file publicly in late February and complete its IPO soon after. Reddit has even picked its future home: The New York Stock Exchange.
If you want to be ready to buy Reddit stock once it hits the market, here’s what you need to know.
How to buy Reddit stock
Once Reddit has gone public, you’ll be able to buy Reddit stock. If you want to invest in Reddit as an individual stock when it becomes available, you’ll need an investment account. Investment accounts, or brokerage accounts, are not investments themselves — they simply house the money you use to buy investments, and your actual investments once you purchase them. There are several types of investment accounts, and it’s worth investigating which type is best for you since some offer tax advantages.
Once you open an investment account and add money to it — and Reddit goes public — you’ll be able to buy the stock. That being said, some brokers do offer access to IPO shares before they’re more widely available, but they may have mandatory investor assessments, account minimums or trade minimums.
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What to consider when buying Reddit stock
While Reddit serves a slightly different function in a different format than its competitors (think more question-and-answer and in-depth discussion than Instagram pics and platitudes), the company is still entering a ring that already has a few heavyweight champs in it.
With competition such as Meta, TikTok and Pinterest, it may be difficult for Reddit to hold its own. Plus, sources from inside Reddit told Bloomberg that the company has yet to turn a full-year profit
. Reddit relies on two main income streams: Advertising revenue, and a paid plan called Reddit Premium lets users pay $5.99 per month to avoid that advertising. Both sources of revenue were met with protest from Reddit users when they were introduced.
When purchasing any stock you’ll want to consider the company’s fundamentals, such as its revenue, net income and earnings per share. When looking into a company that is new to the public sphere, such as Reddit, it can be difficult to find that information since private companies don’t have to produce regular reports. Once Reddit becomes public, that information will be more readily available because the company will be required by the SEC to provide regular financial updates.
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How much should you invest in Reddit stock?
No one will know how much a share of Reddit stock will cost until its IPO price is announced, and even then, the market will have its say about the company’s value. But like any large or significant purchase, it’s a good idea to know how much you feel comfortable spending before you hit “buy.”
A good rule of thumb is to not invest more than 5% to 10% of your overall investment portfolio (that includes all your investment accounts, such as a 401(k), an IRA and any traditional brokerage accounts) in individual stocks. For easy math, that means if you have $100 to invest, you may only want between $5 and $10 to be allocated to individual stocks such as Reddit.
The rest of your account could be made up of funds, such as index funds. Funds offer instant diversification for your portfolio since they invest in lots of companies at once. That way, if one company performs poorly, your overall portfolio is bolstered by the performance of the other companies.
Once Reddit IPOs and is a publicly-traded company, you can decide how much you want to spend on its stock. If you open an investment account with a broker that offers fractional shares, you’ll be able to pay for your stock in a dollar amount rather than a share amount. That means if the price per share is more than you want to spend, you can purchase a fraction of a share rather than a full share.
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Fees
$0
per trade
Fees
$0
per trade
Fees
$0
per trade
Account minimum
$0
Account minimum
$0
Account minimum
$0
Promotion
None
no promotion available at this time
Promotion
None
no promotion available at this time
Promotion
Get up to 75 free fractional shares (valued up to $3,000)