Tag Archives: CDs

How to Invest Your First $1,000

How to Invest Your First $1,000 :: Mint.com/blogSaving $1,000 is a big deal. Investing it for the first time is an even bigger one.

Once you’ve reached this milestone, you might feel excited to watch your investment grow as well as terrified you could lose it all.

But investing doesn’t have to be intimidating, and it’s not as complicated as you think.

Ready to invest your first $1,000? Here’s a guide to making it simple and rewarding.

Ask This Key Question

Before you start weighing all your investment options, start with one question: When do you plan to use the money?

That’s right, it’s not about buying up the trendiest stocks. It’s about choosing the best option based on how soon you plan to spend your money.

This is crucial due to a key factor: risk. A general rule of thumb: the sooner you plan to cash out, the less risky investment you should choose.

A strategy based on your risk tolerance and time horizon will better protect you against losses.

Let’s look at short- and long-term scenarios and options for both.

Minimize Risk for Short-Term Investing

If you’re looking to invest for a year or two with a short-term goal in mind, like a down payment on a car, you likely don’t want to risk losing money.

In this case, options other than the stock market may be best, including:

  • Certificates of Deposit. These often come with a guaranteed return over a certain term combined with very little risk of loss since the FDIC backs them.
  • Treasury Direct I Savings Bonds. These are bonds issued by the U.S. government. The current rate on these bonds is 1.18% per year, and it’s possible this will increase. They’re also considered very safe against loss.
  • GE Interest Plus. Rates for these accounts are about 1% on $1,000 invested, which is higher than many savings accounts offer today.

Short-term options are low risk but also offer lower returns.

[Related Article: What Is a Stock? (infographic)]

This is a tradeoff compared to the risk of losing a big chunk of your investment in the stock market and no longer being able to make your car down payment.

Focus on Growth for the Long Term

Long-term investing — over decades, rather than just a few years — is a whole different ballgame. The most common long-term case is saving for retirement.

When you’re young, you have a relatively long investment time-horizon increasing your ability to take risk and weather the ups and down of the market over many years.

Rather than the conservative options above which return only about 1% annually, you’re now looking to create an investment portfolio to deliver you the best long-term performance possible .

Asset allocation is the single most important decision you can make when constructing your portfolio.

[Related Article: Mint’s Top 5 Investing Tips]

Studies show that over 80% of a portfolio’s variance over time is due to its asset allocation. Typical asset allocation for a younger person saving for retirement might include just three asset classes: $600 in U.S. stocks, $200 in international stocks and $200 in bonds or equivalents.

How much to invest in each should be determined by your willingness to see your portfolio rise and fall in value as you head to retirement. Free tools like Jemstep’s Portfolio Manager can help you find an asset allocation strategy that’s custom-tailored to your needs.

Next you need to evaluate and select the vehicles that are best suited to deliver strong results. A good place to start is “pooled vehicles” like mutual funds and exchange traded funds (ETFs).

[Related Article: How to Pick ETFs]

Pooled vehicles reduce the amount of time you have to spend researching individual stocks, and help you diversify and spread the risk.

With $1,000 to invest, a good place to start is with low transaction cost index ETFs (Exchange Traded Funds) as they are tax efficient and have low operating expenses.

You can also find ETFs with no transaction fees at brokers such as Charles Schwab, Fidelity or Vanguard.

When investing for the long-term in the stock market, keep these considerations in mind:

  • Use retirement accounts for tax advantages. Investing in a Roth IRA means your money can typically be withdrawn tax free in retirement. These accounts can be created in minutes with nearly any brokerage firm like Charles Schwab or Vanguard.
  • Monitor investments, but not too closely. There’s a misconception, especially among first-time investors, that you must be actively watching the stock market constantly. This just isn’t the case. Your initial $1,000 does require some attention, but this could simply be on a monthly or yearly basis. As you invest more and your situations changes, the complexity of managing increases and you may want to use a tool  like Jemstep Portfolio Manager to help guide your investments strategy and monitor and adjust your portfolio on an ongoing basis.Investing your first $1,000 is exciting, but a realistic approach will serve you best no matter how long you plan to let your money grow.
  • Before careful of the following, especially when you’re just getting started:
  • Buying individual stocks. This often isn’t the best way to get started. Picking stocks is more complicated and often riskier, as well. With only $1,000, it’s harder to get good bang for your buck while still diversifying your holdings.
  • Funds with high expenses. Mutual funds get a lot of buzz, but if you’re not careful, they can eat away at your earnings with high expenses.
  • Too good to be true” investments. The goal isn’t to turn your $1,000 into millions. Don’t chase pipe dreams of multiplying your money many times over with risky investments or borderline scams that make unrealistic promises.

Maybe most importantly, don’t wait!

The earlier that  you invest, the more time your money can spend growing. Getting started is more important than finding the perfect fund or stock.

What is your strategy for investing your first $1,000? 

How to Invest Your First $1000” was provided by Mint.com

Mint is a free personal finance tool that brings all your financial accounts together online or on your mobile device, automatically categorizes your transactions, and helps you set budgets so you can achieve your financial goals.

Interest Rates Are Rising! Here’s What You Need to Do Now

interest rateThose of us with savings accounts know where interest rates have been in recent years: Nowhere. But the historically low rates used by the Fed to help stimulate lending and borrowing (and by extension, the entire economy) are very likely to rise soon. In some sectors, such as housing, mortgage rates have already doubled in recent months. Here’s what you need to do now to position yourself for rising rates:

Check Your Current Interest Rates

Find out what you’re paying on private student loans, car notes, mortgages, and so forth, because if any of these are variable, that rate will almost certainly rise in the coming months. Now’s the time to switch to a fixed loan if you can, or re-allocate additional funds in your budget toward debt servicing if you can’t. Rising interest rates make loans more expensive to re-pay, so act now to re-finance, if possible. In the case of variable rate mortgages (whose rates are already increasing rapidly), you should have acted yesterday, so get moving!

Re-Think Savings & Money Market Accounts

My “high yield” savings account has been paying me less than 0.8% interest – and I’ve gladly taken it, because safe sources of yield have been hard to come by in recent years. But many investors have shunned savings and money market accounts and CDs in search of better returns elsewhere. If you’ve been reluctant to hold cash because of low yields, it may be time to re-consider. (Who remembers the pre-recession days when such accounts yielded four or five percent?) Rising interest rates will provide you with better returns and a safer environment for your funds. That’s of real benefit if you’re expecting to make higher payments on variable-rate loans — or if you just plain want more money in the bank.

Bond Market Malaise

Rising interest rates mean a decline in the value of bonds (these move inversely), so the recent suggestion that the Fed might ease back on its bond purchases some time later this year has caused a mass sell-off in the asset class. Depending upon your investing style, this may be the time to re-consider your bond holdings. Some experts believe the worst is yet to come and are encouraging a complete departure, while others think the demand for bonds will re-surface as banks, major companies and government entities seek new purchases to roll-over older debt. They see this dip as a buying opportunity. Either way, one thing’s for sure: Bonds are likely to suffer in the coming weeks and months. Consider positioning yourself accordingly as you see fit.

Potential Five Ten Twenty Club Savings Example:

Let’s say you have a $10,000 savings account that is currently earning 0.5% interest (and that you don’t add a single penny to it). If rates return to their pre-recession levels of about 4%, you’d be earning eight times as much interest! Such a dramatic rise is unlikely in the near-term, however, so let’s focus on a more realistic new rate of about 2%.

Total Savings With 1-Year Interest Gains: $10,200 (vs. $10,050 at current rates)

Total Savings After 10 Years: $12,190 (vs. $10,500 at current rates)

Total Savings After 35 Years: $20,000 (vs. $11,900 at current rates)

..And, if rates do rise to 4% again, you’d have almost $40,000 after 35 years!

What interest rate are you earning on your savings account(s)? Have you started looking at whether your interest rates are variable or fixed? What do you plan to do next? Share your story in the comments below or in our Community Forum!

Disclaimer: This post is for your consideration only and should not be taken as actual financial advice. Please consider consulting a financial management professional before modifying your investments.