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Investing can be a good way of building towards financial stability and can be a good way to generate passive income.

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Investing is an important part of your financial plan and way to reach your goals. It enables you to make your money work for you and potentially grow over time, giving you the chance to accumulate wealth over the years.

However, it’s not always as simple as deciding to invest — there are many factors that go into making smart investing decisions, from choosing which securities or asset classes will provide the highest return, to understanding risk tolerance and diversifying your portfolio.

In this guide, we’ll break down why it pays to invest in the stock market, including how investors can set effective investing goals and manage their strategy over time.

Why is investing important?

Investing is essential for anyone looking to grow their savings and build wealth. It allows you to put your money into assets that may increase in value over time, as opposed to leaving it in a bank account where it collects interest at a much slower rate.

Investing can also protect you from inflation because as prices rise, the value of your investments usually also rises.

The key benefit to investing is potential long-term growth. You can create a portfolio of investments that grows in value over time, allowing you to accumulate wealth and meet financial goals such as saving for retirement or purchasing a home.

Though the markets fluctuate, the longer you keep your money invested, the greater chance you have of increasing your wealth. You can use investing to take charge of your future financial security and meet your short, medium and long-term financial goals.

There are also tax benefits available to investors who choose to save in a retirement account, such as an IRA or 401(k). Investing in accounts such as these can be a great way to diversify your overall financial portfolio and reduce risk.

Identifying your financial goals

Setting realistic financial goals is an important first step in achieving success with investing. It’s important to remember that your individual goals will differ from other investors, and may even change over time. You should reevaluate your financial goals often to ensure that they suit your financial circumstances.

Consider evaluating how your age, income and risk profile can impact your financial goals. For example, someone who is young and just starting out in their career may have different goals from a middle-aged parent who is in their peak earning years.

Knowing whether you want to pursue short-term gains or long-term gains, or a combination of both, can be a starting point for developing an effective plan for managing and growing your wealth:

• Short-term goals are typically achievable within one year and may include reducing debt or saving enough money for a purchase such as a new car or vacation.
• Long-term goals, on the other hand, require higher levels of commitment because they involve investing in the future and cannot necessarily be achieved within a year. Examples of long-term goals include retirement planning or funding a larger purchase such as a home.

Should I invest now or later?

You’re never too young or too old to start investing. Big financial goals often require big saving, so starting as soon as possible will give you more time to prepare.

Investing for the long term allows you to ride the ups and downs of the stock market to help maximize the growth of your assets. Even if the market looks turbulent, if you’re invested for the long run, you’ll have more time to recover your losses.

Over time, earnings on your investment will drive more earnings, thanks to compounding interest. This creates a flywheel effect that can lead to substantial growth outside of your initial investment.

However, it’s never too late to begin investing — you may just need to take a different approach from someone younger. If you are closer to retirement and have money to support your lifestyle that you won’t need in the next five years, there are still benefits to investing in and growing your retirement fund. This is why investment is essential, regardless of the life stage you are at.

That being said, there are some scenarios where you may need to wait to jump into investing. If you have debt, are living paycheck to paycheck, or have no emergency savings, it’s best to focus on improving those areas before investing. Using a budget can help you identify places to cut back, and any extra money should be put toward paying off your debt or shoring up savings.

If you aren’t sure if you have the money to invest, ask yourself these questions:

Do you have enough money to cover your living costs?	Do you have an emergency fund?	Do you have any outstanding high-interest debt?
If you don’t have enough money to cover your essential expenses (think rent or groceries), or you think you may struggle in the near future, now is probably not the best time to start investing. Most investors put their money in the market for the long term, so it’s important that your short-term finances are secure beforehand.	You should have a savings fund specifically to cover any emergencies. Most experts agree that you should have at least three months’ worth of expenses in your rainy day fund, but you may want to consider saving more depending on your situation (e.g., upcoming expenses such as college or paying off loans). While you can access your invested money at any time, it can be better to have a separate place to keep your emergency money. Also, you don’t want to store your emergency money in a place you could lose it.	Your investments will grow over time, but they may not outpace the rate of interest you are paying on your debt — especially high-interest debt such as credit cards or personal loans. Paying off this type of debt in the short term will save you money in the long term, which you can then invest when you are debt-free. This doesn’t include long-term forms of debt, such as a mortgage. These loans often have interest rates below what you could earn in the stock market, so you can prioritize your mortgage and investments at the same time.

Consider your risk tolerance

Risk tolerance is an important concept to understand when constructing your investment portfolio. Whether you are looking to grow your wealth as quickly as possible or just looking for steady returns with minimal risk, it’s essential to have a good understanding of how much risk you’re willing to take on.

Taking on greater levels of risk may result in more significant rewards, but it can also mean more volatility and potential for loss. By taking the time to consider your own level of risk tolerance, you can make financial decisions that are more closely aligned with your short and long-term goals.

• Aggressive investors have the primary goal of maximizing their returns and are comfortable experiencing potential extensive volatility and significant losses to get there.
• Conservative investors have the primary goal to preserve their money, even if it means missing out on potential returns.

Keep in mind that risk tolerance is a spectrum, so you likely fall somewhere in between these two extremes.

Understand your investment options

When it comes to investing, it’s important to not only understand the various types of investments available to you, but also the advantages and disadvantages of each one. This will help you select investment options that suit your financial needs.

There really is something for everyone in the world of investments. Choosing where and how to invest your money requires careful consideration of which assets fit within your risk tolerance level and budget. Choices include (but are not limited to):

• Stocks
• Bonds
• Mutual funds
• Exchange-traded funds
• Commodities
• Real estate
• Cryptocurrency

You should make sure to do the proper research so that you can make an informed decision about adding something to your portfolio.

Diversification is the key to smart investing. Spreading your money across different asset classes helps mitigate risk by providing more stable, long-term returns. With these fundamentals under your belt, you can begin building a portfolio with confidence and get closer to achieving your goals.

Developing an investing plan

You can begin developing an investing plan after you’ve identified your investment goals, your risk tolerance and some of the investing options available to you. It’s worth building a strategy with the SMART goal framework, which uses data-driven instances of how investments can benefit you.

You can manage your investments using the SMART goal framework:

• Specific: For example, I want to save X amount for my retirement.
• Measurable: Use systems that allow you to track your progress toward your goals, such as an investing app.
• Achievable: Make sure that your goal is feasible and within your reach.
• Realistic: The goal should be achieved based on your current circumstances.
• Time based: You should set a date for when you want to complete your goal. This will help you stay focused and pick investments that match your time horizon.

Conclusion

Everyone should consider investing as a part of their financial plan, regardless of their age, income or financial goals. With the right knowledge, investing can help you reach your goals, grow your wealth and increase your overall financial health.

To begin investing, identify your financial goals and risk tolerance level to understand what kind of return you’re looking for and how much you’ll need to invest in order to make that happen. Next, thoroughly research the different types of investments available that match your criteria.

You can then develop a personalized plan that corresponds with your individual needs. By following these investing tips, you can gain confidence in your skills as an investor.

eToro offers a range of technical analysis tools, a lively community of investors and regular news updates, plus many educational resources to support you on your financial journey.

Learn more about investing on the eToro Academy.

Quiz

FAQs

Is investing better than saving?

Your current financial circumstances will determine whether investing is better than saving, but investments, especially riskier ones, have the potential to provide a much better return on investment than the interest rate offered by a bank. However, they could also lead to you losing money that would otherwise have been safe in a savings account. For investors looking to beat inflation and improve on the interest available with a savings account, it could be worth investing in indices, which track the price movements of a group of assets, such as stocks.

Should I invest if I don’t have an emergency fund?

Not having spare cash on hand to manage short-term cash flow problems can result in you missing out on some of the beneficial aspects of investing. If you become a forced seller of an asset, you might sell when prices are low. Having an emergency fund allows your investment strategy to play out as planned.

When is the best time to invest?

You are never too young or too old to start investing. It takes time to start seeing a return on any investment, so it’s better to start investing as early as possible. A long-term view can incorporate the benefits of compounding and help you ride out the ups and downs of the market.