Investing for Beginners: How to Invest and Build Wealth

When it comes to building wealth, investing is my #1 strategy for making my money work for me. Think about it: What earns you money over time without you having to do hardly anything? Not much, but investing done right will.

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Basically, investing is spending money with the expectation of making a profit over time. You can invest in a lot of different ways: stocks, funds, cryptocurrency—I can go on and on. But investing can be confusing, and there’s a lot of bad investing advice out there. So, I’m going to break down the basics of investing, so you can start investing your money wisely and see the growth.

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Disclaimer: I’m going to keep it real with you. Investing is never a guarantee. In fact, there’s risk involved. BUT, if you do it wisely and remember to never invest money that you can’t afford to lose, then you’ll be a much richer (and happier) investor. 

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What Does It Mean to Buy Stock in a Company? 

Stocks (also called “shares” or “equities”) are a type of investment that gives investors part ownership in a company. So, if you buy stock in Apple, for example, you own a part of Apple. How dope is that!? 

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And it gets better.

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Owning stock means that as the value of the company grows, so does the value of the stock. 

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Here’s an example: Let’s say, you buy Apple stock for $170. Cool. Then, Apple releases the new iPhone. Suddenly, the company is making even more money, and the value jumps to $200 per stock. You just made $30, and you didn’t even do anything!

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You can also buy portions of a stock. Say you don’t have $170 to buy an entire Apple stock, but you have $17. You can buy 10 percent of the stock, and still experience the same growth. So, if Apple stock jumps from $170 to $200, your $17 is now $20. 

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Now, there are a lot of things that can affect a stock’s value, like politics, company shareholders (AKA owners of the company) and how many people are buying and selling at the time. That can cause stock prices to fluctuate, which means you can make and lose money. But stick with me. I’m going to explain how everyday people, like you and me, make real gains using the stock market. 

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How to Make Money in Stocks

You make money by buying stocks, selling them at a higher price than what you paid for and pocketing the difference. There are quite a few methods to do that. Let’s take a look:

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The first method is buying single stocks. Investing in single stocks is basically purchasing stock from an individual company or companies. So, if you open a Robin Hood or Acorns account, this is the kind of investing you’d be doing. If the value of stock increases you can sell it for profit. But, beware: Investing in single stocks is by far the riskiest investment strategy. Why? Because you’re putting a lot of eggs in one basket. Diversification is essential to protecting your investments.

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Dividends are another way to make money using stocks. It’s basically a payout from the company for owning their stock. Not everyone does this, however, McDonald’s is famous for paying dividends. Every year, if you own McDonald’s stock, they pay you a percentage of profits according to how many stocks you own: More stock = more dividends. It’s a nice perk.

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Compound interest is one of my favorite ways to make money using stocks. In fact, I use it for my retirement strategy. (I’ll explain how I invest for retirement later.) Basically, certain investment accounts, like 401Ks, IRAs, etc., allow you to invest in the stock market up to a certain amount each year. If you leave your initial investment (also called principal) plus the interest you earn alone, it will continue to multiply over time, giving you 5x, 8x, even 10x+ on your investment.

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To show you the power of compound interest, check out this example: Let’s say you turn 30 years old this year and you want to retire at 67 years old. If you contribute $200 per month for 37 years, you’d have contributed $88,800, but your retirement will be worth almost $1.5 million! If that doesn’t make you want to start investing, then I don’t know what will.

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What Are the S&P 500, the Dow Jones and Nasdaq? 

These are all “indexes,” charts that give a quick summary of how each company is doing in the market. They aren’t investments; they simply track top U.S. companies from a bunch of different industries, like healthcare, technology and real estate. You’ll use indexes to keep up with how your investments are doing. 

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The S&P 500 is a list of the 500 largest publicly traded companies, like Google, Target and Amazon. The Dow Jones Industrial Average monitors 30 of the largest American companies, like Home Depot, Microsoft and McDonald’s. The NASDAQ follows over 3,300 companies, like Tesla, Intel and T-Mobile. 

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There are a lot more indexes out there, but these are the top three in the U.S., and where I suggest you start if you’re looking to invest. 

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What Are Index Funds?

While indexes simply track the top companies in the U.S.; index funds let you invest in them. 

For example, if you invested in an S&P 500 index fund, you’d be using your money to buy small shares of all 500 companies that it represents. 

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The main advantages of investing in index funds are:

• Diversified investments (which lower your chances of losing money) 
• Investing in top companies (#win)
• Expect the same profits as you see on the index reports 

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However, there are some downsides to it: 

• Index funds will never beat the market, because they follow the market.
• These are passive investments without a professional’s guidance

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Index funds are a step up from investing in single stocks, in my opinion, because there's less risk. However, if you really want to maximize your profit, I always suggest investing in mutual funds. 

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What Are Mutual Funds? 

With mutual funds, investors combine their money to invest. Each mutual fund has a fund manager who oversees how the money is invested into a variety of stocks.  

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Here are the advantages of investing in mutual funds:

• Diversified investments 
• Managed by an investment professional or a team of professionals 
• Opportunity to beat the market

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I don’t really have any downsides to investing in mutual funds. They’re what I invest in, personally, and have made me a lot of money from. However, here are some downsides that critics have found with mutual funds:

• Potential for unethical management
• Less control over tax strategy
• Not ideal for day trading or swing trading

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I highly recommend mutual funds for retirement investing, and will explain more of that later.

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What About Cryptocurrency and Non-Fungible Tokens (NFTs)? 

There’s been a ton of hype around cryptocurrency, like Bitcoin, Ethereum, dogecoin, etc. If you’re not sure what they are, cryptocurrencies are digital assets used as investments and actual currency. 

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You can invest in cryptocurrency by purchasing coins or tokens and holding onto them while the value increases. Later, you can sell them for profit, much like stocks. You can also stake your crypto, which is a lot like depositing money into a bank and gaining interest on it. 

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In its simplest terms, NFTs are unique pieces of digital collectibles or art that you can buy, sell and collect. Some of them are selling for major coin, like Crypto Punks, but most aren’t so valuable. And they’re so new to most investors, no one knows if this is the new Bitcoin or the new Beanie Baby, if you catch my drift. 

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Now, do I recommend investing in crypto or NFTs? Not as your primary investing strategy. Here’s why:

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Cryptocurrency is unstable. In November 2021, Bitcoin hit an all-time high of $68,990 and fell to less than $48,000 in a matter of weeks. As for NFTs, a lot of people are questioning the long-term utility of most of these new releases. DAUs (decentralized autonomous organizations), private Discords and free crypto sound nice, but can NFT creators actually deliver? Only time will tell.

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If you want to invest in crypto and NFTs, make sure you’re out of debt, with 3-6 months of your emergency fund saved, AND you’re saving 15 percent of your income in retirement. After all of that, if you have cash to spare, by all means, shoot your shot at crypto investing. Just accept that you might lose some money. 

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What is the Best Way to Invest for Your Retirement?  

Here's my plan for investing for retirement: Once you're out of consumer debt and have a 3-6 month emergency fund, you should invest 15 percent of your income in solid mutual funds in a retirement account and a Health Savings Account (if you qualify). These accounts grow with compound interest. That’s how someone who only invested $88,800 over 37 years can have a portfolio worth $1.5 million by 67 years old.

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So, how do you know which retirement account to pick? First, check with your job to find out what retirement plan options they offer. The most common retirement plans are 401K and IRA, and these come in Traditional and Roth options. Traditional means it’s your typical 401(k) or IRA—nothing special. Roth means that you don’t get taxed until you withdraw your money, which is a HUGE advantage. Here’s the trump card, though: If your company offers a match—whether its Traditional or Roth—always take the match. It’s free money! My friend, Dave Ramsey has a saying that I stand by: Match beats Roth, Roth beats Traditional.

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NOTE: Most retirement accounts don’t let you withdraw money until you’re 59 ½ years old. So, you’re investing for the long-term, but your older self will thank you. 

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Here’s a breakdown of the difference between a 401(k) and an IRA: 

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401(K) Retirement Account

• Max annual contribution of $20,500 if you’re under 50 years old.
• Allows you to invest your money into mutual funds. 
• Traditional 401(k) doesn't require you to pay taxes on that money until you withdraw in retirement. (This lowers your current taxable income, so you pay less to Uncle Sam.)
• Roth 401(k) allows you to pay taxes now, but withdraw money tax-free in retirement. This is a better option, because taxes on a $200 investment are a lot lower than a $2,000 withdrawal.

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IRA Retirement Account

• Max annual contribution of $6,000 under 50 years old.
• You can do this without an employer. 
• Traditional IRA doesn't require you to pay taxes on that money until you withdraw in retirement. 
• Roth IRA allows you to pay taxes now, but withdraw money tax-free in retirement. (A better option.)

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Another benefit your company might offer is an HSA. Don’t sleep on this one, you guys. It’s a tax-advantaged savings account that acts as an extra emergency fund for medical expenses. And if you’ve been hospitalized recently, you know how expensive medical bills are. 

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HSAs are only for individuals and families with a high-deductible insurance plan. Self-employed people can qualify, too, but that HDHP is key.

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The max contribution for an HSA in 2022 is $3,650 for individuals and $7,300 for families. 
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You can make contributions to your HSA directly from your paycheck each month. You can spend that money immediately with no penalties, or you can convert it to an investment account, so it grows interest. If you invest it, once you turn 65, you can withdraw money for anything you want, without paying taxes. However, if you make a withdrawal prior to 65, you’ll face penalties. It’s a good option for young, healthy individuals, who don’t spend much on medical bills.

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Investing in your HSA is not part of your initial 15% investment toward retirement. This is an additional option if you want to be intentional about saving for medical expenses.

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Alright y’all, I know that was a ton of info, but thanks for sticking with me. Investing is super exciting and I can’t recommend it enough. But you have to do it wisely, so you build lasting wealth for your future and leave a legacy for your family.