Firstly, you are off to a fantastic start if you have $10,000 to invest. Very few people reach that first milestone of having a spare $10,000 to invest.
So congratulations on getting your $10,000 together ready to invest.
Having $10,000 to invest is more than many of the world’s richest investors started with, including the most successful investor we all know and love, Mr. Warren Buffett. So, you are off to a flying start.
In this blog article, I will be sharing with you some tips on how to go about investing your first $10,000 and what to consider when you are just getting started.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
They allow you to buy small pieces from hundreds or thousands of different companies at once.
Mutual funds come in many different varieties:
Some focus on stocks, some focus on bonds, and some focus on commodities.
Some mutual funds invest in foreign markets, while others stick to American-based companies. There are also index funds that track the performance of an entire market (for example, the S&P 500) and actively managed funds that try to beat their benchmarks.
Benefits of mutual funds.
The most significant benefit of mutual funds is diversification: with one investment, you can own hundreds or thousands of different companies worldwide. And because each share represents a fractional ownership interest in the underlying securities held by the fund, they’re much less expensive than buying individual shares directly from a company, and diversify risk by not having all your eggs in one basket.
Investing $10,000 in an IRA.
The first thing to do if you are looking to invest $10,000 is to try to get your $10,000 into an IRA.
IRA stands for Individual Retirement Account.
Benefits of Investing in IRA.
The advantage of an IRA is that the money you put into it is tax-deferred, meaning that you would have to pay tax on that $10,000 if it didn’t go into an IRA wrapper.
This means that instead of having the entire $10,000 to invest, you would only have around $6000 to invest after the government has taken their piece of your hard-earned money.
So, putting your $10,000 into the IRA means that you would benefit from a larger capital investment at the start.
Any gains you make within the IRA investment will be more considerable because they are based on a larger capital investment. There is also another benefit to operating within an IRA.
Not only is the capital invested tax-free, but any gains you make on top of the capital within the IRA wrapper are also tax-free.
This means that your investments are as tax efficient as possible and will make you the most returns to live on during those retirement years when you have finished working.
Tax impact on your portfolio.
Tax makes a huge difference to your investment portfolio; it takes a considerable chunk out of your initial capital and the gains you make, so it is important that you try to be as tax efficient as possible with any investments you are considering making.
You will eventually have to pay tax on the IRA gains, but this tax is not paid until you retire, so you will be entitled to a tax-free amount to draw out annually.
Also, if you have stopped working by the time you start to draw on your money in the IRA, your tax code will be lower, meaning that you will pay less tax than you would have paid when you first invested.
Open a high interest savings account.
If you are more risk averse, you may want to open a high-yield savings account with a bank with no fees and reasonable interest rate returns. If you are unsure where to look, the best way is to check out the high-interest savings accounts on the internet.
Once you have an account open, put your $10,000 into the account as an initial deposit.
If you want to carry on contributing to the savings account, the best way of doing this is by setting up automatic withdrawals from your pay check. This will ensure that you never even see the money in your checking account, which will help keep temptation away from spending it.
If you want to contribute more in the future to this account, there are two ways that you can save more money: increase your income or decrease your spending.
Increasing your income will make saving easier because you can put more money aside for retirement instead of buying things you don’t need, so make sure you learn the discipline you need.
Invest $10,000 In Exchange Traded Funds.
In the world of investment, there are many options. Here’s one that is relatively new and could be very lucrative for investors over the next few years. Exchange Traded Funds (ETFs) are a solid way to invest in the stock market without all the hassle and expense of owning individual stocks.
Like mutual funds, ETFs will also allow you to buy a basket of stocks or bonds with one transaction. Unlike mutual funds, which often have high management fees and restrictions on how quickly you can sell them, ETFs trade like stocks on an exchange.
This means they have low costs, can be bought and sold throughout the day, and can even be shorted, which means you can earn money if the shares value goes down.
Investing $10,000 In Real Estate Investment Trusts (REITs).
Real estate investment trusts (REITs) are a great way to invest in real estate. They offer diversification, liquidity, and transparency. REITs are publicly traded investments that own and operate real estate assets.
The idea is to pool your assets with others with similar goals and pay interest while allowing you to invest in a pool of properties that generate income from rent, mortgages, and other sources. If you’re looking to invest $10k in REITs, here are some things to consider:
Know the market and your options.
There are many different types of REITs available. Different types of real estate have other risk profiles and returns, so it’s important to understand what kind of property each REIT invests in before deciding which one(s) you want to buy.
For example, some REITs focus on shopping malls, while others focus on office buildings or apartments. The properties they own will determine the kind of returns they can generate and how much risk they carry.
Understand leverage and leverage costs.
Some REITs use leverage to increase their yield potential — but there’s a cost for this added performance. Some REITs use debt financing, whereas others don’t use any leverage at all; this means that if there’s any decline in the value of their assets, those without debt financing will be able to cover their losses from earnings from other sources, such as rental income whereas those with debt will not.
Investing in a single stock or small group of stocks is risky because it exposes your money to the fortunes of one company or industry.
Diversifying your portfolio by buying multiple stocks helps spread out risk so that if one stock goes down, another might go up. With REITs, this means spreading your money across different real estate sectors (such as retail, office, or apartments) and geographic areas (such as different states or countries).
Impact on your investment returns.
The type of REIT you choose will impact your investment returns. Some REITs focus on large office buildings in major cities, while others buy smaller properties across different states and regions. It would be best if you considered where your money will be going before making any investing decisions.
Max out your 401k and combine them with employer contributions.
If your employer is offering to match your monthly or annual contributions to the 401k, you should take full advantage of this as it is effectively free money.
There are not many places where you can get an instant 100% return on investment, so if you are not taking full advantage of this, you need to ask yourself why not and look into getting into your company 401k as soon as possible.
You may be able to backdate payments, and you would need to speak to your employer.
This combined contribution to your 401k will mean a huge boost your investing journey. This is because before you have even made any stock market or mutual fund gains, you will already be 100% up on your invested money.
This means that the principal capital going into your account is doubled, so any gains you make will also be doubled, and that’s an opportunity you need to take advantage of if you are not already doing so.
Once you have maxed out the IRA, you will need to look at other places you can invest more money within the markets, as there is a cap on the amount you can invest in an IRA tax-free with an employer contribution for obvious reasons.
IRA Contribution Limits.
The 2022 IRA contribution limits are currently $6000 if you are younger than 50. But you can contribute an additional $1000 per year as a catch-up contribution bringing the total maximum contribution if you are over 50 to $7000 annually.
This does not include employer contributions; these are only the contributions made by you as an individual, so if your employer matches your contributions and you are over 50, the maximum amount your IRA can grow by annually through contributions alone is $14,000.
If your employer matches your contributions and you are under 50, the maximum amount your IRA can grow annually through contributions alone is $12,000.
The downside of 401k investment.
The only downside to the 401k is that they are not actively managed to pick out the best stocks and shares or the stocks and shares with the best future potential. They are mainly invested over a large spread of mutual funds to minimize the risk to investors.
The gains here will generally be tracking the market averages, which is ok and will get you steady gains. But the best investors in the world don’t just put their money into mutual funds. They individually pick the stocks and shares with the most growth potential, and that is what we can look into next:
Investing your $10,000 into individual stocks and shares.
If you still have money left to invest after you have invested the maximum amount into a contribution matching scheme with your employer and invested the maximum amount into your IRA, then you need to start looking at investing in individual stocks and shares for maximum gains.
Be Aware of General Rules.
When buying into stocks and shares, you need to be aware of the general rules of investing and how to pick them. I also have some great summaries and key takeaways from some financial and investing books about investing, so be sure to check them out.
If you can develop these investing methods, as I show you in the other articles, if done correctly, you could make gains that outperform the market if you choose the right stocks and invest in them correctly.
Investing in Individual Companies.
I do have to say, though, that individually investing in individual companies is a risky strategy if you don’t know what you are doing. None of the information in my article constitutes financial advice, it is purely based on my own experience, and you should do all of your research into any methods you want to use for investing in individual stocks and shares.
Remember that you need to have patience when it comes to investing, and you need to think long-term. Make sure you do extensive research on any of the stocks or shares you wish to buy and follow the general and basic rules of investing to achieve maximum success.
You Need to Have a Rainy-Day Fund.
Another thing to consider if you have $10,000 to invest is that you need to have a rainy-day fund for when things go wrong.
If you only have $10,000 to invest and don’t have your rainy-day fund, you ideally need to set that aside before investing in stocks and shares and more risky investments.
Investing into things like a 401k or an IRA means that those funds are locked up until retirement; if you try to draw them out before this, huge restrictions and penalties will wipe out any gains your portfolio has made.
Only invest in 401K or IRA when you afford it.
You should only invest in these funds with money you can afford to keep invested long-term.
I advise you to set aside at least six months’ total expenses as an emergency fund. If you lose your job or have unexpected bills to pay, you do not have to start closing out your investments to pay the bills, as this is a sure fire way to lose money because you can guarantee that these needs will arise when the markets are at their lowest.
Keep your investment running over a long period.
You need to keep your investments running over long periods and don’t want to have to exit early before any gains are made because you needed house repairs or you lost your job.
You should be looking at investments in 10-year blocks, but as Warren Buffett says, his favourite time to hold a share is forever!
It would be best if you had that mindset, too. Investing is for the long term, not the short term; think about investing for your retirement rather than paying for a vacation next year.
So make sure that when you have your $10,000 ready to invest, this is an amount on top of your rainy-day fund, so you and your family are covered should the worst happen and you need to get your hands on funds quickly.
Another thing that people don’t tend to consider is if they currently have high-interest debt. If you are carrying high-interest debt, such as credit cards and bank loans, the $10,000 you want to invest is usually best spent on paying off this existing high-interest debt first.
Think about it, if you made a good return of 30% in your stock market investments, you are still 20% worse off as you have paid 50% in interest charges to your credit card company, so make sure that you pay off all your debt before you investigate investing any spare cash you have.
Tax benefits are the incentives you get from the government to save money, pay fewer taxes or increase your income. Tax benefits can be in the form of direct subsidies or indirect subsidies.
Direct tax benefits are monetary payments given by the government to individuals and businesses. Indirect tax benefits are those enjoyed by everyone in society, such as low prices for goods and services.
The following are examples of tax benefits:
These are usually refundable credits that reduce your taxable income. For example, if you qualify for a $2,000 child care credit but only owe $1,000 in taxes, you would receive a refund of $1,000 from the IRS after filing your return.
These reduce the amount of income subject to taxation when they exceed that income level; they’re available to all taxpayers regardless of filing status or type of deduction. For example, if you have $20,000 in mortgage interest paid during the year, your adjusted gross income is $30,000 ($10K over). You can deduct up to $10K worth of interest paid on your home loan from your taxable income and reduce your tax liability accordingly (though there are other limitations).
Invest in yourself.
When you are looking to invest an amount of $10,000 also, don’t forget that you don’t have to invest in stocks and shares, you can also make the investment in the best asset there is, which is in you.
It’s one of the greatest investments you can make; if you can spend money that allows you to get better educated and make bigger gains in the stock market or to start a new business using your newfound knowledge, then this is a great way to invest your money.
But even if you don’t want to invest a dollar amount in your financial education, you can invest time and effort to educate yourself. The list is endless; the more effort you put into increasing your knowledge, the better off you will be on your financial journey.
All in all, with investing start small. Follow these rules above, make sure you have paid off any high interest debt before you start investing, then make sure you have your 6 month emergency fund. Then you are ready to invest.
Make sure you do it in a tax efficient way and invest for the long term.
Lee, now the author of Learn Life Money, has started businesses in various industries such as E-commerce to social media marketing. He is an award-winning entrepreneur having received awards from Dragons Den Theo Paphitis, and winning awards for the fastest-growing social media marketing agency in 2019, You can read his full story here. Lee helps people to start and scale their businesses using their knowledge and experience. He has a passion is to help others achieve the success he has achieved and wants to help people pave their path to financial freedom from making the right decisions with money to starting their own businesses.