Cut Through the Investing Confusion

When you first start to learn about personal finance and investing, it is natural to feel overwhelmed. These subjects are far more complicated than your math teacher implied when she taught you how to balance a checkbook! Suddenly your finances aren’t simple addition and subtraction. And if you’re starting your own business, figuring out the financial details can feel even more confusing. If you feel completely unprepared, don’t worry. You’re not alone!

Here’s the good news: there is a lot of information out there that you can use to help find your footing. There is a plethora of printed and digital material to download and watch. Entire sections of libraries and bookstores are dedicated to the subject. Heck, there are even television channels dedicated to helping people figure out how to manage their money. There are also sites like Simpler Trading where you can learn directly from current financial experts.

Which Educational Path is Right For You?

If you are like most novice investors, even choosing a method of education can feel overwhelming. But guess what: if one method doesn’t work, you can simply try another! This isn’t school, where you’re forced to learn via specific channels whether they work for you or not.

So here is the first question that you need to ask yourself: “How do I learn best?” For example, if you are someone who learns best in a classroom setting, that’s great! Are you disciplined enough to manage your class work independently? If so, take an online class. If you need someone to hold you accountable (pardon the pun), look for classes at your local community center or community college.  If you learn best on your own, pick up a book. If you need to be able to bounce ideas off of someone, find an investing mentor.

What Should You Study First?

While there are a variety of opinions about this, my personal feeling is that if you’re intimidated by all of the minutiae involved in investing, the best place to start is with savings accounts. Savings accounts are the most basic form of investing. It’s always good to master the basics before moving on to more advanced topics.

You probably already know the rule about tucking 10% of every paycheck away in a savings account. You can build on this knowledge by learning about the different types of savings accounts and how they work, their benefits and drawbacks, etc. Start with accounts that are relatively easy to understand, like CDs, and then learn about retirement accounts like 401(k)s, IRAs, etc.

Intermediate Investing

Once you know how savings accounts (both short and long term) work, the next step is to learn about bonds. Bonds are sort of like CDs in that you pay money into an account, let the account mature and then recoup your initial investment plus a little (or a lot!) extra. There are a lot of different types of bonds out there. Savings bonds are the easiest to buy and learn about, but definitely learn about the other types of bonds as well!

Advanced Investing

After you’ve mastered savings accounts and bonds, it’s time to learn about the stock market and how stocks work. This can be confusing at first because on the surface level it seems simple: invest X and, depending on how well that stock does, earn/lose Y. But do you know how to evaluate a stock’s performance or worthiness of your investment? These details are more involved, and it is important to learn them before you start tossing money into an eTrade account or hiring a financial advisor.

A Word About Mutual Funds

We’ve left mutual funds for last because, at heart, mutual funds are an amalgamation of the other types of investing we’ve already talked about. You need to understand how those types of investments work before you learn about mutual funds and whether or not they are the right type of investments for you. Many financial advisors will push newbies toward mutual funds because it gives the a varied portfolio from the get-go. Even so, it’s good to know how the individual components of that fund function before investing anything.

That’s a good rule of thumb for all investments: learn how it works before you invest in it with your hard earned money.