Planning Your Personal Finances Planning Your Personal Finances

Are you hesitant to get into investing because you feel like you don't understand enough? You're not alone by any means. But many Americans often overestimate what they need to know in order to get started with basic investing tools.

For instance, you can design a well-balanced and successful portfolio just by knowing the basics about the three types of financial returns generally available. Here's what to know about them and how to use them to get started. 

1. Appreciation

The value of stocks and bonds goes up or down based on a variety of factors. A rise in the value of a stock is called appreciation. This amount is how much you'll receive if you sell it at a given time. On average, the stock market has appreciated about 10 percent per year over time. The good news is that you aren't taxed on this rise in value until you sell the stock.

By investing in a given stock, you take on the risk of losing some or all of the money invested. In return, though, you benefit if the company does well and its value rises. Rates of appreciation fluctuate, so many ordinary investors use a "buy and hold" strategy with a long-term mindset. 

2. Interest

Interest is a return on certain types of investments such as bank accounts, certificates of deposit, and bonds. Usually, the investor is given the interest rate, how often it's paid out, and how long the terms are good for.

Interest-bearing investments are often considered safer investments because there's a higher-than-average chance that you'll get your money. The downside is that the interest rate is often lower than other forms of investment returns. This combination means they're valuable in your portfolio to counteract higher-risk investments, but they usually should be the minority of your investments. 

3. Dividends

If you haven't invested before, you may not be familiar with dividends. These are somewhat like interest payments, in that the company pays its stockholders a return for their investment on a periodic basis. However, the amount of dividends is not usually guaranteed. Most investors look for companies that have a healthy and long history of dividend payments. 

As with interest, the investor is taxed on the amount of dividends paid during that year. So, when you need to reap the rewards of investing (such as at retirement), you can withdraw those dividends. But many people reinvest them back into their portfolio each period, boosting growth. 

Where to Start

Don't let unfamiliarity with financial investments rob you of time and opportunities. Even with just the fundamentals under your belt, you can craft a solid performing portfolio of any size. Get help by meeting with a financial investments planner today to learn more.