The term “investing” can feel like a daunting thing meant for men in suits with thousands to stash. In reality, people can build wealth by developing good habits of saving up money every month—even if they can only start with a few dollars. And, in today’s world, investing can all be done from the comfort of your home, right on the convenient screen of your nearest online device.
Benefits of Investing
Investing is great for helping you build up wealth and retire earlier. Investment funds usually stay ahead of inflation and aren’t taxed—which helps you build faster. Eventually, your investment can provide a regular or “passive” income.
If you want to build wealth, you are going to need to invest at some point. Investing offers a safety net, especially later in your career. Investments can eventually make other financial goals a reality, like starting up a dream business or saving for your child’s college fund.
When Should You Start Investing?
It’s never too early to get started with good habits. Start the practice of just saving $10 a week, and pretty soon, that account isn’t going to be anything to sniff at. Before you know it, your small investment account is going to accumulate to the lump sum you can use to make some actual moves.
Keeping your expenses below your salary can be difficult early on, so many Americans don’t think much about saving until they earn more. By then, they might feel a little overwhelmed with concerns that they started too late. While it is better to start as early as possible, it’s also better to start now than never.
How to Start Investing
Now, right now, is the best time to get started! Here are some first steps to become a beginner investor right now.
1. Rethink Your Budget
The trick is training yourself to leave that money alone. If you are like most Americans, you don’t have a large safety net of savings in place. Ideally, you want to have two savings accounts that you add to every month—one for a sizable rainy-day fund and one for investing.
It’s easy to have one small thing happen (your car breaks down or you have a medical emergency) and suddenly need an influx of cash. But you won’t want to pull that from your investment accounts. That is why it’s so important to start investing while you are also saving for emergency needs.
It is also important to avoid certain forms of debt—like car loans and credit cards—that will be very expensive in the long run. Your monthly interest rate for these convenience loans will be high, which will offset anything you invest. So, to be truly effective at investing, you need first to use any free money to eliminate these high-interest debts as you are slowly saving for emergencies. Once debts are paid off, you can take that same amount and use it for investing and emergency fund savings.
This means you are going to have to keep your day-to-day expenses well below what you are making. You may have to sacrifice at first—choosing the smaller apartment or first home, reusing a lot of your wardrobe, buying used cars and furniture, etc.
2. Determine Investment Goals
The best goals are clearly defined. Rather than say, “I really need to save more,” you should say something like, “I will save $100 per month, and half of that will go towards my investment account.” Make your goals attainable but challenging. If saving $25 a week is easy, then set a goal of saving $50. There may be some seasons of life where you can save a LOT, so do it—because there may be some seasons where you are facing a really tight budget.
Eventually, you will want to determine your ultimate goal and work to save accordingly. But, starting out, it’s a good idea to get that number as high as you can without racking up debt.
3. Determine Your Risk Tolerance
Not everyone is ready to ride the tide of market value fluctuations. While many financial advisors will encourage a high-risk, high-reward investment account early on, as you reach retirement, you will be encouraged to get a more conservative account, but always do what you are comfortable with. Some people prefer a lower compounding rate to get a smoother ride with a safer account direction.
If the stock market makes you feel uncomfortable and nervous, other assets might be a more ideal option. It is best to have investments spread out over different asset types, so you aren’t in trouble if one doesn’t yield the kinds of gains you expected.
4. Choose a Management Method
You can run your accounts yourself, but it’s a good idea to find a financial advisor you trust. Financial advisors can give you tax guidance, asset management advice, investment options, and financial planning assistance to help you set and reach your long-term goals. You might hire one on your own, through your bank, or use one provided by your employer.
Investments for Beginners
There are several ways to get started investing now. Here are some of the most basic options for beginner investors.
1. Employer Accounts
Many employers have matching programs for a retirement fund, like a 401(k) or Roth IRA. The best place to start is to make sure your contribution is set to the highest level they will match. This money is pulled directly out of your paycheck and placed into a retirement fund, so you won’t have to think about it. For 2020, the average matching contribution was 4.3%. Investopedia reports that some employers match dollar-for-dollar up to 3%, while others may contribute $.50 on the dollar for up to 6% of your pay. Take advantage of this option because it is an easy and secure option that will help you create a diversified portfolio.
These bots will make investing as simple as possible, letting you set the risk tolerance and goals before doing all the investing work for you. Robo-advisors use algorithms to invest your money in stocks and bonds, optimizing your account for taxes. In most cases, you will need just $500 to get started, and the annual fee is typically around 0.25%.
3. Online Brokers
There are many day trading apps that let customers create and handle an investment brokerage account on mobile apps. These companies often offer low-cost investment options where you can pick up stocks with a DIY approach to trading. These include apps like Ameritrade, E*TRADE, Fidelity, Ally Invest, and Robinhood. The downside is that many of these apps won’t have customer service, may have a very limited amount of tools, are taxable investment accounts, may have hidden fees, and won’t have financial advisors. The upside is that you can usually withdraw your money at any time and contribution requirements are low or nonexistent.
4. Traditional Brokers
When you are ready to invest larger sums, traditional financial institutions and brokerage firms usually offer expert advisory and financial management to help your account grow more steadily. The minimums are usually much higher, and the management fees are higher, too, though often worth it.
5. Index Funds
Fund managers put index funds together to track a market index. This is usually a conservative way to invest for long-term growth, choosing stock indexes and bonds that are then offered directly from mutual fund companies or brokerages.
Exchange-traded funds (ETFs) are small mutual funds that are purchased through a mutual fund company or brokerage and traded like stocks. These are popular investments that offer low-cost access to a number of different industry sectors, markets, and asset classes. They typically have a range of options for investment, diversification benefits, low expense ratios and are typically safer than buying individual stocks. ETFs might include commodities (like precious metals or natural resources), foreign currencies, industry-related stocks, corporate or government bonds, and more.
Once you start investing, you will find there are a lot of options. You can invest in real estate, cryptocurrencies, mutual funds, entrepreneurial startups, CDs, and more. All investments will carry some level of risk, so it’s important to understand that risk before investing.