Investing for Beginners: 5 Simple Steps to Start Building Wealth Today
Are you ready to take control of your financial future? If you’re 18 years or older and want to help your money grow, investing may hold the secret to your financial future. But where do you start? So don’t fret, we’ve got you covered with this primer on how to get started investing.
Why Start Investing Now?
Before jumping into the steps, however, let’s cover the importance of investing. You may be thinking, “I’m young; I have all the time in the world to start thinking about investing later.” But here comes the kicker: when it involves investing, time is your best friend.
The sooner you invest, the more time your money has to grow. Due to the power of compound interest, even small investments grow into substantial amounts over long periods. It’s like planting a tree — it’s gonna take a while to grow but the sooner you plant it the bigger it’ll be by the time you need the shade.
So now let us go into the five easy steps that should help you begin investing today.
Step 1: Define Your Financial Objectives
It’s important to know what you’re investing for before you spend your first dollar. Are you saving for a home down payment? Planning for retirement? Or perhaps you would like to create a nest egg for the future education of your children?
This will help you define your:
- How much you need to invest
- Until when you can have your money invested
- Your appetite for risk
Note that your goals will (and most likely will) shift over time, and that’s totally fine. The critical part is having a base for you to play off.
“A goal without a plan is just a wish.” - Antoine de Saint-Exupéry
Short-term vs Long-term
Break them into short-term (1-3 years), medium-term (3-10 years) and long-term (10+ years) goals. You will develop your strategy based on this classification. For example:
- Saving for a vacation next year: Short-term goal
- 5-year long-term goal: Saving for a house down payment
- Ten-year goal: Saving for retirement in 30 years
The longer your time horizon, the more risk you can generally afford to take with your investments.
Step 2: Learn The Basics Of Investing
With those goals in mind, it’s time to master the investing fundamentals. You don't have to become a sudden Wall Street whiz overnight, so rest easy. There are a few concepts you need to know to get started.
Types of Investments
There are a few different types of investments, but as a newcomer, you’ll be looking at these primary categories:
How to invest 5 ways to invest your money Stocks: When you buy a stock, you are purchasing ownership in a company. Stocks can have higher returns but at greater risk.
Bonds: A type of loan you provide to companies or governments. They often yield lower returns than stocks but are typically viewed as less risky.
Mutual Funds: Pools of stocks, bonds, or other securities managed by professional investors. For beginners, they provide diversification and are often seen as a progressive investment.
Exchange-Traded Funds (ETFs): ETFs are funds that trade on an exchange (like a stock) and represent a basket of securities like mutual funds.
Risk and Return
The Risk-Return Relationship One of the foundational concepts in investing is risk versus return. As a rule of thumb, higher-risk investments tend to have higher potential returns. You want to achieve a sweet spot that feels right to preserve your goals and comfort level.
Step 3: Make a Budget and Start Saving
To invest, you must first have some money to invest. That is where a budget helps you understand your income and expenses, and identify where you can pop the expenses and save more.
The 50/30/20 Rule
One of the most popular budgeting methods is the 50/30/20 rule:
50% of your income is for needs (housing, dairy, utility)
30% to wants (entertainment, restaurants)
20% is allocated to savings and debt repayment
This is only a guideline and you can modify the percentages depending on your personal situation. The trick is to prioritize saving.
Emergency Fund
You need to first have an emergency fund before investing. This is money that’s put away in case of emergencies. As a rule of thumb, save 3-6 months of living expenses in an accessible savings account.
A healthy emergency fund ensures peace of mind, and protects you from having to hastily sell an investment at a loss should you need cash on the fly.
Step 4 — Decide How You Want to Invest
Now that you have some savings, and know the basics, let’s talk about your investment strategy. Which will depend upon your goals, risk appetite, and time commitment to manage your investments.
Passive vs. Active Investing
There are two principal styles of investing:
Passive Investing: This approach consists of purchasing and holding a broad range of investments, usually using index funds or ETFs that follow a market index such as the S&P 500. It's a low-cost strategy that doesn't require much time or effort.
Active Investing: This is the approach of trying to outsmart the market by selecting individual stocks or actively managed funds. Although this can result in increased returns, it does come with bigger risks and requires greater time and expertise.
At tax time, many clients — especially novices — will benefit most from a passive investment approach, which is easier to manage and has historically shown reliable performance.
Asset Allocation
Asset allocation is how you spread your money across various asset classes (stocks, bonds, cash). Your allocation should match your risk tolerance and your investment timeline.
One rule of thumb is to take 110 and subtract your age from it to determine the percentage of your portfolio that should be in stocks. (If you’re 25, say, you might aim for 85 percent stocks and 15 percent bonds.) But this is only a guide — adapt to your specific needs and comfort level.
Step 5: Start Investing
You’ve established your goals, learned the fundamentals, launched a budget, and selected your strategy. It's finally time to take action and invest!
Opening an Investment Account
Investing for the first time starting an investment account Here are some options:
401(k): If there is an employer-sponsored plan (a 401(k)), start there, particularly with any employer-matching contributions.
Individual Retirement Account (IRA): Tax-advantage account for retirement savings. Traditional and Roth IRAs have different tax implications.
This is a flexible type of account where you can buy or sell different kinds of investments. Numerous online brokers provide easy-to-navigate platforms for novices.
Start Small and Consistent
That does not require a lot of money to invest. Many mutual funds and ETFs can be purchased for relatively low minimum investments; some brokers even offer fractional shares, which means you can invest with just a few dollars.
The secret is to be quiet and consistent. If you have an investment account, consider contributing automatically. This approach, dollar-cost averaging, can help mitigate market volatility in the long run.
Final Thoughts: Take The First Steps On Your Path to Financial Freedom
Stepping into the world of investing isn’t so scary once you’ve got these five steps under your belt and set towards building a wealthier future. Keep in mind, that investment is a journey, not a destination. Mistakes along the way are fine, we learn and grow.
Continue learning as you embark on your investing journey. Educate yourself—Traditional Accounts and Qualified Plans: Read up on SEC.gov, reputable financial news sites, and your (free) credit report. Initiate personal connections with a financial professional, and involve them early if you feel uncertain about navigating finances (most offer free consultations).
It is said that the first step, which is to begin, is the most significant of all. So why wait? Future you are going to be thankful for the financial choices you make right now.
“The best time to plant a tree was 20 years ago. The second best time is now." - Chinese Proverb
This is a perfect proverb for the investing world. The best time to start investing was years ago, but the second-best time is now. So take that first step, and start building your wealth today!
