Most people are well aware that investing is the key to building long-term wealth, yet that doesn’t mean that getting started is easy. In fact, all new investors face a huge learning curve when it comes to figuring out how to invest and where to invest their extra money.
It doesn’t help that there are so many different kinds of investments out there, as well as various apps and platforms that all claim to be the best.
So, how do you start investing exactly? And what steps can you take to ensure your investments have the chance to reach their full potential?
I wholeheartedly believe that investing for beginners should start with the core principles of personal finance.
After all, you really do need to get your money straight in order to have extra cash to invest in the first place, and you need to clearly outline your goals or what you’re trying to accomplish before you dive in.
If you are hoping to begin building wealth but you’re not sure how to get started, it helps to break down investing tips for beginners into several smaller steps.
The sections below explain exactly what you should do to start your investing journey and in the exact order you should do it, so read on to learn more.
Table of Contents
Ready to Start Investing?
Whether you are hoping to start investing small amounts of money or you have a lump sum of cash to get started, you should know that investing isn’t necessarily a “set it and forget it” activity.
Even if you are investing for the long haul or retirement, you’ll still need to reassess and potentially update your investment plan from time to time.
Also, remember that, like it or not, there is a real risk of losing some of your investment over the short term. With that in mind, you’ll want to consider your timeline, your goals, and your tolerance for risk as you read over these steps.
Build an Emergency Fund
Before you start investing, it’s crucial to have an emergency fund in place. This is based on the fact that, if you don’t have any emergency savings to draw from, you may have to sell your investments at an inopportune time or even at a loss.
Most experts suggest having three to six months of expenses in emergency savings where it is easily accessible. If you are currently spending $4,000 per month on your rent or mortgage and your other bills, for example, you would try to build an emergency fund of $12,000 to $24,000 over time.
What is an emergency fund for, exactly? For the most part, your e-fund is there to cover surprise expenses you don’t actually expect — things like a sudden and unexpected car repair bill, a new HVAC system when your air conditioning goes out, or emergency medical bills.
Some examples of banks that fit the bill include:
Any of these banks keep your money safe, completely liquid, and pay interest rates that are well above local banks. In the meantime, a high-yield savings account can keep your e-fund easily accessible when you need it.
Define Your Goals
Next up, you’ll want to clearly define your investment goals before you start putting your money at risk. For example, you’ll need to know your investment timeline or how long you want to keep your money invested before you need to access it.
You’ll also need to decide how much risk you’re willing to take and if you’re willing to take on more risk in order to have a chance at better returns.
Let’s say you want to invest some money you plan to use for the down payment on a home in a few years. In that case, you would want to choose among the best short-term investments that are unlikely to have any losses over that short of a timeline.
If you’re trying to invest for retirement and you have several decades of work ahead of you, on the other hand, you can choose among the best long-term investments that have a history of higher returns.
Examples of the best low-risk investments that can help your money grow with limited potential for losses include high-yield savings accounts, money market accounts, Certificates of Deposit (CDs), short-term bond funds, and even Series I Savings Bonds (I-Bonds).
Meanwhile, smart long-term investments can include real estate, stocks and bonds, exchange-traded funds (ETFs), index funds, and more.
Know Your Investments
Next up, you’ll want to make sure you have a general idea of the type of investments you can choose from, as well as how they work.
Steps you can take to learn more about investing include:
- Buying and reading books about investing (or checking them out from the library);
- Reading fund prospectuses and learning all the lingo;
- Following and reading personal finance websites;
- Taking an online course in investing;
- Following investing forums and
- Investing small sums of money so you can learn as you go.
For example, the “investing super app” known as M1 Finance offers its own resources hub with educational articles, and the app itself makes it easy to learn about investing at every turn.
Meanwhile, crypto platforms like Coinbase and Gemini offer articles, webinars, and other resources that can help you learn how to get started investing in digital currencies.
Start Small, But Start Now
While learning about investing can help you build a basic understanding of how to build wealth, it’s important to avoid being completely overwhelmed. After all, there are so many ways to invest and so many platforms to choose from, so it’s easy to wind up doing nothing as a result.
No matter what you do, you have to find a way to get started investing in something. Even if you’re only investing your spare charge at the beginning, this basic first step can help you gain confidence as you begin investing for the short-term or the long-term.
When it comes to starting small without a ton of work on your part, I typically suggest the investing app Acorns. This app connects with your bank card or credit card with the goal of “rounding up” your charges and investing the difference each time you make a purchase.
If you buy something on a credit card for $7.12 and you are connected to the Acorns app, for example, the company will round up your purchase to $8 and invest $.88 cents on your behalf.
That may not sound like a lot, but your spare change can grow dramatically over time. This is especially true since Acorns invests your money in expertly curated portfolios that are fully diversified for long-term growth.
From there, your investment will be fully managed, including periodic rebalancing to maintain the asset allocation, as well as reinvestment of dividends.
Diversify Your Investments
A common mistake many new investors make is putting all their money into a very small number of stocks or maybe even one stock. If they can just invest in the right stock at the right time, many beginners believe they can become a millionaire overnight.
Unfortunately, that’s rarely how things go in the investing world, and investing in one stock means you are putting all your eggs in one basket. If the single stock you invest in doesn’t perform well or loses money, you won’t have other investments that can make up for those losses.
With that in mind, you can consider investing in things like:
- Index funds, which are made up of a portfolio of investments that are made to track a specific index, such as the S&P 500;
- Mutual funds, which let you invest in companies that pool investments into securities such as stocks, bonds, and short-term debt;
- Exchange-traded funds (ETFs) are a type of pooled investment security that tracks a specific index or commodity
- Real estate investment trusts (REITs), let you invest in commercial and residential real estate without buying physical property
If you don’t have a lot of money to start investing, also keep in mind that you can diversify your initial funds by investing in fractional shares. Investing in fractional shares lets you buy small “pieces” or “slices” of individual stocks, ETFs, and more, which helps you diversify when you don’t have a ton of cash to get started.
If you want to invest $1,000 and spread it across as many stocks and other securities as possible, for example, platforms like Robinhood and Stockpile let you do exactly that with the help of fractional shares.
Don’t be Afraid to Ask for Help
For example, you could turn to a robo-advisor like Betterment for help. This company lets you get started and fund your account with regular monthly deposits, and they will even craft a diversified investment portfolio on your behalf.
Not only does Betterment help you get started with automated investing, but they also build their portfolios with low-cost, diversified ETFs that can help you grow long-term wealth without incurring a ton of trading fees.
They also offer benefits like automatic portfolio balancing, dividend reinvestment, and tax-saving tools. If you can contribute at least $100 per month, you’ll be surprised how quickly the account will build up.
Meanwhile, M1 Finance is another robo-advisor to consider, and this company lets you invest in “pies” that are diversified with a mix of stocks and ETFs. You can choose the type of pie you want to invest in based on your risk tolerance and timeline, or you can create your own pie.
Either way, M1 Finance takes over and manages your portfolio for you from there. You choose your investments, but they handle the day-to-day management.
Best of all, M1 Finance doesn’t charge any fees, and you can start an account with as little as $100 (or $500 for IRAs).
Final Thoughts for Beginner Investors
Whether you are hoping to learn the basics of investing in stocks or how to invest in real estate, just remember that you have to start somewhere.
Also, keep in mind that you’ll likely be a lot better off if you have a plan in place before you invest and if you get in a stable place financially by building emergency savings up and even paying off debt.
Whatever you do, make sure you don’t let your lack of knowledge stop you from investing in the future you want to have. When it comes to learning about personal finance and the stock market, the internet offers a treasure trove of information for those who take the time to look.