How To Start Investing

You’ve probably heard time and time again that investing is the best way to build wealth. And while investing can certainly help grow your money, it does come with some risk and can be intimidating to start. 

To make investing easier, here's a step-by-step guide that will set you up with the basics. That way, you can have the confidence to make moves toward a stronger financial future!

1. Start Investing as Early as Possible

Investing as early as possible can have a profound impact on your long-term wealth and financial security. This is all thanks to the power of compounding!

Compounding is when your initial investment earns returns, and those returns, in turn, generate more returns.

Over time, this compounding effect can significantly grow your investments! And the earlier you start investing, the longer your investments have to compound and multiply. Time is your greatest asset in investing.

Even small contributions, made consistently, can grow into substantial sums over several decades. The longer your money stays invested, the more opportunities it has to weather market volatility and recover from any temporary setbacks. 

This also means that when you're young, you can invest more into assets with potentially higher returns. For example, stocks tend to be more volatile in the short term but also offer greater growth over the long haul. As you get older, you'll want to invest in less risky assets, like bonds.

2. Decide on Your Investment Goals 

Before you can start investing your hard-earned money, you need a clear understanding of what your goals are.

Are you investing for the long haul or looking for short-term gains? This lead time plays a major role in how you invest your money. 

Short-term vs. long-term investments

The length of time you plan to keep your money invested is called your “time horizon.” Generally speaking, longer time horizons allow for a higher risk tolerance. 

When will you need the money? Are you looking to fund a wedding or make a down payment for a house in a year or two?

If so, you probably want to opt for more conservative investments to protect your principal (your original investment amount), like certificates of deposit.

If you're investing for retirement or a child’s college education many years down the road, you may be more open to riskier investments for potentially greater returns.

As a general rule, you shouldn’t invest money you’ll need in the next five years into the stock market. 

READ MORE: Long-Term vs. Short-Term Investment Strategies

High-risk vs. slow and steady investments

You need to consider your risk tolerance when planning your investment strategy.

Begin by honestly evaluating your own attitude towards risk:

• How would you react to fluctuations in the value of your investments?
• Will you be able to handle the rollercoaster of temporary losses in the pursuit of gains?
• Would you rather have more conservative, stable gains? 

If market fluctuations are likely to keep you up at night or cause you significant stress, it might be an indicator that you have a lower risk tolerance.

READ MORE: How To Set Your Investment Goals

3. Calculate How Much You Can Invest

You don’t need to set aside thousands of dollars to start investing. Even investing $50 a month can help you build out your investment portfolio.

Fractional investing is an option if you can only invest small amounts. With fractional investing, you buy just a portion of a stock, which can be a much more accessible way to dip your toes into investing. 

Here's how to determine how much you can afford to invest each month. 

Review your budget

Look at your monthly income and expenses. Create a comprehensive budget that accounts for all your fixed financial obligations, such as rent or mortgage, car or student loan payments, utilities, and groceries. 

Once you list your essential expenses, subtract them from your total income. The remainder represents your discretionary income.

This is often referred to as “fun money” for covering wants, like new clothes or a night out, but you can also think of it as “future money” — the funds you have available to invest. 

Set a target

Determine what portion of that discretionary income you want to allocate toward investing. While there's no one-size-fits-all answer, financial experts often recommend aiming to save at least 10-20% of your income. 

You can also work backwards from your goal. If you want to have $1 million saved in 40 years, then you’ll need to invest about $300 per month, assuming 8% growth.

If you only have 30 years, you’ll need $700 to reach $1 million in 30 years — so you can see the importance of starting early!

Review your investment budget

If you have more ambitious investment goals and want to invest more each month, revisit your budget to see how else you can trim expenses. 

If you can’t hit your target right away, don’t worry. Start with what you can and increase it as you go. If you make changes in your budget or you start to earn more money, you’ll be able to increase your monthly contribution. 

READ MORE: How to Start Investing When You Don’t Have Much Money

4. Choose an Investment Platform

You know your goals, and you have a budget. Now what?

You need to choose an investment platform to work with. The good news is that there are tons of great investment apps to choose from. Erika is a fan of Webull, but some other popular ones are M1, Fidelity, and Robinhood. 

When you're researching investment platforms, check whether they allow you to self-direct your investment choices or if they use a robo-advisor or professional advisor to pick your investments.

A robo-advisor is usually more affordable than working with a professional advisor and uses algorithms to automate your investments based on your goals and risk tolerance.

Consider the taxes

Different types of investment accounts are taxed differently. If you're saving for retirement, you'll want to invest in a retirement account such as an IRA, 401(k), or 403(b), as they are considered “tax-advantaged.”

Traditional IRAS, 401(k)s, and 403(b)s let you contribute “before tax” money and then they grow “tax-deferred,” meaning you won't pay any taxes until you withdraw the funds in retirement.

Roth versions of these accounts are taxed differently. The contributions are made “after taxes,” but the money grows tax-free. You owe no taxes when you withdraw the funds in retirement.

There are also accounts that don't have any tax advantages. These are “brokerage accounts” or “taxable accounts,” and you pay taxes on the growth when you sell the investment. The benefit is that you don't have to wait until retirement to withdraw the money.

READ MORE: Roth IRA vs. Traditional IRA: What’s the Difference?

5. Pick Your Investments 

When you're just starting out, you’ll want something that is well-diversified and low-cost. Index funds are a great place to start. They follow a large portion of the market rather than just one company. 

Index funds aim to replicate the performance of a specific segment of the market, such as the S&P 500 or even the whole stock market (a total market fund). They offer broad market exposure and have lower fees compared to actively managed funds.

Other popular investments for beginners

• Mutual funds: Mutual funds pool money from multiple investors into a diversified portfolio. Professional fund managers make investment decisions on behalf of investors, so you don't have to choose individual stocks or bonds.

• Exchange-traded funds (ETFs): ETFs are similar to mutual funds but trade on stock exchanges like individual stocks. ETFs are known for their flexibility and liquidity, as you can buy and sell them throughout the trading day.

• Stocks: Stocks are ownership shares in a company. Stocks have the potential for high returns, but they also carry higher risks. Research and choose companies with growth potential and a history of strong performance. If you are just getting started, only put a small percentage of your portfolio in stocks.

• Bonds: Bonds are debt securities issued by governments or corporations. When you invest in bonds, you're essentially lending money in exchange for regular interest payments and the return of your principal amount at maturity. Bonds are generally considered lower risk than stocks. But in exchange for lower risk, expect to earn less.

RELATED: Why Asset Allocation Is Essential for Investing

Investments for advanced investors

The following are investments that you may have heard of, but they probably aren’t appropriate for brand-new investors. We're mentioning them in case you were wondering what they are. 

• Real estate investment trusts (REITs): REITs allow you to invest in real estate without owning physical properties. They own, operate, or finance income-generating real estate and can be residential, commercial, or industrial.

• Commodities: Commodities include physical assets like gold, oil, and agricultural products. Investing in commodities can provide diversification and act as a hedge against inflation. However, commodities can be volatile and may require specialized knowledge.

• Cryptocurrencies: Cryptocurrencies, like Bitcoin and Ethereum, are highly volatile and speculative. They're only suitable for risk-tolerant investors who understand the technology.

Cover your basics first and build some wealth before diversifying into any of these.

READ MORE: 25 Investment Terms to Know If You’re a Beginner Investor

Step 6. Monitor Your Portfolio

Many investment platforms offer tools to automatically track your portfolio's performance. These tools can provide you with up-to-date information on the value and performance of your investments.

That said, watching your investments too closely can lead to impulsive reactions to short-term market fluctuations.

A best practice is to set a calendar reminder to review your investments at regular intervals, like every quarter or even annually. 

Check your asset allocation

Something you'll want to check is your asset allocation.

Let’s say you’ve decided to invest in 75% stocks and 25% bonds. If stocks have done well and bonds haven't, then your asset allocation may now look like 85% stocks and 15% bonds.

At this point, you will want to sell a portion of stocks and buy bonds to bring it back to the desired percentages. 

Check your goals

You will also want to revisit your investment goals and objectives. Have your goals changed? Are you closer to achieving certain milestones?

Regular check-ins provide an opportunity to adjust your portfolio to reflect any shifts in your financial aspirations or time horizon.

Optional Step: Get Help if You Need It

If investing feels overwhelming, there is definitely help out there.

You can hire a certified financial planner to help you build an investment strategy that fits your goals and risk tolerance. They can build it for you or be a second set of eyes as you manage your own investments.

Many online brokers have financial planners you can talk to for a fee. Or you can hire one yourself.

FAQs

TL;DR: Your First Investment Steps

Starting to invest doesn't require thousands of dollars or complex strategies — you can begin with as little as $50 per month. The important thing is to start as early as possible to harness compound growth.

To get started, first define your goals and know your risk tolerance. Then, choose a low-cost platform such as Webull, and invest in diversified options, like beginner-friendly index funds.

Set up automatic contributions, check your portfolio quarterly (not daily), and don't let perfectionism stop you from starting.