How to Start Investing

You’ve probably heard time and time again that investing helps you make the most out of your savings and helps you reach your financial goals. Investing can certainly help you grow your money, but it does come with some risk, which is why it can be a bit intimidating to start. 

To make figuring out how to start investing easier, we’re going to walk you through a step-by-step guide that will help you get situated with the basics. That way, you can have the confidence to make moves toward a stronger financial future. 

Step 1. Start investing as early as possible

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

Compounding is the process by which your initial investment earns returns, and those returns, in turn, generate further returns. Over time, this compounding effect can significantly amplify the growth of your investments! The earlier you start investing, the more time 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 means you can allocate a higher portion of your early investments to assets with potentially higher returns, like stocks, which tend to be more volatile in the short term but historically offer greater growth over the long haul.

As a bonus, starting to invest early can help you develop financial discipline and healthy financial habits. Consistently setting aside money for investments helps you prioritize saving and investing, setting the foundation for responsible money management throughout your life.

Whether your goals involve buying a home, funding education, retiring comfortably, or something else entirely, investing early helps ensure you have the necessary funds in place when you need or want them. This financial security provides peace of mind and enables you to pursue your dreams without financial stress.

Remember: If you're unsure about investment monitoring or need expert insights, you can always consult a financial advisor. 

Step 2. Start investing and decide on your investment goals 

Before you can start investing your hard-earned money, you need to have a clear understanding of what your goals are. Are you investing for the long haul or looking to get short-term gains? The lead time for when you want to utilize your investments plays a major role in how you invest your money. 

Start investing: Short-term vs. long-term investments

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

Consider when you'll need the invested funds. Are you looking for short-term gains to fund a wedding or a down payment for a house in a year or two? You probably want to opt for more conservative investments to safeguard your principal, or your original investment amount.

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. Longer-term goals leave room for riskier investments that stand to pay off big time!

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

Start investing: High-risk vs. slow and steady investments

You need to consider your risk tolerance when designing an investment strategy in order to set yourself on a path that aligns with both your financial goals and your comfort level. 

Begin by honestly evaluating your own attitude towards risk. Consider how you would 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? Or would you rather have more conservative, stable gains? 

Market volatility and economic conditions will influence your portfolio’s performance. 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.

Here's more about risk tolerance.

Step 3. Start investing by calculating how much you can invest

Determining how much you can invest is a crucial step in creating a sustainable and effective investment plan. By aligning your investments with your financial reality, you can work towards achieving your goals without straining your overall budget. 

You don’t need to set aside thousands of dollars a month to start investing. Even investing $50 a month can help you build out your investment portfolio. Fractional investing is also an option for those looking to invest small amounts. With fractional investing, you’re able to buy just a portion of a stock, which can be a much more accessible way to dip your toes into investing. 

We recommend these steps to determine how much you can afford to invest each month. 

Review your budget

Start by evaluating 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 — the amount left over after meeting all your financial obligations. 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 save or invest. 

Set a savings target

Before you land on your investing budget, determine what portion of that discretionary income you want to allocate toward saving. 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 backward from your goal. If you want to have a million dollars saved in 40 years then you’ll need to invest about $300 per month, assuming 8% growth. You’ll need $700 to have a million dollars in 30 years. You can see the importance of starting early!

Related: How Dollar Cost Averaging Works

Review your investment budget

What’s left now is for investing. Remember, you don’t have to wait for a big lump sum to start investing. Even investing $50 to $100 a month can pay off big in the long run. 

But 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 along. If you make changes in your budget or you start to earn more money, you’ll be able to increase your monthly contribution. 

Step 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 online investment platforms to choose from, like Webull or Fidelity. 

When researching investment platforms, the biggest thing you’ll want to pay attention to is whether the platform allows you to self-direct investment choices or if they use a robo advisor or professional advisor to determine your investment choices. A robo-advisor is usually a more affordable option than working with a professional advisor and uses algorithms to automate your investment choices based on your goals and risk tolerance. 

Consider the taxes

When setting up your accounts you'll need to choose what type of account you want.

Different types of accounts are taxed differently. If you're saving for retirement, you'll want to invest in a retirement account as they are considered “tax-advantaged.”

Retirement accounts include the traditional IRA, Roth IRA, 401(k)s, and 403(b)s. These accounts are tax-advantaged and will save you money in taxes over the long run. Traditional versions of these retirement accounts 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 do not have any tax advantages. These would be considered “brokerage accounts” or “taxable accounts”. Your money is invested “after taxes” and you'll 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.

Step 5. Pick your investments 

Once you know your investing goals and budget and have chosen a platform, you need to choose how to invest your money. These are a few popular types of investments you can consider. 

When you're just starting out you’ll want something that is well-diversified and low-cost. For this, we suggest an index fund that follows a large portion of the market rather than just one company. 

Fidelity has a total market fund with zero fees. This is a great fund to get started with. It will give you a good base and a way to grow your wealth without taking on outsized risk. 

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. Index funds are a favorite among passive investors who believe in the long-term potential of the market.

Lean more about index funds.

Here are some other popular investments new investors might be interested in: 

• Mutual funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of assets, such as stocks, bonds, or a combination of both. Professional fund managers make investment decisions on behalf of investors, providing instant diversification without the need for you to choose individual stocks or bonds.
• Exchange-traded funds (ETFs): ETFs are similar to mutual funds but trade on stock exchanges like individual stocks. They offer diversification across a range of assets and sectors. ETFs are known for their flexibility and liquidity, as you can buy and sell them throughout the trading day.
• Stocks: Investing in individual stocks means buying ownership shares in a specific company. Stocks have the potential for high returns, but they also carry higher risks due to market volatility. Research and choose companies with solid fundamentals, growth potential, and a history of strong performance. If you are just getting started, only use a small percentage of your portfolio to play with.
• 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 and are suitable for investors seeking steady income and capital preservation. However, in exchange for being lower risk, you can expect to earn less with bonds.

Investments

The following are investments you may have heard of but probably aren’t appropriate for brand-new investors. You’ll want to cover your basics first and build some wealth before diversifying into the following investments. But we want to mention them in case you’ve heard of them and 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 across various sectors, such as residential, commercial, or industrial. REITs can provide regular income and potential capital appreciation.
• 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 also be volatile and may require specialized knowledge.
• Cryptocurrencies: Cryptocurrencies, like Bitcoin and Ethereum, have gained popularity as alternative investments. However, they are highly volatile and speculative, making them suitable for risk-tolerant investors who understand the technology and potential risks involved.

Related: Why Asset Allocation Is Essential for Investing

Step 6. Monitor your portfolio

Many investment platforms offer tools to track your portfolio's performance automatically. 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 establish a consistent schedule for monitoring your investments by setting a calendar reminder to review your investments at regular intervals, like every quarter or even annually. 

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 did not, 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. 

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.

Individual Stocks

If you decide to invest in individual stocks, keep up with news and developments related to the companies you've invested in. Changes in leadership, product launches, or market shifts can impact the performance of your investments. For mutual funds, ETFs, and other managed investments, regularly review your investment objectives to ensure that their strategies align with your financial goals and that there have been no significant changes in their management.

Optional step: Get help if you need it

If getting started 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.

But don't let fear or overwhelm stop you from getting started. Remember your time horizon? The longer you plan to invest your money, the better. The best day to start is today! And if you need a hand, don't be afraid to ask.

FAQs

Is $100 enough to start investing? 

Yes! Getting started is the hardest part. Even if you only have $100 to start investing, do it. We recommend index funds as the perfect starter investment. You’ll want to find a fund that has low or no fees and a low minimum initial investment. FZROX at Fidelity is good for this. 

How much money do I need to invest to make $3,000 a month?

There is a rule of thumb called the 4% rule that states you can safely withdraw 4% of your portfolio per year without drawing down the principal. If you wanted an income of $3,000 per month or $36,000 per year, you'd need a nest egg of $900,000.

Should I buy individual stocks?

Probably not right away. Investing in individual stocks is fun…but risky. You'll want to be sure you have a nice base first. Get your basics set up in index funds, mutual funds, or ETFs first. Once you have the fundamentals covered, then you can start playing with stock investing!

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