One of the trickier ideas in personal finance can be investing. However, it’s also a fundamental component of achieving financial independence and accumulating wealth. While it may seem daunting to keep up with the latest market movements and navigate the alphabet soup of terms like 401(k)s and IRAs, knowing the fundamentals can help you feel more confident and at ease when you begin.
Investing is a crucial step towards achieving your financial goals, whether it’s building wealth, securing retirement, or saving for a major purchase. As a beginner, navigating the world of investments can seem daunting. But don’t worry, this guide will help you understand where to start and make informed investment decisions.
Why should you start investing?
Investing offers several advantages over traditional savings accounts:
- Outpace inflation: Inflation erodes the purchasing power of your money over time. Investing helps your money grow at a rate that outpaces inflation, preserving and increasing its value.
- Achieve financial goals: Investing allows you to reach long-term financial goals like retirement, buying a home, or funding your children’s education.
- Build wealth: By investing consistently over time, you can accumulate wealth and secure your financial future.
Important considerations for new investors:
Before you start investing consider the following:
- Risk tolerance: Different investments carry varying levels of risk. Assess your comfort level with risk and choose investments accordingly.
- Financial goals: Define your short- and long-term financial goals. This will help you determine the type and amount of investments needed.
- Active vs. passive investing: Choose between actively managing your investments or using a passive approach like index funds or robo-advisors.
- Do-it-yourself or hire someone: Decide whether to manage your own investments or seek professional guidance from a financial advisor.
- Taxes: Understand the tax implications of your investments and consider tax-advantaged accounts like IRAs.
Best investments for beginners:
Here are some top investment options for beginners:
1. High-yield savings accounts (HYSAs):
- Earn higher interest than traditional savings accounts.
- Access your money easily.
- Ideal for short-term savings goals or emergency funds.
2. 401(k) or other workplace retirement plans:
- Benefit from employer matching contributions.
- Contributions made pre-tax, reducing your taxable income.
- Tax-deferred growth until retirement.
- Automatic contributions for consistent investing.
3. Short-term certificates of deposit (CDs):
- Earn higher interest than HYSAs.
- Lock in your money for a specific period (typically 6 months to 5 years).
- Early withdrawal penalties apply.
- FDIC-insured for added security.
4. Money market accounts (MMAs):
- Similar to savings accounts, but offer check-writing privileges.
- Earn higher interest than traditional savings accounts.
- FDIC-insured for added security.
5. Index funds:
- Track a specific market index, such as the S&P 500.
- Low fees and diversified holdings.
- Suitable for long-term wealth building.
6. Robo-advisors:
- Automated investment management services.
- Create a personalized portfolio based on your risk tolerance and goals.
- Low fees and minimum investment requirements.
7. Investment apps:
- User-friendly platforms for buying and selling stocks, ETFs, and other investments.
- Fractional shares allow investing with small amounts.
- Educational resources and tools for beginners.
8. Diversify your investments:
- Don’t put all your eggs in one basket. Spread your investments across different asset classes and sectors to mitigate risk.
How much money is needed to start investing?
The good news is that you don’t need a large sum of money to start investing. Many online brokers have no account minimums, and some offer fractional shares for investing with small amounts. Micro-investing platforms allow you to round up purchases made with a debit card, automatically investing the spare change.
Investing is essential for achieving your financial goals. By considering your risk tolerance, financial goals, and investment options, you can make informed decisions and start building a secure financial future. Remember, it’s never too late to start investing, and even small contributions can grow significantly over time with consistent effort.
Decide your investment goals
Think about your overall objectives before choosing to open an account and start comparing your investment options. Knowing whether you want to invest for the long run or for your portfolio to produce income will help you focus your search and make the process of investing easier.
“Consider what your ultimate goal is for this money—is it for retirement, a down payment on a house in the next five years, or something else?” says Lauren Niestradt, CFP, CFA, and portfolio manager at Truepoint Wealth Counsel.
Knowing your objectives and when they should be achieved will help you decide which investment accounts should be prioritized and how much risk you can afford to take.
For instance, if your objective is to invest for retirement, you should select a tax-advantaged account, such as a 401(k) if your employer offers one, or an individual retirement account (IRA). However, you might not want to deposit all of your money intended for investments into a 401(k) because you won’t be able to access it until you turn 59 and a half, and you might incur penalty fees (with a few exceptions).
Additionally, you should avoid investing your emergency fund in a brokerage account because it can be difficult to access funds quickly. Additionally, should you require that cash during a market downturn, you may lose money if you are obliged to sell at a discount.
How to start investing
Investing is, in essence, the process of figuring out where you want to go with your money and matching those objectives with the best investments to get you there. This entails being aware of and gradually managing your relationship with risk.
All you have to do is dive right in once you know what you want. Investing can be done independently or under the expert advice of a financial planner. We go over each of the essential steps to get you started with investing in detail below.
Investing for Beginners – How I Make Millions from Stocks (Full Guide)
FAQ
Where should I start as a beginner investor?
Where I go to actually start investing?
How do I start investing?
To get started investing, pick a strategy based on the amount you’ll invest, the timelines for your investment goals and the amount of risk that makes sense for you. Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page.
How do I choose the best investment platform?
Consider factors like fees, available investment options, and the platform’s user-friendliness. Pick your account type: Decide whether you’re opening a cash account, which requires you to pay for investments in full, or a margin account, which allows for borrowing to purchase securities.
When should I start investing?
Start investing: Once you’ve verified the funds are in your account (don’t worry: the brokerage won’t let you trade otherwise), it’s time to start choosing among the stocks that best fit your investment goals. If you plan to trade frequently, check out our list of brokers for cost-conscious traders.
Should a beginner invest in stocks?
With stocks, beginner investors must consider the degree of risk that they can take. Typically, the more risk in an investment, the greater the potential reward. Investing in stocks has become increasingly accessible, with beginners able to open an account with little money through a brokerage’s website or mobile app.