How Can You Start Investing?

Jennifer Wills

Sep 9

4 min read

Investing is a strategy to grow your money over time. You can pursue long-term goals such as purchasing a home, funding your retirement, and paying for your child’s education.

Investing involves risk in exchange for potentially great returns over time. The sooner you begin, the more time your money has to grow.

Benefits of Investing

The benefits of investing include the following:

Compound Growth

Compound growth occurs when your investment return generates an additional return. You earn money on your initial investment and the interest that has already accumulated.

For instance, if you earn 8% in Year One on a $1,000 investment, your total return is $80. The next year, you can invest $1,080. If it returns 8%, your total return is $86.40. Multiplying the return by thousands of dollars and many years demonstrates the potential impact of compound growth.

Staying Ahead of Inflation

Inflation erodes the value of money over time. For instance, if the annual inflation rate is 4%, you must earn at least this much on your money to break even.

Investing can beat inflation. Although past performance is not a guarantee of future returns, the S&P 500’s inflation-adjusted annual average return on investment is approximately 7%. If your investments earn that average, your real return is a 4% growth.

Tips to Start Investing

Breaking down investing into smaller steps makes the process easier to understand and follow:

1. Determine your financial situation.

Ensure you can answer “yes” to the following questions before you begin investing:

Do you have an emergency fund? Your emergency fund should cover three to six months of living expenses and be kept in an easily accessible account.
Have you tackled high-interest debt? Credit cards and personal loans typically carry interest rates that are higher than average investment returns. Paying down this debt frees up more disposable income.
Do you have extra money after you pay your expenses each month? Because investing is a long-term strategy that involves risk, ensure you can live without the money you plan to invest.

2. Define your investing strategy.

Your investment strategy guides your risk tolerance and where your money goes. Build your investment strategy around these key factors:

Your goal: Whether purchasing a home or sending your kids to college, knowing what you want to attain and when helps you maximize the money you invest.
Your timeline: The longer your timeline, the more investment options you have, and the more risk you can take.
Your risk tolerance: Understanding your preferred balance of risk and reward creates the foundation for your investment portfolio.
Your preferred investing method: Determine how involved you want to be in investing. Consider whether you want to work with a financial professional, invest on your own, or both. Your choice depends on your confidence level, interest, and/or budget.

3. Choose your investment accounts.

Diversifying your investment accounts can help you meet your goals and reduce the amount of taxes you pay over time:

Retirement accounts: These tax-advantaged accounts are designed to help you save for the long term. Retirement accounts include a 401(k), 403(b), and an Individual Retirement Account (IRA).
Non-retirement investment accounts: Brokerage accounts, education accounts such as a 529 plan, and health savings accounts (HSAs) can help you save for goals other than retirement.

4. Diversify across investment vehicles.

Determine which assets to purchase. Include a mix of asset classes to manage risk.

Common asset classes include:

Stocks: A share of ownership in a company, also called equities.
Bonds: A loan that you make to an entity, such as a government or corporation.
Mutual funds: A pool of investors' money that is used to invest in securities.
Exchange-traded funds (ETFs): A type of security that tracks a stock market index, a specific sector, or a commodity, such as natural gas or wheat.
Real assets: An investment in something tangible, such as real estate, commodities, or infrastructure.

5. Decide how to invest your money.

How you invest depends on how much money you have and how involved you want to be in managing your investments. The following are options based on your financial starting point:

If you have a small amount to invest: Micro-investing allows you to start investing with as little as a few dollars a month. These platforms make investing convenient and straightforward, but offer limited assistance.
If you have $500 to invest: Consider using platforms that combine advanced algorithms with human expertise to build and manage your portfolio. Robo-advisors generally have an investment minimum of $500 and provide a balanced mix of automation and personal guidance.
If you have a sizable amount to invest: A licensed financial professional can provide personalized guidance to help optimize your investments. The investment minimum depends on which financial institution you work with.
If you prefer to manage your own portfolio: An online brokerage account lets you independently build and manage your portfolio. While these platforms generally do not have investment minimums, self-directed investing requires a willingness to research and make decisions on your own.
If your employer offers a retirement account: Take advantage of employer-sponsored retirement accounts such as a 401(k), 403(b), SIMPLE IRA, or SEP IRA. Contributions are deducted from your paycheck pre-tax, and many employers offer matching contributions, which is essentially free money to grow your retirement savings.

Investment minimums vary by account type. Research management fees, sales commission fees, and other costs associated with the provider you work with.

Maintain Your Investments

Investing isn’t a set-it-and-forget-it activity:

Once your money is in the market, you must manage it.
Market volatility and other economic factors might require further diversification.
You might experience a major change in your finances or lifestyle that justifies a portfolio adjustment.

Deal with Market Volatility

Because investment values can go down or up, you should stay invested for the long term. Consider consulting a financial professional for perspective to explain your options during economic uncertainty.

Understand Inflation and Interest Rates

Inflation can decrease the value of your investment returns over time. Interest rate changes can also impact your investment portfolio. Understanding these economic factors helps you remain logical and prepared.

Adapt Your Investment Strategy to Life Events

Periodically review your portfolio to ensure it reflects your financial goals and risk tolerance. This process, called portfolio rebalancing, can be triggered by market fluctuations, life changes such as starting a family, inheriting money, or preparing to retire, or because it’s been a while since you’ve done it.

*This information is for educational purposes only.

Are you ready to start investing? Let me know in the comments!