I remember first googling investing in my 20s and feeling overwhelmed. Sure, I was excited about finally making enough income to get started. But I felt clueless about what to invest in, what account I needed, or whether I was risking too much money. Once I gained some experience with an IRA, though, I realized investing doesn’t require knowing everything right now. Here’s a beginner’s guide to investing that I wish I had back in the day.
What Is Investing?
Investing involves putting money into assets that you expect to either grow in value over time or provide you with an income for owning them. They can include physical things like real estate or gold bars, or intangibles like stocks, bonds, and cryptocurrency.
If your investment appreciates after you buy it, you can make money when you sell it. However, when you receive interest or dividends as investment income, you don’t have to sell the investment to make money. Some investments, including dividend stocks, allow for both.
I need to clarify that saving and investing aren’t the same thing. Yes, both can make money. However, Investing is for the long term and has different risks and benefits. So, you’d invest in your retirement in 25 years but save money for your vacation in a few months. Neither replaces the other.
Why Should You Invest?
Many people (including me) invest since it’s a great way to grow your money faster than if you put it in a savings account or leave it inside a safe at home. It’s harder to retire or save for your kids’ college if you’re earning less than 1% on a bank deposit than a 7% return on an investment. These higher returns also help you beat the ever-present inflation.
Investing is great because of compounding returns that add up over several years or decades. You just need to consistently invest some amount each month. Then, leave your investments untouched over the years, and reinvest any earnings. I often use this compound interest calculator as a motivator for when I’d rather spend more money on my hobbies.
And there’s another reason I recommend investing. It’s flexible enough so there’s something for everybody. That’s true whether you’re a high-risk person who wants the highest possible return or an almost retiree who wants to play it safe but still earn more than a bank account offers.
What Are the Risks?
First off, no investment guarantees you’ll make money or even break even. Despite investing in what I thought was “safe,” I still lost money sometimes. You’ll always be risking some loss for returns. The markets are always changing, so only invest what you’re OK with possibly losing. I wouldn’t recommend beginners to invest all their savings, for example.
Beginners should also know that unpredictability is the norm. One type of investment might do well now but crash in a few years. This makes diversifying a must. You don’t want to have all your money tied up in one company or type of investment and regret it when things go wrong.
Keep in mind that most investments usually aren’t as easy to access as cash in a bank account. Sure, you can sell them, but that means you need a willing seller. You also might need to sell at a loss, which isn’t ideal. That’s why you don’t want to hold up ALL your money in investments.
What Types of Investments Are There?
There are tons of investments I could talk about. But if you’re a beginner, I recommend starting with the simpler ones, such as:
- Stocks: These allow you to own a part of a company (like Walmart or Apple). The idea is that you can potentially see your investment’s value appreciate based on the company’s performance. On one hand, there’s high return potential if you make smart picks. On the other, the risk can be high. I highly advise understanding the company well.
- Bonds: Rather than owning part of a company, you’re lending it money in exchange for interest (coupon rate) and a full amount in the future (maturity date). Companies and governments offer them, which Vanguard says are less risky than stocks. I like bonds in my portfolio since I find the predictable interest payments useful.
- Mutual funds: If you use a 401(k), you’ll often invest in these. They’re a collection of different investments, such as stocks and bonds. That makes them great for avoiding putting all your eggs in one basket. Also, a manager handles the complicated stuff for you. Take the SEC’s advice to watch for fees, though.
- Exchange-traded funds: I have plenty of these in my IRA. They’re similar to mutual funds in that they pool different investment types for diversification, and a manager handles the admin stuff. However, they have several differences, such as charging lower fees and being based on a market index.
- Certificates of deposit (CDs): Fidelity considers them low-risk, and my experience has mirrored that. You give a bank or brokerage a deposit for a certain number of months or years, earn a better interest rate than most savings accounts pay, and get your original deposit and interest back at the end. I’ve never lost money with CDs. Be warned, it’s still possible if you do an early withdrawal or have a brokered CD, though.
Others may be more complicated or riskier than you’re open to. As a beginner, you might not have enough money to buy a property to rent out, for instance. Cryptocurrency is another popular one, but it’s highly unpredictable. Other investments, like commodities, derivatives, and annuities, also have their risks. Have a financial advisor walk you through options.
How Do You Get Started?
Now that you know the basics, here’s what I recommend for getting started with investing.
- Get ready. Since investing has its risks, I recommend first having savings for at least three months of living expenses. Paying down high-interest debt is smart since the cost could outweigh your returns. Making sure your budget can accommodate investing (or you have plans to increase your income) is also wise.
- Know your goals. Don’t put your money in investments without considering your whole picture and goals. Why are you interested in investing? How much risk can you stomach? How much do you plan to invest and how often? What returns do you expect? When do you plan to sell your investments? Figure it all out, ideally with a financial advisor.
- Choose an investment account. If your work offers a 401(k) plan, that’s a great way to get started, and you might even get a match on your contributions. Otherwise, you can do what I did and open an IRA (traditional for before-tax money or Roth for after-tax money). You can also get a basic taxable brokerage account. While you’re at it, research the account’s tax implications and any annual contribution limits. I like my traditional IRA since I can defer income taxes on my contributions. You might prefer owing no tax when you make the withdrawals during retirement, though.
- Start building your portfolio. Now you can actually start investing. The next steps will depend on the account and your preferences. You might do this manually, let a robo-advisor choose investments, or have a plan administrator (for a company plan) or financial advisor set everything up. I must emphasize that you should always research any investment. Risks, fees, potential return, and all. Don’t forget to diversify, either.
- Stick with it. Investing usually isn’t a one-time deal. Long ago, I set up monthly transfers from my checking account to my IRA. I recommend that type of consistency for you, too. It’s much easier to reach your goal when the money is taken out automatically than if you have to make an effort to do it. That’s wise advice for paying bills and saving as well.
- Stay patient. You probably won’t wake up tomorrow with a large gain. You also shouldn’t freak out if you see your balance fall, either. This is all a long-term journey. If you’re patient, consistent, and calm, you’ll probably end up better off than if you get scared and pull your money out. Still, adjustments are OK as your goals and risk tolerance change. I’d just recommend professional advice before making major changes, though.
My Final Investing Tips for Beginners
Since investing can seem confusing for any beginner, take it slowly. Don’t feel like you have to rush and pick several investments right now. It’s fine to put a lump sum in a CD or put a little of each paycheck toward your 401(k) or IRA. With experience, you can try new options. But that’s only after careful research. Don’t just listen to the scary market talk or internet hype.
Also, don’t worry about the perfect timing. I regret not investing earlier since I could have had a much larger nest egg by now. Compounding over time really is the magic here, so invest as soon as your finances allow. Since there’s a lot more to learn, keep reading about investing online, take free beginner’s courses, and talk to financial professionals about your plans.
For more tips, see our posts on investing do’s and don’ts and diversifying your portfolio.
Frequently Asked Questions
What’s the easiest way for beginners to invest?
Automatically contributing to a company 401(k) or signing up for an IRA or brokerage account with a robo-advisor makes things easier for beginners. But make sure you know which assets you’re investing in.
What’s the Rule of 72?
It says that dividing 72 by the yearly interest rate an investment has shows you how many years it’ll take until your money doubles. I like it as a simple and fast rule of thumb. It’s not perfect, though, and doesn’t consider costs like fees and taxes.
Which investments are the safest for beginners?
Experts like Fidelity consider U.S. Treasuries, CDs, and money market funds to be pretty safe options. But remember that you’ll probably see lower returns when taking on less risk. Plus, you probably won’t find a risk-free investment.
How much do I need to start investing?
You don’t need a lot of money, so even a dollar might be enough. It depends on the type of investment or account. Some CDs have no minimum, and fractional stocks start at a buck.
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Sources:
https://www.investor.gov/introduction-investing
https://www.finra.org/investors/investing/investing-basics
https://www.fidelity.com/viewpoints/personal-finance/how-to-start-investing
https://finred.usalearning.gov/saving/StocksBondsMutualFunds
https://www.ssb.texas.gov/types-investments
https://www.sec.gov/investor/pubs/tenthingstoconsider.htm
https://www.fidelity.com/learning-center/smart-money/investment-accounts-types
https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
https://www.investor.gov/introduction-investing/investing-basics/building-wealth-over-time
https://www.fidelity.com/learning-center/personal-finance/low-risk-investments https://www.investor.gov/introduction-investing/investing-basics/glossary/mutual-fund-fees-and-expenses
