5 Steps Every Beginner Should Take to Get Started Investing

 5 Steps Every Beginner Should Take to Get Started Investing

Investment strategies to adapt as a beginner.

What exactly is investing?

Investing is defined by Webster as "committing (money) in order to gain a financial return."

 

In essence, you're investing money in something like a business, a project, real estate, or something else in the hopes of earning money or making a profit.

 

That's fine and dandy, but why is it significant?

 

It's one of the simplest ways to start making money work for you rather than against you.

 

Your capacity to develop wealth and attain financial freedom skyrockets when you can stop exchanging your time for money and start establishing passive streams of income.

Many personal finance gurus believe that investing your money is the quickest path to financial independence.

 

 

Begin early and contribute frequently.

In general, I advise individuals to begin'seriously' investing when they begin their jobs.

 

For many people, this might imply different things, but it's normal for people in their early twenties, following college, to begin their careers and, as a result, begin investing.

 

Examine your retirement plan alternatives when you start your first job.

 

The majority of workplaces provide a qualifying retirement plan (such as a 401(k) plan) to assist you in saving.

 

In this post, we won't go through the details of those programs, but it's crucial to know if your firm provides a "match." Employers will frequently urge you to save by matching a portion of your contribution.

 

 

Keep an emergency fund on hand.

First and foremost, you must establish an emergency fund.

 

Life isn't always predictable, and it's not a matter of whether, but when you'll face an emergency.

Things like a job loss, a family death, auto repairs, house repairs, and so on should not ruin your finances.

Starting with a $900 emergency fund is a good place to start.

After that, you should set aside 3-6 months' worth of living costs in a fully filled emergency fund.

 

 

Pay off any debt with a high-interest rate.

Then, before investing your discretionary cash, pay off all high-interest debt. What criteria do you use to identify what is of high interest?

 

In the stock market, an active investor has traditionally earned around 10% yearly returns on average (using the S&P 500 as a proxy).

 

High-interest debt is any debt with an annual interest rate that is higher than the rate of return that may reasonably be expected from investing.

In this case, the aggressive investor should pay off any interest that has a greater than 10% annual interest rate.

So, while this is all useful knowledge, deciding where to begin investing can be difficult.

 

How to Get Started Investing - 5 Simple Steps for Newbies

1) Begin as early as possible.

We have stated that you should begin investing when you are young. It makes no difference how much money you have to invest; even little investments will increase.

 

If you haven't begun investing yet, consider the image below from Money and U.S. New as a wake-up call and get started right now!

 

2) Determine the amount of money to invest

It's typically a good idea to set aside a certain amount of money each month for investing.

 

Making weekly or monthly payments to an investing account is also a smart idea. Dollar-cost averaging is the term for this.

 

It simply implies that you are purchasing a certain dollar amount of assets regardless of market conditions.

 

Set up an automated transfer to ensure that you don't miss out on an investment opportunity. Paying yourself first in this manner is a certain method to accumulate money.

 

 

3) Open a savings account. 

This is a difficult step to take. There are a plethora of choices available. How do you choose the best option? Do I need to create an account with a financial advisor since older generations rave about them? Isn't there a less expensive option? Are there any less expensive alternatives to hiring a financial advisor?

"I'm not sure I can accomplish this on my own." This is something you can accomplish on your own! Although having a brokerage account with a financial adviser has its benefits, it is not for everyone. Typically, people who have been investing for a long time and have amassed big quantities of money may seek expert guidance from a financial adviser on how to keep their money safe.

Beginners will typically be unable to fully utilize all of a financial advisor's services, leading them to seek for less priced "Robo-Advisors." Robo-advisors automate investment management by employing computer algorithms to design and manage your portfolio depending on your goals and risk tolerance. These services are available for a minimal price on websites like Betterment, M1 Finance, Webull, or Robinhood, and there are usually no account minimums. Robo-advisors are ideal for less experienced investors who don't want to pick and select which investments to make. Self-directed brokerage accounts are a great option for people who wish to be more involved in their financial portfolios.

 

 

4) Be knowledgeable of your investment options.

This is the phase that will most likely deter most individuals from investing.

How can you possibly keep track of how a bond works, what a Sharpe Ratio is, or how a company's P/E Ratio influences its stock price when there is so much jargon thrown around by investors?

Isn't it true that you need to know these facts before you invest? No. You just need to be aware of your investing possibilities and where your money will provide the best results.

However, there are a few phrases you need to be familiar with before we go any further.

The distinction between index funds and individual equities is one of the most fundamental investing skills you should understand.

 

5) Decide on a strategy for investing.

Portrait of a cheerful family sitting on the sofa at home with a laptop flashing a thumbs-up sign.

 

You should always have a goal in mind when choosing an investment plan.

 

It may be anything from purchasing a new laptop in four months to purchasing a home in two years to retiring in forty years. Your investing plan should be determined by your final aim.

 

Investing in the Short Term (5 years or less)

Short-term investment is characterized by portfolios that are less aggressive. You normally want to preserve the money you've saved while also earning a tiny return.

 

If you want to purchase a house in two years, it could be a smart idea to buy a two-year, investment-grade bond and collect income while preserving the money you've already put up.

 

 

Of course, your risk tolerance will influence this. You can invest part of your money in stocks if you can stomach some volatility, but it's best to stick to the safe side of equities, such as US Large Cap Stock.

 

Income-oriented mutual funds are another solid alternative. These are mutual funds that invest in vehicles that create a lot of money in the form of dividends or interest and are a safer alternative to growth funds.

 

Long-term investments (five years or more)

When you invest for the long term, you have the option to take on greater risk when you first start out.

 

If you're in your twenties and want to invest for retirement, you'll have decades to make up for any market losses.