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How to Start Investing: A 7-Step Beginner’s Guide

The key to successful investing is staying focused on your long-term goals. Start small, stay consistent, and let your investments work for you.

So you want to start investing?

Being a beginner in anything comes with great challenges, but it also brings rewards and new opportunities.

Investing may seem daunting for beginners, but it’s an essential tool for building long-term wealth and achieving financial independence. Whether you’re saving for retirement, a down payment on a house, or simply seeking to grow your money, investing can help you reach those milestones.

What is Investing?

Investing involves committing money to an asset with the expectation of receiving a return on that investment over time. These assets can include stocks, bonds, real estate, mutual funds, exchange-traded funds (ETFs), and more. The goal of investing is to generate income or profit through capital appreciation, dividends, or interest payments.

How Investing Works

When you invest, you’re essentially putting your money to work for you. Instead of letting it sit idle, you’re giving it the opportunity to grow over time. For example, investing in stocks means buying shares of ownership in a company. If the company performs well, the value of your shares may increase, allowing you to sell them for a profit.

Why is Investing Important?

Investing is crucial for several reasons:

  1. Wealth Building: Investing has the potential to generate higher returns compared to traditional savings accounts, helping you accumulate wealth over time.
  2. Beating Inflation: Inflation erodes the purchasing power of your money over time. By investing, you have the chance to outpace inflation and maintain the value of your savings.
  3. Achieving Financial Goals: Whether it’s saving for retirement, buying a home, funding your children’s education, or reaching financial independence, investing can help you reach your financial goals more efficiently.

Investing vs. Saving

While both saving and investing involve putting money aside for the future, they serve different purposes:

  • Saving: Involves setting aside money in a low-risk account, such as a savings account or certificate of deposit (CD). Savings accounts offer minimal returns but provide easy access to funds.
  • Investing: Involves putting money into assets that have the potential to grow over time. Investing carries more risk than saving but offers the potential for higher returns.

Let’s say an individual saves $6,000 in a traditional savings account versus investing the same amount in a diversified portfolio over a period of 10 years. We’ll assume an average annual return of 7% for the investment portfolio, which is a commonly used long-term average for a diversified investment portfolio.

Here’s a comparison of how the savings and investment would grow over time.

YearSavings Account BalanceInvestment Portfolio Balance
1$6,060$6,420
2$6,121$6,868
3$6,183$7,338
4$6,247$7,831
5$6,311$8,350
6$6,377$8,897
7$6,445$9,473
8$6,515$10,081
9$6,586$10,722
10$6,659$11,398

In this example, you can see that the balance in the savings account grows steadily over time due to accrued interest while the investment portfolio grows at a faster rate due to the compounded returns earned on the invested amount.

Over the course of 10 years, the investment portfolio significantly outpaces the growth of the savings account. This illustrates the potential long-term benefits of investing compared to saving alone.

Types of Investing Accounts

Before diving into investments, it’s essential to choose the right type of account to hold your investments. Here are some common options:

  1. Individual Retirement Accounts (IRAs): IRAs offer tax advantages for retirement savings. Traditional IRAs allow you to contribute pre-tax dollars, while Roth IRAs use after-tax dollars but offer tax-free withdrawals in retirement.
  2. Employer-Sponsored Retirement Plans: Many employers offer retirement plans such as 401(k)s or 403(b)s. These plans often include employer-matching contributions and providing tax benefits.
  3. Taxable Brokerage Accounts: These accounts allow you to invest in a wide range of assets without the restrictions of retirement accounts. While they don’t offer tax advantages, they provide flexibility in accessing funds.

It’s important to understand that if you’re contributing to a 401(k), you’re already investing. The key is knowing how to take full advantage of retirement accounts along with using taxable brokerage accounts to build wealth.


Steps to Start Investing

Investing is a powerful tool for building wealth and achieving financial independence.

Take the time to learn about different investment options, asset classes, and strategies. This website has plenty of resources. You can start with investing basics and investing tips.

Now, let’s go over the steps to getting started investing.

Step 1: Set Financial Goals

Understand your investment goals and determine why you are investing and what you hope to achieve.

AspectExplanation
Determine Your Investment GoalsClarify why you are investing and define your financial objectives. Your goals may include saving for retirement, buying a home, funding education, building wealth, or achieving financial independence.
Financial SituationEvaluate your current financial situation, including your income, expenses, assets, liabilities, and overall financial stability. Complete a financial checkup. Understanding your financial position can help you set realistic investment goals and develop an appropriate strategy.
Investment PreferencesIdentify your investment preferences, such as the types of assets you prefer to invest in (e.g., stocks, bonds, real estate), your preferred investment style (e.g., active trading, passive investing), and any ethical or social considerations.

Step 2: Assess Your Time and Risk

Understand your risk tolerance and investment horizon. Younger investors with a longer time horizon can typically afford to take on more risk, while older investors may prefer a more conservative approach.

Time HorizonConsider your investment time horizon, which is the length of time you expect to hold your investments before needing to access the funds. Short-term goals may have a horizon of a few months to a few years, while long-term goals may span decades.
Risk ToleranceAssess your risk tolerance, which is your willingness and ability to endure fluctuations in the value of your investments. Determine how much volatility you can tolerate without feeling anxious or making impulsive decisions.

Step 3: Choose Your Brokerage Account

You’ll need a brokerage account to start investing. You have many options depending on your needs. The table below highlights them.

ServiceDescription
Online BrokerageOnline platforms that allow investors to buy and sell securities such as stocks, bonds, mutual funds, and ETFs. Online brokerages provide access to trading tools, research, and educational resources. Investors manage their own portfolios and make investment decisions independently. Find online brokerages on phroogal.com.
Robo-AdvisorsRobo-advisors use algorithms to create and manage diversified investment portfolios based on investors’ goals, risk tolerance, and time horizon. They typically offer low fees and require minimal human intervention, making them suitable for passive investors seeking hands-off portfolio management. Find robo-advisors.
Wealth ManagementProfessional advisors or firms provide comprehensive financial services to high-net-worth individuals and institutions. Wealth management services include financial planning, investment management, retirement planning, estate planning, tax optimization, and personalized advice.
Investment AppsMobile applications that offer convenience, real-time market data, and user-friendly interfaces make it easier for investors to monitor their portfolios, execute trades, and stay informed on the go. Find investing apps.

Step 4: Open an Account

Choose a reputable brokerage firm to open your investment account. Consider factors such as fees, investment options, and customer service.

Read our list of best online brokerages.

FactorDescription
Fees and CommissionsEvaluate the fees associated with trading, including commission fees, account maintenance fees, and other charges. Look for competitive rates and fee transparency.
Investment OptionsConsider the range of investment options offered by the brokerage, including stocks, bonds, mutual funds, ETFs, options, and more. Ensure that the brokerage provides access to the types of investments you’re interested in.
Account MinimumsDetermine if the brokerage has any account minimum requirements. Some brokerages may require a minimum deposit to open an account, while others may have ongoing balance requirements.
Customer ServiceAssess the quality of customer service provided by the brokerage. Look for prompt and helpful support via phone, email, or live chat. Consider reading reviews and testimonials from other clients.
Research and ToolsEvaluate the research and educational tools offered by the brokerage. Look for access to market analysis, research reports, financial news, and investment screening tools to help inform your investment decisions.
Trading PlatformAssess the usability and functionality of the brokerage’s trading platform. Consider factors such as ease of navigation, order execution speed, customization options, and mobile accessibility.
Security and RegulationEnsure that the brokerage is regulated by a reputable financial authority and adheres to industry standards for security and privacy. Look for features such as encryption, two-factor authentication, and account protection measures.
Reputation and ReviewsResearch the brokerage’s reputation and read reviews from other investors. Look for feedback on reliability, transparency, and overall customer satisfaction. Consider consulting reputable financial publications and online forums.

It’s important to conduct thorough research and comparison before selecting a brokerage to ensure that it aligns with your goals and preferences. Learn more on how to open an online brokerage account.

Stay 5: Choose Your Investments

Warren Buffet, one of the most successful investors of all time has advised beginners to consistently invest in low-cost index funds and ETFs despite the market fluctuations.

In 2017, he said, “Consistently buy an S&P 500 low-cost index fund. Keep buying it through thick and thin and especially through thin.”

The following are just a few examples of the various investment options available to beginners.

Investment TypeDescription
StocksOwnership shares in publicly traded companies. Stocks offer the potential for high returns but also carry higher risk due to market volatility. Beginners can invest in individual stocks or through diversified mutual funds and ETFs.
BondsDebt securities issued by governments, municipalities, or corporations. Bonds provide regular interest payments and return of principal at maturity. They are generally considered lower risk than stocks but offer lower potential returns.
Mutual FundsPooled investment funds that invest in a diversified portfolio of stocks, bonds, or other assets. Mutual funds are managed by professional portfolio managers and offer diversification and convenience for beginners.
Exchange-Traded Funds (ETFs)Similar to mutual funds, ETFs hold a diversified portfolio of assets but trade on stock exchanges like individual stocks. ETFs offer liquidity, diversification, and typically lower expense ratios compared to mutual funds.
Real Estate Investment Trusts (REITs)Companies that own, operate, or finance income-generating real estate properties. REITs allow investors to gain exposure to the real estate market without directly owning properties. They offer dividends and potential for capital appreciation.
Index FundsPassive investment funds that track a specific market index, such as the S&P 500. Index funds offer broad market exposure, low expense ratios, and are suitable for beginners seeking long-term, diversified investments.
Certificate of Deposit (CD)Time deposits offered by banks with fixed interest rates and maturity dates. CDs are considered low-risk investments but offer lower returns compared to stocks and bonds. Beginners can use CDs for short-term savings goals.
CommoditiesPhysical goods such as gold, silver, oil, and agricultural products that can be traded on commodity exchanges. Commodities offer diversification benefits but can be volatile and may require specialized knowledge for effective investing.
CryptocurrenciesDigital or virtual currencies that use cryptography for security. Cryptocurrencies like Bitcoin and Ethereum have gained popularity as speculative investments but are highly volatile and carry significant risk. Beginners should proceed with caution.

Step 6: Automate Investing

Do yourself a favor and automate your investments. Set aside a portion of your paycheck or an amount each month to be transferred to your brokerage account to purchase stocks and index funds. Doing so will help you grow your portfolio in a faster time frame and improve your rate of return. 

Many online brokerages allow you to set a buy-order schedule.

Step 7: Stay Disciplined

Investing is a long-term endeavor, and market fluctuations are inevitable. Avoid making impulsive decisions based on short-term market movements and stay focused on your long-term goals.

Conclusion

Remember, the key to successful investing is staying focused on your long-term goals. Start small, stay consistent, and let your investments work for you.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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