When you’re first starting, just the act of balancing rent, utilities and debts might feel overwhelming. With some trial and error, you’ll start getting the hang of your monthly budgeting before long. Your next step after hitting that goal is to start investing, but knowing how to begin investing can be the trickiest part. That’s why we’ve put together this step-by-step guide on how to begin investing for beginners. You’ll be excited to know that we even have tips on how to invest with little money.
How To Begin Investing In 8 Steps
From the day that you decide that you want to start investing, you’ll likely have a lot of questions: how much should I invest? What should I invest in? For how long? How do I even get started?
Investing is not a “one-size-fits-all” concept, and there’s typically no right or wrong answer. Your strategy will depend on how much money you’re willing to invest, for how long, and how much risk you can tolerate. Below are the 8 steps that can help you start devising a plan:
Learn your investment options
Determine how much to invest
Start investing in a 401(k)
Open an investment account
Choose your investment strategy
Start investing early
Work with a financial advisor
Build your investment portfolio
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1. Learn Your Investment Options
Before you can begin investing, you’ll need to know what types of investment options are out there. Although the below is by no means an exhaustive list, it includes some of the most popular options you’re likely to encounter. Once you’re well-versed in the following list, then you can start exploring some advanced investment vehicles. Here are 6 common options to help you decide before you begin investing.
Stocks: When you invest in a stock, it means that you own a part, or share, in a company. Depending on the company you’re investing in, a single stock can cost anywhere from a few dollars to thousands. The price of the stock will fluctuate based on the performance of the company, as well as the general economy.
Bonds: A company, government, or municipality will sell bonds to private investors. Bonds represent loans that will be paid back to the investors in a set number of years. Until that time, or the bonds reach maturity, the investors will earn interest. Because of these set terms, bonds are considered lower-risk.
Mutual Funds: Instead of purchasing individual stocks or bonds, you have the option of investing in a mixture of equities. A mutual fund could offer a diverse blend of stocks and bonds with various risk levels. Some investors enjoy mutual funds because it takes out the personal burden of research and guesswork. The diversification also helps to spread out risk when compared against individual stocks.
Exchange-Traded Funds: Exchange-traded funds, ETFs for short, represent bundles of individual investments. ETFs are unique from mutual funds because they are traded throughout the day. Much like stocks, they are purchased for a share price. If you’re just starting and have a modest budget, then ETFs can be a solid option. An ETF share price is typically lower than the minimum required investment for a mutual fund, thus making them more affordable.
Real Estate: The word “investing” often draws up images of traders on Wall Street; real estate is not often the first that comes to mind. However, real estate remains one of the most rewarding and sound investment options on the market. As a young investor, you might shy away from real estate due to the perceived cost. What many don’t realize is that you can put down an initial investment and leverage a loan to finance the purchase of a property. In the following section, we provide a run-down of how to begin investing in real estate.
Alternative Investments: Alternative investments are assets that don’t fall into traditional investing categories, such as stocks or bonds. Real estate is just one example. Alternative investing opens up a world of venture capital, hedge funds, arts and antiques, and so on. Investors with a high net worth tend to hold these investments because of the higher degrees of risk and costs of assets.
2. Determine How Much To Invest
An essential metric you must consider before you begin investing is determining how much to invest. The best way to decide how much money to invest is to work backward. First, define the investment goal you want to hit, and how many years you have to hit that goal. You will need to factor in the interest rates of your investments. Then, you can work backward to break your investment total into a weekly or monthly number.
This step is necessary because it will help you evaluate your budget on a granular level. By knowing exactly how much room you need to make in your budget, the more likely you’ll be able to hit your target. Dave Ramsey offers some excellent tips on how to trim the fat off your monthly spending so you can clear your path to investing much sooner.
Most experts recommend investing 15% of your income. This amount seems to help you gain the most momentum in terms of time and compound interest. This is especially true if you have important financial goals like saving up for tuition or paying off your mortgage.
3. Start Investing In A 401(k)
A common investment goal for many is to save up enough money for retirement. If your employer offers a retirement account, most commonly a 401(k), then you should participate. A 401(k) is a type of plan sponsored by your employer that allows you to save up for retirement. You contribute a percentage of your income through automatic payroll deductions. This contribution is made with pre-tax dollars. If you’re lucky, your employer will also match your contribution amount if you hit a certain minimum. This is free money, so make sure you hit that target. Experts suggest contributing 10 to 15 percent of your annual income toward retirement.
4. Open An Investment Account
If your employer doesn’t offer a 401(k) plan, don’t worry. There are hundreds of reputable financial institutions that offer private retirement savings options. These accounts are referred to as “IRAs” which stands for “individual retirement account.” A Roth IRA allows you to pay taxes on your contributions upfront so that you won’t owe taxes on withdrawals in retirement.
If you do have a 401(k), don’t be quick to pass up a Roth IRA as an additional investment opportunity. For example, your employer might set the automatic deduction for your 401(k) at around 7 percent. If you remember, experts recommend investing as much as 15 percent towards retirement. This means you still have 8 percent left over to invest – why not let your money grow in a tax-free environment?
5. Choose Your Investment Strategy
Now that you’ve received a run-down on some of the most common investment options, it’s time to choose your investment strategy. Again, we come back to these questions: what is your savings goal? How much money do you need to reach that goal? In how many years do you want to reach that goal?
Based on your answers to these questions, you’ll start getting an idea of how aggressive or conservative you can afford to be. For example, hitting a savings goal for retirement likely gives you a few decades, meaning you can tie up your money in long-term stocks and funds.
But what if you have a short-term goal in the next couple of years? In this case, it wouldn’t make sense to tie up all of your money in long-term assets. Instead, it would make more sense to save up using a high yield savings account, where your funds remain liquid. Working with a financial advisor can be a great way to decide your best investment strategy.
6. Work With A Financial Advisor
There’s absolutely no shame in your game if you want to work with a professional. Rather, it’s highly recommended that you do so when you first get started. Investing can get confusing, and you’ll likely have a lot of questions.
An experienced financial professional can help you make the best decisions possible. It’s also a great way to get educated on different investment options and techniques. Eventually, when you start investing independently, you’ll feel much more informed and confident.
7. Start Investing Early
Building wealth takes a long time. The longer your money is invested in equities and assets, the more time it will have to grow.
However, some financial experts recommend that you focus on paying off debt and saving up an emergency fund. When you are tied up in debt payments, you can’t put that money towards investments or savings. We’re also all one emergency away from going broke – unless you’re properly prepared. That’s why it’s best to focus on these two items first before investing. That way, you can ensure you can invest as much of your income as possible, with a security net to catch you in case you should fall.
8. Build Your Investment Portfolio
Once you do start investing, the next step will be to begin building a portfolio. A portfolio is an array of different investments. One investor might have a portfolio made up of different types of stocks. Another investor might have a mix of stocks, ETFs, and mutual funds.
There is no right or wrong answer. What one investor’s portfolio looks like will greatly differ from that of the next. This is because everyone has unique financial goals, timelines, and risk tolerance.
However, you are encouraged to find a good mix of different assets, especially when you’re first starting. This helps protect you in terms of risk. By having variety in your investments, you won’t be putting all your eggs into one basket.
How To Begin Investing With Little Money
Feeling insufficient is easily one of the top deterrents preventing young people from investing. However, thinking that you have to have a lot of money to invest is a common myth. You can start investing with a small amount of money. Here are some examples of how:
Enroll In Your Employer’s Retirement Plan
Use A Robo-advisor
Find Low Initial Investment Mutual Funds
Invest In Treasury Securities
Start Investing In Real Estate
The reality is, you still need at least a little bit of money to invest it. Don’t worry though, saving up is not as daunting as you might think. The tough part is being disciplined with your spending. Start small by putting a few dollars away a week. As you adjust, get into the habit of living on less than what you earn. Over time, start tucking away more per week as you learn how to live on less and less. You can put your money away into a piggy bank, or use an online savings account. Either way, just make sure you don’t accidentally spend your savings.
Enroll In Your Employer’s Retirement Plan
If your employer offers a 401(k), and especially if they offer to match, take advantage immediately. Snoozing on 401(k) matching is giving up free money. You can start small by deducting a small percentage from your paycheck. (Remember, it comes out of your payroll automatically so you won’t even miss it.) Then, you can incrementally increase your contribution over time. One tip is to boost your contribution each time you get a raise.
Use A Robo-advisor
A Robo-advisor is a technology service that uses algorithms to invest client funds. When first selecting a Robo-advisor, you’ll fill out a questionnaire to communicate your investment goals. This option is ideal for individuals who want to invest, but don’t want to put in the effort. You’d also have to feel comfortable letting someone else make decisions on how to invest your money. Keep in mind that Robo-advisors charge a fee in exchange for their services. The good news here is that some Robo-advisors allow you to start investing with as little as $500 (or less!)
Find Low Initial Investment Mutual Funds
You may have shied away from mutual funds when you saw the minimum investment requirements that range from hundreds to thousands of dollars. What you might not know is that there are mutual funds out there that will waive the minimum. In exchange, you’ll agree to invest small monthly amounts (in the $50 to $100 range) automatically.
Invest In Treasury Securities
If you feel nervous about risking your hard-earned money, treasury securities can be a great way to get your feet wet. Treasury securities, or bonds, are extremely safe. The returns aren’t very high, but you will earn some interest, and rest assured that your risk is super low.
This could be a great way to introduce yourself to the idea of investing and get used to some of the mechanics. Then, you can venture out and make some bolder moves when you feel ready to do so!
Start Investing In Real Estate
As a real estate company, of course, we are partial to real estate investing. We’re in the business because of the amazing benefits that real estate investing has to offer. Not to mention, real estate returns and value have been solid and dependable over the decades. If you’re not ready to buy properties yet, you can still begin investing in Real Estate Investment Trusts (REITs) or get into crowdfunding. Read the next section to get to know several real estate investing strategies.
How To Begin Investing In Real Estate
Like any investment, investing in real estate can be risky, but mostly only for those who don’t do their research and due diligence. It is possible to start investing in real estate even if you don’t have an enormous nest egg saved up. Below, you’ll find some popular real estate investing options broken down.
Real Estate Investment Groups
Investing in rental properties means buying residential properties and renting them out to tenants. (Yes, you’ll become a landlord!) You’ll earn a monthly rental income, which can be put towards mortgage payments, plus any necessary maintenance. If you prefer not to get involved in traditional landlord activities, you can also hire a property manager. Although it can be hard work, owning a rental property is a smart way to acquire a real asset that’ll increase in value over time. Plus, you’re potentially locking down a passive income stream for life.
If you like the way stocks work, but also want to invest in real estate, then REITs might be just the right fit. REITs – real estate investment trusts – are firms that acquire and rent out properties using investor funds. Some firms specialize in certain real estate sectors, such as commercial real estate or multifamily properties. In exchange, you will earn back dividends as the properties appreciate. As a beginner investor, this is a great way to buy real estate in bits and pieces.
A more recent investing vehicle that has been gaining in popularity is the crowdfunding platform. Instead of going through REITs or corporations, investors will instead put their money directly into a pool to be used by a real estate developer. This could be a developer who buys land and builds property from the ground up, or it could be someone who buys and improves properties. Because you don’t have control over the outcome, crowdfunding can be a pretty risky investment. However, you can do your research and select a fund that seems promising. In exchange for the risk, you can typically expect higher returns.
Real Estate Investment Groups:
If you like the idea of group investing but want more control, try a real estate investment group. This is a group of like-minded investors who pool their resources to acquire residential real estate. Examples include apartment buildings and condos. Most groups go through a company that handles the logistics, such as negotiating deals, acquiring properties, and handling maintenance and property management.
This is a great way to get a little more involved in the investment process and spread your risk with an inner circle of investors.
Vacation rentals work much like rental properties. Instead, however, you rent out your property to vacationers who want to stay for shorter periods. You can list your vacation rental on your website, or through vacation rental sites like Airbnb.com.
Although you’ll have to deal with regular turnover, and thus more wear and tear, vacation rentals can be lucrative. This is especially if your property is located in a popular tourist destination and offers competitive amenities. Perhaps the best perk is that you have control over your booking schedule and can vacation in your property whenever you want!
House-flipping is one of the riskier investment options in real estate. However, the reward can be well worth it. A house flipper will find a property being sold at below market value and then renovate it. By doing so, they can then turn around and resell the improved property at a higher price.
House-flippers need to be careful that they are finding a good deal in a great market. Be sure to avoid common mistakes. Some investors don’t do their research and find out too late that their house will have a tough time selling in the wrong market. Others might invest more in their rehab than what they can make back in profit. Be sure to check out our guide on how to start flipping houses to avoid silly mishaps!
If you had no idea how to begin investing before reading this article, then hopefully now you have some ideas on how to get started. Just remember, it’s okay to start small and modest. The key is to get started as early on as you can – the only way to grow your money (without a pay increase) is to invest it. Making incremental progress and increasing your investing budget as you gain experience is a perfect way to get started.
Do you have any great investing tips for someone who is just getting started? Share your wisdom in the comments below!
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