One of the best things you can do for your finances is start investing. Over time, investing is one of the likeliest ways you’ll build enough wealth to reach your financial goals — and even achieve financial independence.
While investing can seem like a daunting task, the good news is that it’s easier than ever to get started. Here’s what you need to know about how to start investing.
Decide how much you can invest
Figure out how much you can invest each month. The key to long-term investing success is consistency. Even if it’s a small amount, you can start investing.
Look at your income and expenses. Review which items can be reduced to create some room for investing. Even if you can only invest a few dollars per week, it will help you get started.
Paying down debt vs. investing
One of the big issues facing millennials is whether to pay down debt or invest. In the end, it depends on your preference, but having debt doesn’t mean you can’t invest. For example, if you have student loans, you might put 70% of your available money toward paying down those student loans and the other 30% toward investing. However, if you have high-interest debt like credit cards, it might make sense to put 90% toward debt reduction and 10% toward investing.
Depending on your situation, you might want to tweak where you put the money, but you don’t have to let being in debt stop you from investing if you want to start building wealth.
Know your goals
Next, decide on your goals. What do you want your money to accomplish on your behalf? What you plan to use your money for, as well as your timeline, can determine how you invest your money.
- Short-term goals: If you want to save for a down payment on a house, a vacation or a similar goal in the next one to three years, consider putting your money in high-yield savings vehicles, or, depending on your situation and risk tolerance, bond investments. Even for short-term goals, in some instances, a mix of stocks and bonds can work.
- Long-term goals: For longer-term goals like saving for a child’s college education or your retirement, you might decide to invest more heavily in stock funds, real estate investment trusts (REITs) and other higher-yielding assets.
Your risk tolerance
As you learn to start investing, make sure you understand risk tolerance. You need to be familiar with how much risk you’re prepared to take on. For example, if you’re relatively young, you have more time to withstand and recover from market downturns, economic problems and investing mistakes.
You should also consider your emotional risk tolerance. Even if, financially, you can handle the ups and downs of the market, you must be able to handle them emotionally, as well. If you struggle with the idea of using a stock index ETF to meet your short-term goals, then look for something that better suits your needs.
Get help to learn how to start investing
There’s nothing wrong with asking for guidance as you learn a new skill. A number of online investment brokers can offer you professional help as you make your plans. Betterment, Wealthfront and Wealthsimple can help you build a portfolio that matches your risk tolerance and goals. Additionally, it’s possible to get help from human advisors as you create a portfolio.
Basic tips to help you start investing
Start ASAP
It’s all about compounding returns, so the earlier you start, the better off you’ll be in the long run. Many investing experts talk about “time in the market instead of timing the market.” For many investors, starting early and being consistent about investing, while increasing contributions over time, is most likely to result in long-term success.
You can start investing at any time. If you haven’t started already, begin now. It’s relatively easy to open an account and begin investing.
It’s fine to start small
You don’t need a lot of money to start investing. In fact, there are a number of apps that allow you to invest using pocket change. Check out our recommendations for the best investing apps here.
It’s true that investing a few dollars each week isn’t likely to fully fund your retirement or other financial goals. However, starting small gets you in the habit of investing and growing your wealth.
As your finances improve, you can increase how much you invest, growing your contributions to meet your goals. But, for now, start with whatever amount you can. The money you do invest in will grow over time, and you can keep adding to your portfolio in the future.
Consider index mutual funds and ETFs
When trying to decide what to invest in, some people are overwhelmed by the prospect of sifting through individual stocks and trying to pick “winners.” For many beginners, it makes more sense to focus on vehicles that offer “instant diversity.”
Index investments offer exposure to hundreds — or even thousands — of securities at once. Rather than trying to choose individual stocks, you can get access to a wide swath of the market. If you decide later that you want to invest differently, you can change your portfolio makeup. For beginners, however, index investments offer a way to start building wealth while you research other choices.
Learn the basics
Finally, make sure you learn the basics. Read about how investing works, how different assets perform and when they might be appropriate. While you can start small with index investments, use that time to learn when (or if) it’s time to try other investing strategies.
In the end, no one knows your situation as well as you do. Before investing, carefully consider your own situation and consider requesting help from an investing professional.
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