Rent, utility bills, debt payments and groceries might seem like all you can afford when you're just starting out, much less during inflationary times when your paycheck buys less bread, gas or home than it used to. But once you've wrangled budgeting for those monthly expenses (and set aside at least a little cash in an emergency fund), it's time to start investing. The tricky part is figuring out what to invest in — and how much.
As a newbie to the world of investing, you'll have a lot of questions, not the least of which is: How much money do I need, how do I get started and what are the best investment strategies for beginners? Our guide will answer those questions and more.
Here are five steps to start investing this year:
1. Start investing as early as possible
Investing when you’re young is one of the best ways to see solid returns on your money. That's thanks to compound earnings, which means your investment returns start earning their own return. Compounding allows your account balance to snowball over time.
At the same time, people often wonder if it's possible to get started with a little money. In short: Yes.
Investing with smaller dollar amounts is possible now more than ever, thanks to low or no investment minimums, zero commissions and fractional shares. There are plenty of investments available for relatively small amounts, such as index funds, exchange-traded funds and mutual funds.
If you’re stressed about whether your contribution is enough, focus instead on what amount feels manageable given your financial situation and goals. “It doesn't matter if it's $5,000 a month or $50 a month, have a regular contribution to your investments,” says Brent Weiss, a certified financial planner in St. Petersburg, Florida and the co-founder of financial planning firm Facet.
How that works, in practice: Let's say you invest $200 every month for 10 years and earn a 6% average annual return. At the end of the 10-year period, you'll have $33,300. Of that amount, $24,200 is money you've contributed — those $200 monthly contributions — and $9,100 is interest you've earned on your investment.
» Learn more about micro-investing
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There will be ups and downs in the stock market, of course, but investing young means you have decades to ride them out — and decades for your money to grow. Start now, even if you have to start small.
If you're still unconvinced by the power of investing, use our inflation calculator to see how inflation can cut into your savings if you don't invest.
In this episode of NerdWallet's Smart Money podcast, Sean and Alana Benson talk about how to get started investing, including digging into your attitudes around investing and different types of investing accounts.
2. Decide how much to invest
How much you should invest depends on your financial situation, investment goal and when you need to reach it.
One common investment goal is retirement. As a general rule of thumb, you want to aim to invest a total of 10% to 15% of your income each year for retirement. That probably sounds unrealistic now, but you can start small and work your way up to it over time. (Calculate a more specific retirement goal with our retirement calculator.)
If you have a retirement account at work, like a 401(k), and it offers matching dollars, your first investing milestone is easy: Contribute at least enough to that account to earn the full match. That's free money, and you don't want to miss out on it, especially since your employer match counts toward that goal.
For other investing goals, such as purchasing a home, travel or education, consider your time horizon and the amount you need, then work backwards to break that amount down into monthly or weekly investments.
» Learn more: IRA vs. 401K retirement accounts
3. Open an investment account
If you’re one of the many investing for retirement without access to an employer-sponsored retirement account like a 401(k), you can invest for retirement in an individual retirement account (IRA), like a traditional or Roth IRA.
» Looking to start saving for retirement? See our roundup of the best IRAs.
If you're investing for another goal, you likely want to avoid retirement accounts — which are designed to be used for retirement, and have restrictions about when and how you can take your money back out.
Instead, consider a taxable brokerage account you can withdraw from at any time without paying additional taxes or penalties. Brokerage accounts are also a good option for people who have maxed out their IRA retirement contributions and want to continue investing (as the contribution limits are often significantly lower for IRAs than employer-sponsored retirement accounts).
» Get the details: How to open a brokerage account
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4. Pick an investment strategy
Your investment strategy depends on your saving goals, how much money you need to reach them and your time horizon.
If your savings goal is more than 20 years away (like retirement), almost all of your money can be in stocks. But picking specific stocks can be complicated and time consuming, so for most people, the best way to invest in stocks is through low-cost stock mutual funds, index funds or ETFs.
If you’re saving for a short-term goal and you need the money within five years, the risk associated with stocks means you're better off keeping your money safe, in an online savings account, cash management account or low-risk investment portfolio. We outline the best options for short-term savings here.
If you can't or don't want to decide, you can open an investment account (including an IRA) through a robo-advisor, an investment management service that uses computer algorithms to build and look after your investment portfolio.
Robo-advisors largely build their portfolios out of low-cost ETFs and index funds. Because they offer low costs and low or no minimums, robos let you get started quickly. They charge a small fee for portfolio management, generally around 0.25% of your account balance.
» Get the details: How to invest $500
5. Understand your investment options
Once you decide how to invest, you’ll need to choose what to invest in. Every investment carries risk, and it’s important to understand each instrument, how much risk it carries and whether that risk is aligned with your goals. The most popular investments for those just starting out include:
Stocks
A stock is a share of ownership in a single company. Stocks are also known as equities.
Stocks are purchased for a share price, which can range from the single digits to a couple thousand dollars, depending on the company. We recommend purchasing stocks through mutual funds, which we'll detail below.
» Learn more: How to invest in stocks
Bonds
A bond is essentially a loan to a company or government entity, which agrees to pay you back in a certain number of years. In the meantime, you get interest.
Bonds generally are less risky than stocks because you know exactly when you’ll be paid back and how much you’ll earn. But bonds earn lower long-term returns, so they should make up only a small part of a long-term investment portfolio.
» Learn more: How to buy bonds
Mutual funds
A mutual fund is a mix of investments packaged together. Mutual funds allow investors to skip the work of picking individual stocks and bonds, and instead purchase a diverse collection in one transaction. The inherent diversification of mutual funds makes them generally less risky than individual stocks.
Some mutual funds are managed by a professional, but index funds — a type of mutual fund — follow the performance of a specific stock market index, like the S&P 500. By eliminating the professional management, index funds are able to charge lower fees than actively managed mutual funds.
Most 401(k)s offer a curated selection of mutual or index funds with no minimum investment, but outside of those plans, these funds may require a minimum of $1,000 or more.
» Learn more: How to invest in mutual funds
Exchange-traded funds
Like a mutual fund, an ETF holds many individual investments bundled together. The difference is that ETFs trade throughout the day like a stock, and are purchased for a share price.
An ETF's share price is often lower than the minimum investment requirement of a mutual fund, which makes ETFs a good option for new investors or small budgets. Index funds can also be ETFs.
» Learn more: How to buy ETFs
As an expert and enthusiast, I don't have personal experiences or beliefs, but I can provide you with information on the concepts mentioned in the article you shared. Let's dive into each concept:
Investing:
Investing refers to the act of allocating money or resources with the expectation of generating a profit or achieving a specific financial goal. It involves purchasing assets such as stocks, bonds, mutual funds, or real estate, with the aim of earning a return on investment over time. Investing can help individuals grow their wealth, save for retirement, or achieve other financial objectives.
Compound Earnings:
Compound earnings, also known as compound interest, is the process of earning interest on both the initial investment and the accumulated interest from previous periods. In other words, it's the interest earned on top of interest. Compound earnings can significantly boost investment returns over time, especially when investments are held for long periods.
Index Funds:
Index funds are a type of mutual fund or exchange-traded fund (ETF) that aims to replicate the performance of a specific market index, such as the S&P 500. Instead of actively selecting individual stocks, index funds hold a diversified portfolio of securities that mirror the composition of the chosen index. They offer broad market exposure, low costs, and are often recommended for beginner investors due to their simplicity and potential for long-term growth.
Exchange-Traded Funds (ETFs):
Exchange-Traded Funds (ETFs) are investment funds that trade on stock exchanges, similar to individual stocks. ETFs are designed to track the performance of a specific index, sector, commodity, or asset class. They offer investors the opportunity to gain exposure to a diversified portfolio of assets in a single investment. ETFs are known for their liquidity, transparency, and relatively low expense ratios.
Mutual Funds:
Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers who make investment decisions on behalf of the investors. Mutual funds offer diversification, professional management, and accessibility to a wide range of investors. They can be a suitable option for beginners looking to invest in a diversified portfolio without the need for extensive research and stock selection.
Retirement Accounts:
Retirement accounts are specialized investment accounts designed to help individuals save for retirement. Common types of retirement accounts include 401(k)s and Individual Retirement Accounts (IRAs). These accounts offer tax advantages, such as tax-deferred growth or tax-free withdrawals in retirement, depending on the type of account. Many employers offer retirement plans like 401(k)s, which often include employer matching contributions, making them a popular choice for retirement savings.
Risk:
Risk refers to the potential for loss or uncertainty associated with an investment. Different types of investments carry varying levels of risk. Generally, investments with higher potential returns tend to have higher levels of risk. It's important for investors to assess their risk tolerance and consider their investment goals when choosing investment options. Diversification, asset allocation, and understanding the risk-return tradeoff are key factors in managing investment risk.
Please note that the information provided here is based on general knowledge and should not be considered financial advice. It's always recommended to consult with a financial advisor or do thorough research before making any investment decisions.
