How to start investing: A beginner’s guide

If you’re new to investing, you may think you need a lot of money to invest. Or that the stock market is too volatile and that you’ll lose your money. Or even that you can only invest with the help of a financial professional.

These and other misconceptions can cause you to miss out on the potential benefits of investing. Let’s break down the basic concepts of investing and help you gain the confidence you need to begin.

What is investing?

Investing is a strategy to grow your money over time. It helps you pursue long-term goals like buying a home, paying for your child’s education or funding your retirement.

While saving and investing both involve putting money away for the future, they’re different in fundamental ways. A savings account gives you easy access to your money with little risk, but it also offers lower rewards. With investing, you accept more risk in exchange for potentially greater returns over time.

Why is investing important?

Investing is an essential part of any financial plan because it can help you work toward your goals faster. Here are two primary benefits.

Investing is powered by compound growth.

Compound growth happens when the return on your investment dollars generates its own return. You earn money on your initial investment and on the interest that has already accumulated.

For example, if you earn 7% in year one on a $1,000 investment, your total return is $70. The next year, you can invest $1,070. If it returns 7% again, you yield a total return of $74.90. That extra $4.90 may sound small but multiply this by thousands of dollars and many years and you can see the potential impact of compound growth.

The earlier you start investing, the more time you’ll have to let compound growth help build your wealth.

Investing helps fight inflation.

Inflation erodes the value of your money over time. For example, if the annual inflation rate is 3%, you’ll need to earn at least this much on your money just to break even – and most basic savings accounts can’t match that.

Investing, however, has the potential to beat inflation. While past performance is not a guarantee of future returns, the S&P 500’s inflation-adjusted annual average return on investment is about 7%. ¹ If your investments earn that average, your real return is a solid 4% growth.

How to start investing: Your 5-step guide

Breaking it down into smaller, manageable activities can make the process of investing much easier to understand and follow. From setting goals to choosing investment accounts, these steps are designed to set you up for success.

1. Check your financial foundation.

Investing brings risks as well as potential rewards, so the first thing to do is check in on your financial situation. Make sure you can answer “yes” to these three questions before you start investing.

• Do you have an emergency fund in place? Your emergency fund should be enough to cover three to six months of your living expenses and kept in an easily accessible account.
• Have you tackled high-interest debt? Credit cards and personal loans often carry interest rates that are higher than average investment returns. Paying these down frees up more disposable income.
• Do you have extra money after you pay your expenses each month? As previously stated, investing is a long-term strategy that involves risk, so be sure you can live without the money you plan to invest.

2. Define your investing strategy.

Once your financial foundation is solid, it’s time to create an investing roadmap. Your investment strategy will guide where your money goes and how much risk you take.

Build your investment strategy around four key factors.

• Your financial goals. Whether it’s purchasing a new home or sending your kids to college, knowing what you want to achieve (and when) can help you make the most of the money you’re investing.
• Your timeline. Time is one of your most valuable assets when investing. The longer your timeline, the more investment options you have (and the more risk you can take).
• Your risk tolerance. Every investment comes with risk. Generally, the greater the risk, the bigger the potential reward. Understanding your preferred balance of risk/reward is the foundation for your investment portfolio and will often shift over time. 
• Your preferred investing method. How involved do you want to be in investing? Would you like to work with a financial professional, invest on your own, or a combination of the two? Your choice will depend on your confidence level, interest and/or budget.

3. Select your investment accounts.

Once you’ve determined your investing strategy, it’s time to find a place to put your money. Diversifying your investment accounts may help you meet specific goals and reduce the amount of taxes you’ll have to pay over time.

• Retirement accounts. These tax-advantaged accounts are designed to help you save for the long term. Retirement accounts include employer-sponsored retirement plans, such as a 401(k) or 403(b), and individual retirement accounts (IRAs). Read more about IRAs and 401(k)s.
• Non-retirement investment accounts. Brokerage accounts, education accounts (like a 529 plan) and health savings accounts (HSAs) can help you save for goals other than retirement. Read more about non-retirement investing.

4. Diversify across investment vehicles.

Next, you’ll determine which assets you’d like to buy. A diversified investment portfolio includes a mix of different types of asset classes to manage risk.

Common asset classes include:

• Stocks: A share of ownership in a company. These are also called equities.
• Bonds: A loan that you make to an entity, such as a government or corporation. Types of bonds include corporate, high-yield, municipal and mortgage.
• Mutual funds: A pool of money from many investors that is used to invest in securities. Types of mutual funds include equity funds, fixed-income (bond funds) and money market funds.
• Exchange-traded funds (ETFs): A type of security that tracks a stock market index, a specific sector or a commodity, such as natural gas or wheat.
• Real assets: An investment in something tangible, such as real estate, commodities or infrastructure.

5. Choose how to invest your money.

How you invest will depend on how much money you have and how involved you'd like to be in managing your investments. How much money do you need to start investing? Thanks to modern technology, investing is more accessible than ever and you don’t need a lot of money to get started. In fact, you can start investing for the price of a donut.

Here are some options based on your financial starting point.

• If you have a small amount to invest. Micro-investing allows you to start investing with as little as a few dollars a month. Micro-investing platforms make investing convenient and straightforward but may offer limited assistance if you’re new to investing.
• If you have $500 to invest. For those with a bit more to work with, consider using platforms that combine advanced algorithms with human expertise to build and manage your portfolio. Robo-advisors generally have an investment minimum of $500 and provide a balanced mix of automation and personal guidance.
• If you have a sizable amount to invest. A financial professional can provide personalized guidance to help optimize your investments. In this case, the investment minimum will vary depending on which financial institution you work with.
• If you prefer to manage your own portfolio. For hands-on investors, an online brokerage account allows you to build and manage your portfolio independently. These platforms typically don’t have investment minimums, giving you flexibility. However, self-directed investing requires a willingness to research and make decisions on your own.
• If your employer offers a retirement account. Take advantage of employer-sponsored retirement accounts like a 401(k), 403(b), SIMPLE IRA, or SEP IRA. Contributions are deducted from your paycheck pre-tax, and many employers offer contribution matching, which is essentially free money to grow your retirement savings.

You’ll notice that investment minimums vary by account type. And in many of these instances, the investment minimum is not the only cost you need to consider. Make sure to research any management fees, sales commission fees, and other costs associated with the provider you work with.

Maintain your investments to build long-term wealth

Investing isn’t a set-it-and-forget-it activity. Once your money is in the market, your job shifts to maintenance. Market volatility and other economic factors may require further diversification. Or you may experience a major change in your finances or lifestyle that justifies an adjustment to your portfolio.

Deal with market volatility.

You’ve probably seen these words before: Investments can go down as well as up. Market volatility is a fact of life, so keep in mind that you’re in it for the long haul. A financial professional can offer perspective and help you understand your options during economic uncertainty.

Understand inflation and interest rates.

Just as inflation increases the price of their groceries and decreases the value of the dollar in your wallet, it can also eat into your investment returns over time.

Additionally, changes in interest rates may also affect different areas of your financial life, including your investment portfolio. Understanding these economic factors can help you maintain perspective and stay prepared.

Adapt your investment strategy to life events.

Even if you prefer to be a hands-off investor, there are times when you’ll need to play an active role in reviewing your portfolio to make sure it still reflects your financial goals and risk tolerance. This process, known as portfolio rebalancing, can be triggered by market fluctuations, life changes (starting a family, inheriting money, preparing to retire, etc.) or simply because it’s been awhile since you’ve done it.

Whether you invest on your own or partner with a professional, taking that first step is the most important part of your journey. The sooner you start, the more time your money has to grow.

Learn more about your investing options.