How to Start Investing: a 9-Step Guide for Beginners

Learning how to start investing can feel confusing to new investors. Failed attempts to translate investment jargon and seeing ticker symbols run across your screen as you watch the morning news is enough to keep potential investors out of the investing game for good.

How to Start Investing

There is no one right way to start investing. But, after listening to your co-worker, uncle, and neighbor swear by their investment strategies, you're likely ready for some actionable tips. 

This guide walks you through nine simple steps to overcome the overwhelm and teaches you how to start investing.

1. Set Financial Goals

Setting goals should always be the first step in any significant financial changes you're looking to make. Whether investing, buying a house, or working to increase your income, think of your goals as a roadmap to take you from Point A (where you are now) to Point B (where you want to go).

Ideally, if you are married or combine finances with a partner, they should be part of the goal-setting process. Any good goal-setting sesh begins with a dream. Taking the time to dream about your future is crucial. You weren't born simply to work and pay bills. Investing is about taking care of your future self and finding financial freedom to live the life you truly want.

So, when you sit down to set financial goals, it's crucial to envision the life you truly want to live. If you don't know how you want to live in the future, it's difficult to know how much money you'll need to support that life.

Set financial goals for varying time frames. Long-term goals are critical as they will reflect the quality of life you want when you retire. But short-term goals are necessary, too, as they serve to keep you motivated along the journey.

Get specific with your goals. Outline the amount of money you want to have in your investment accounts by a particular date. Determine how much you want to grow your nest egg by the time you reach retirement age.

The more detailed you can make your “road map,” the better it will guide you to make the best investment decisions for you and your future self.

2. Live on a Budget

If your financial goals are your road map, then consider your budget the vehicle that's transporting you along your journey.

Often overlooked, your budget is your foundation to financial success. Having a solid grasp of how you spend and save is essential to the beginning investor. 

Whether you prefer to jot down a quick budget on a notepad or create a detailed spending plan for each paycheck, consistent budgeting gives you a better understanding of the money that flows in and out of your bank accounts.

Your budget tells you if you're able to invest a little money or a lot of money, and it executes the plans you put in place to manage your money, pay your bills, and get out of debt.

Common Misconceptions

Many believe budgeting to be complicated and restrictive; however, once you're regularly budgeting, you'll find it's neither. Instead, budgeting offers you the freedom to spend and save in a way that supports your values and priorities.

Contrary to popular belief, budgeting does not have to be complicated. The level of complication is solely up to you. You can set up an over-complicated budget that takes you hours to maintain each week or opt for a simple system like zero-based budgeting to create a plan for every dollar you earn.

3. Build an Emergency Fund

And if your budget is the vehicle to take you where you want to go, financially speaking, then an emergency fund is like your AAA membership (American Automobile Association). When you own a car, you expect it to have issues or need maintenance at some point. Sure, if you buy a brand new vehicle, it'll come with a fancy warranty that will likely cover your butt for a long time.

However, eventually, something will happen: you'll get a flat tire, get in an accident, or need a tow. If you have a AAA membership, call them, and they'll send a tow truck to your location and haul your car to the shop. By planning ahead and anticipating the need for these types of services in the future, “past you” saved “future you” a bunch of money and frustration.

That's an emergency fund's exact purpose – but for your life overall, not just your vehicle.

Before you begin investing, it's in your best interest to establish an emergency fund. Essentially, you want to avoid investing all your extra money and then taking it back out when you experience an emergency.

Emergencies will happen; there's no way around it. But unfortunately, we rarely know the details of how they will happen, when they will happen, and how much they will cost. 

Therefore, beginning to invest without having an emergency fund puts your finances in a volatile position, especially if you're on a tight budget.

Review your budget to determine how much money you need to live on a monthly basis. Then, multiply that number first by three, then by six. This will tell you how much you will need to save to sustain your lifestyle for three months (the lower number) up to six months (the higher number). 

Ideally, you'll maintain a savings account balance of at least three full months of living expenses in your emergency fund. However, six months would offer you and your finances much more protection.

4. Get Out of Debt

Once you have built an emergency fund, look at your debt profile. Are you in debt? If your answer is “yes,” what types of debt do you owe? Since debts carry different interest rates, accounts like mortgages and student loans often have lower interest rates. In comparison, credit cards and personal loans are typically considered high-interest debt.

As with all personal finance decisions, deciding whether to get out of debt before investing is personal. However, many people don't want to wait to begin investing for fear that they will miss out on potential growth as they work to pay off their debt. 

Others realize that their debt consumes a large portion of their monthly income, leaving them with less money to invest.

You may decide to pay off your credit cards quickly and start investing while you continue to work to pay off your student loan debt. There are many different methods to get out of debt. Determine which will work best for your current financial situation, create a plan, and get to work.

5. Educate Yourself

It's perfectly normal to feel scared of something you don't understand. Investing-related terms such as real estate investment trusts (REITs), exchange commission, and market conditions can sound like a foreign language to would-be investors. 

Although it's normal to shy away from topics that make you feel you need a finance degree to join the conversation, the longer you avoid investing, the more potential gains you'll miss.

Lucky for you, investing isn't quite as complicated as some financial advisors and institutions would have you believe. According to Merriam-Webster, the word “invest” means:

1: to commit (money) in order to earn a financial return

2: to make use of for future benefits or advantages

Yes, investing can be as simple as “making use of your money for future benefits or advantages,” and yes, when investing, you are committing your money in the hopes of earning a return.

Investing is not inherently complicated, yet, as with most things, it can become more complex the more nuanced you get. This is precisely why educating yourself on basic investing concepts and terminology is such an important step.

Here's the good news – we live in a world where we hold infinite information in our hands.

Everything you've ever wanted to know about how to start investing is only a Google search away. Amazon readily displays page after page of books on investing for beginners up to advanced. Even social media constantly serves up 30-60 second lessons on “how the stock market works” via your various For You pages, though exercise caution when taking investment advice from TikTok.

A call to your financial advisor can be helpful as they are equipped to provide specific investment advice and guidance as you're preparing to make investment decisions. In addition, your accountant has access to your financial information and can advise you on your potential tax liability and the tax benefits of an individual retirement account (IRA).

6. Check With Your Employer

When you're ready to start investing, a good first step is to check with your place of employment. Many employers offer a retirement investment plan as part of your employee benefits package. Yet surprisingly, 17% of Americans with access to workplace retirement plans don't currently participate. 

Individual companies offer various types of plans, such as a pension plan, 401(k), and 403(b). Different types of investments are available but will vary from company to company. Most employer-sponsored retirement plans require you to contribute a percentage of your earnings. In many cases, your employer will also match a portion of your contribution. 

A significant benefit of these plans is that your contribution comes directly from your paycheck, making it an easy way to invest consistently without transferring money from your bank account each time. 

And while many refer to an employer match as “free money,” remember that your employer-sponsored retirement plan (including the employer match) is part of your benefits package. This means your employer considers the amount of money they will contribute as a match to be part of your compensation.

Your company's human resource (HR) department or employee benefits coordinator can offer you additional information on the retirement benefit packages available to you.

A good practice is to invest up to whatever amount your employer requires to receive the maximum allowable match. For example, if your employer offers a 5% match, they may require you to contribute 5% of your paycheck to qualify for the 5% match. 

However, should you elect to only contribute 3% of your paycheck, in many cases, the employer will only match 3%, leaving the additional 2% of the allowable match on the table. Therefore, a great way to start investing is to contribute enough to reap the benefits of your full employer match.

7. Make a Plan

Once you have a basic understanding of investing, it's time to decide how you want to invest your money. For example, suppose you have enough money to invest beyond your employer-sponsored retirement plan. In that case, you may open either a Roth IRA or a Traditional IRA to maximize your tax-sheltered retirement savings. 

Perhaps you want to invest your money with a specific financial institution such as Fidelity, Vanguard, or Charles Schwab. On the other hand, would you prefer individual stocks, mutual funds, or real estate investments? Would you be more comfortable working with an investment advisor or taking the DIY route and using an online platform such as Robinhood or M1 Finance?

Determine Your Risk Tolerance

Typically the younger you are, the riskier you can be – though this is just a rule of thumb, not a hard and fast investment strategy. Still, determining the level of risk you're comfortable with is an integral part of investing. It's often true that a greater risk can yield a greater reward; however, you still risk losing real money.

Adjust Your Expectations

According to investing expert Jeremy Schneider, founder of the investing education platform Personal Finance Club, “We're currently in the midst of high inflation, market volatility, a war, rising rates, and plenty of other scary stuff in the headlines. But it's important to remember that individual investors are best served by focusing on their own finances.”  

Schneider often reminds his 400,000+ Instagram followers that building wealth is nothing more than a simple equation, “Spend less than you make. Invest the difference. That's what will make you rich. Trying to make tricky moves in response to the macroeconomic landscape is more likely to hurt you than help you.” 

Successful investors have to be comfortable with being uncomfortable. So build a diversified investment portfolio that will allow you to stay the course.

8. Stay Consistent

When trying to build wealth by investing, there is no escaping the ups and downs you'll experience over time. However, the most important thing to remember is that “time in the market” will always trump “timing the market.” 

Even the most accomplished investors and fund managers are rarely successful in predicting how the market will perform over any given period. You should prepare to experience substantial gains and extreme losses as a long-term investor.

Your best defense against the peaks and valleys of investing is to remain consistent through it all. Even as we find ourselves in a bear market, history has shown the market always rebounds. The investors who remain steadfast, refuse to withdraw their money, and continue to invest consistently will be rewarded.

9. Start Today

One of the worst choices you can make regarding investing is to procrastinate. So instead, choose one small action and start today. Sit down to prepare your budget for the upcoming month, grab a book about famous investors like Warren Buffet, or take an online class about building wealth with index funds.

Just as the interest in your investments compounds over time, so will the small, consistent actions you take daily.

The Long Haul

Investing is essential to planning for your future and creating the life of your dreams. Still, it's important to remember that investing is a marathon, not a sprint. 

As cliché as that may sound, keeping the big picture in mind will reinforce your expectations throughout your investing journey. 

This post originally appeared on Hello Sensible.