How to Start Investing
For many people investing can seem intimidating and complicated, and they believe it's only for the wealthy or those with extensive financial knowledge. This perception holds people back from starting what has the potential to help them build wealth and achieve their financial goals.
In reality, investing is not that complex. It's for anyone with the desire to learn and the willingness to take on some level of risk. Regardless of income level, investing can be a powerful tool for saving and building wealth over time.
Most financial experts recommend investing as early as possible to benefit from the power of compound interest for accumulating wealth. However, before you start, you should consider a few things.
Questions to Ask Before Investing
While investing can potentially yield significant rewards, be aware that it also carries risks. So, the first thing to do is check on your financial situation. See if you need to address any of the following:
Do You Have an Emergency Fund?
Before embarking on an investment journey, it's essential to re-evaluate your emergency fund or set it up if you don't have one. Having several months of living expenses saved can provide financial stability during emergencies, such as job loss or unexpected medical procedures. Without an emergency fund, you may be forced to sell your investments at inopportune times to cover your unexpected expenses, potentially incurring losses and undermining your long-term investment strategy.
Related: Emergency Fund: An Important Part of Financial Planning
Have You Paid Down Any High-Interest Debt?
Paying off high-interest debt is often the most reliable and low-risk investment strategy that surpasses the returns of other prospects. If you have credit card balances with high-interest rates, the most financially wise move is to pay off the balances in full as soon as possible.
Do You Have Enough Money After You Pay Your Expenses?
For most people, a successful investment strategy involves putting money aside for the long term. Be sure you can live without the amount of money you plan to invest.
Stretching your budget to the point where you need to borrow for daily expenses can negate the benefits of investing. Budgeting can help determine whether you have the financial means to invest and how much you can realistically allocate towards investing.
Related: Budgeting 101: What is a Budget and How to Start Budgeting
Alright, you came here to learn how to invest, but so far the information has nothing to do with investing. It does, and it's very important. Investing is more than simply buying assets and hoping they will increase in value.
Start Saving for Retirement
Saving for retirement might seem like an unexpected top priority, but it's never too early to start setting aside funds for this significant life goal. The earlier you start investing, the more time your money has to grow - thanks to compound interest. Moreover, contributing to retirement savings accounts can reduce your taxable income and help you save money now.
Enroll in Employer-Sponsored Retirement Plan
Enrolling in an employer-sponsored 401(k) plan is one of the easiest ways to start investing. In most cases, you can set up automatic contributions from each paycheck which can help you save consistently. The amount you contribute to your 401(k) can be as small or as large as you want, within certain limits set by the Internal Revenue Service (IRS).
401(k) plan is a more than convenient way of saving and investing. The tax benefits of a 401(k) plan include tax-deferred growth, which allows your money to grow faster by delaying taxes until you withdraw the funds in retirement. Contributions to your 401(k) account can be deducted from your taxable income and can reduce your taxable income in the current year and lower your tax bill.
Take Advantage of "Free Money" from Employer
Another common benefit of 401(k) plans is matching contributions. If your employer offers matching contributions to your 401(k) plan, you can take advantage of this free money just by contributing to your account.
Open an IRA
If your employer doesn't offer a 401(k) plan, you still can get the benefits of tax deductions and tax-deferred growth by opening an individual retirement account (IRA). You will need to open a brokerage account for this.
Open a Brokerage Account
You will need a brokerage account to invest without employer-sponsored plans. A brokerage account is an account with a financial institution that lets you buy and sell investments, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Once you signed up with a brokerage platform, you can choose your investments for your tax-advantaged accounts for your retirement and healthcare savings and taxable investment accounts for your other financial goals.
Related: What Is a Brokerage Account and How to Open One?
What to Invest In: How to Choose the Best Investments
Before buying any investments, you should develop a financial strategy that aligns with your goals and risk tolerance, learn the risks of different types of investments, and select an appropriate asset allocation for your circumstances.
Related: Developing Your Investment Strategy
Understand the Investment Before You Buy
Before selecting any investments for your portfolio, learn about different types of assets and how they perform under various market conditions. Understand how and why the investments you are considering buying are expected to generate returns. The rule of thumb for most successful investors is to never invest in something they don't understand.
Related: What to Invest In: What Is the Best Investment?