The Ultimate Guide to Investing for Beginners

investing for beginners

So, you’ve decided it’s time to start investing.

Good choice. After all, one of the best ways to build wealth over time is to invest.

The good news is that investing for beginners doesn’t have to be hard. In fact, you can get started almost immediately. Here’s what you need to know about how to start investing.

1. Figure out how much you can invest each month

The first step is to decide how much you can invest each month. There are plenty of online brokers that allow you to get started with a small amount of money. In many cases, you can even open an account with $0.

Of course, eventually, you need to invest more if you want your wealth to grow.

Look at your monthly income and expenses and figure out how much you can put into an investment account each month. If you’re willing to set up an automatic account, you can usually set aside as little as $100 each month.

Over time, you should make it a goal to increase the amount you set aside. But if you’re just starting out, it’s fine to put in a small amount. If you’re sure you don’t have any money to invest, take a closer look at your budget. Double-check your spending and look for waste. Trim some of the fat from your budget and use the savings to invest in your future.

It doesn’t have to be an entire 10 percent of your income, but if you can start by investing $50 a month, that’s much better than nothing.

The earlier you start, the better

Even if you aren’t investing very much, the power of compound returns can benefit you in the long run.

Let’s say you’re 25 now and you want to retire at 55. If you invest $200 a month, you could end up with more than $300,000, assuming an annualized return of 8 percent.

how to start investing

Using Student Loan Hero’s investment calculator, you can see what happens if you wait until you’re 35 to start investing:

best way to invest money

That’s a pretty big difference.

Of course, you don’t want to just stick with the same level of investment the whole time. Ideally, you would increase what you set aside as you income grows. Otherwise, you won’t be able to set aside enough to live comfortably during retirement.

How much do you need to retire?

Don’t forget to perform a needs assessment to figure out what you need to retire. If you think you need to save up $1 million for a comfortable retirement, you will need to make bigger contributions the longer you wait to start investing.

If you start saving at 25 and decide to work until you are 65, you only need to set aside $300 a month with an 8 percent return to reach your goal.

But what happens if you wait 10 years? Now, instead of 40 years to save, you only have 30 years. You would have to set aside $700 each month to accomplish the same thing.

Performing a needs assessment now and being realistic about how much you need to work up to saving each month can help you reach your goal without the need to set aside as much money each month. The earlier you start investing, the more time you have to do more with less.

2. Open and fund a brokerage account

Now that you know how much you can and should set aside each month, it’s time to open a brokerage account. There are plenty of brokers that specialize in investing for beginners.

Figure out which broker makes the most sense for you, based on what you have to invest. If you can’t invest at least $100 a month, you can sign up for Acorns, which allows you to invest pocket change.

If you do have $100 a month to invest, companies like  and Charles Schwab can help you set up automatic investing plans to help you put your investing on autopilot.

In order to open a brokerage account, you need the following information:

  • Name
  • Birthdate
  • Social Security number
  • Address
  • Bank account information (for funding)

Once you have the account open, provide the information needed to fund the account. Your best bet is to use some sort of automatic investing plan to help you stay on track.

3. Decide what to invest in

Your next step is to decide what to invest in. You need to decide which assets you should put your money into.

Investing for beginners shouldn’t get too in-depth. It’s a good idea to keep it simple at first and stick to an asset allocation that involves stocks and bonds.

Stocks

Stocks represent ownership in a company. You buy shares which represent an amount of ownership.

When we talk about “trading” stocks on the market, it means buying them from someone who already owns shares. You pay a certain price per share with the hopes that you will see gains as the price rises. You can sell the stock later or hold onto it and hope for income through dividends.

However, there is always the risk that something will go wrong and a company will tank — leaving you holding worthless stock.

Bonds

To counter some of the risks of stocks, many investors also purchase bonds. Bonds represent debt the company owes you. When you buy bonds, you essentially lend money to a company so it can perform its operations. You expect to be paid interest over time and when the bond’s term is up, you get your principal back.

Bonds are considered less risky because they are a debt the company owes you and pays back, rather than relying on the whims of the market. Plus, if a company does go down, bondholders are usually compensated before stockholders.

However, the returns on bonds are generally lower than the potential returns on stocks.

Funds

When deciding where to invest money, you don’t want to get caught up in individual stocks or bonds. Beginning investors are usually better off with funds.

Funds are collections of stocks and/or bonds. In many cases, assets in a fund share specific characteristics. Instead of buying one stock or bond individually, you buy a group of them all at once.

When you start investing, it can make sense to start with funds, particularly index funds. Indexing allows you to benefit from a large part of the market. You get instant diversity in your portfolio and it’s easier to build your portfolio without a lot of money.

For the beginning investor, it makes a lot of sense to start with an index fund. You get some money in the market and your wealth starts growing. You can learn more about other investing strategies and change things up later.

An index fund or exchange-traded fund (ETF) that follows a large index can be one of the best ways to invest money. There are index funds and ETFs that follow the S&P 500, as well as all-market funds that track everything that’s publicly traded in the U.S.

There are also index funds and ETFs that follow bond indexes. You can set up an asset allocation that uses stocks and bonds with nothing but funds.

When you choose a fund that follows a large swath of the market, you are more likely to see growth over time since you just have to keep up with the market to be successful.

Other assets

Since you’re just learning how to invest, there’s no reason to make things complicated. After you’ve learned more about investing, you can experiment a little with other types of assets like real estate and gold.

4. Decide where to put the money

Once you know what you want to invest in, you need to figure out where to keep your assets. Yes, you have a brokerage account. But if you’re looking for tax advantages, you don’t want to just put it in a “regular” account.

A tax-advantaged retirement account can make a big difference in the efficiency of the way you build your wealth. When you open your own account, you will most likely need to go with an IRA.

Your IRA can be Traditional or Roth. With a Traditional account, you receive a tax deduction today for putting money in the account. This lowers your taxable income and your tax bill right now. However, you do pay taxes on the money later when you withdraw during retirement.

If you don’t mind paying taxes now, you can choose a Roth. You won’t get a tax deduction right now, but all your money grows tax-free. When you withdraw during retirement, you don’t have to worry about taxes.

If you need more cash flow today and you think your taxes will be lower in the future, it makes sense to get a Traditional account. On the other hand, if you think taxes will be higher in the future, you might want to use the Roth. Take advantage of lower taxes today and don’t worry about it in the future.

Capital gains

The downside to using a tax-advantaged account is that you can’t access the money until you reach age 59 1/2 without a penalty fee. If you want to use your investments for other goals and access the money sooner, you need to keep it in a taxable investment account.

Be prepared to pay capital gains taxes when you sell at a higher price. You can get a better tax rate if you hold onto your investments for at least a year and a day. If you sell an investment that you’ve held for a year or less, you pay taxes at your regular rate.

What if you lose money instead of gain? Your losses are tax-deductible under certain circumstances.

5. Make it automatic

Now that you know how to start investing and where to invest money, it’s time to make sure that it’s happening like clockwork. Sign up for an automatic investment plan with your broker.

These plans take money from your bank account each month and transfer it to the brokerage. The money is then invested in the assets of your choice.

When first starting out, you have limited funds. It makes sense to choose one broad-based index fund and put the entire amount into it each month. If you try to slice and dice your small monthly contribution too much, it becomes less effective. Investing for beginners is all about simplicity.

With a more traditional online discount brokerage, you need to pay attention to your portfolio and manage it on your own. You can set up an automatic plan, but you still need to stay on top of things.

If you prefer to be more hands-off about your investments, a robo-advisor can help. If you put your money into a robo-advisor such as  or , all of the heavy lifting is done for you. An asset allocation is determined based on your risk profile. Plus, a robo-advisor automatically rebalances your portfolio for you.

Don’t forget your workplace retirement plan

Perhaps the best way to invest money automatically is through your workplace retirement plan.

If you’re contributing to your employer’s retirement plan, you already invest. If you haven’t started contributing to an employer’s plan, it’s time to begin.

Find out if your company offers a retirement plan that matches your contributions. If your employer offers to match a portion of your contributions, that’s free money for your retirement. If possible, sign up to make the contribution that gets you the maximum match.

Automatically investing out of your paycheck — before you even see that money — is an amazing way to build up your retirement account and prepare for the future.

6. Don’t panic when the market tanks

One of the crucial lessons to learn about investing is that you shouldn’t freak out when the market tanks. This is especially true if you have solid investments or if you invest in index funds.

A good example is the S&P 500. It’s had a couple of major market events in the last 20 years.

where to invest money

However, these events are followed by recoveries.

Don’t lose your cool when everything seems to be falling apart. It’s natural for markets to have ups and downs. In the short-term, there’s a lot of volatility. In the long-term, though, the trend line smooths out and you see more consistent returns.

7. Keep learning about investing

Now that you’re off to a good start, you need to keep learning about investing. You might find new ways to invest your money to see better returns, or you might decide to shake things up a little bit with your portfolio.

Seeing your returns can be addicting. Once you see how compounding returns can help you reach your goals, it’s easier to find ways to set even more money aside.

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