The reason people put off investing money is that they think they need a lot of money – thousands of dollars! To start investing. This is far from true. One can start investing money with as little as $100 per month.
In order to start investing, pick a strategy based on the amount you’ll invest, the timelines you’ll be following for your investment goals, and the amount of risk you are ready to take.
When you’re just starting out, rent, utility bills, debt payments, and groceries might seem like all you can afford. However, once you’ve mastered your budgeting skills for those monthly expenses (along with a little cash in an emergency fund); it’s now time to start investing. The tricky part is figuring out where to invest in and how much.
- 1 Best Ways To Start Investing Money:
- 1.1 Getting Started As Early As Possible:
- 1.2 How Much To Invest:
- 1.3 Open An Investment Account:
- 1.4 Understand Your Investment Options:
- 1.5 Build An Investment Strategy:
Best Ways To Start Investing Money:
The secret of building wealth is developing good habits. Good habits include regularly putting money away every month. If you make investing a habit today, you’ll be in a much stronger financial position in the crucial stages of your life.
Investing early is important as it makes your money work for you. If you don’t invest, your money will just be sitting there and not earning a thing.
This is very important because $100 today will not be of the same worth in the future if you just let it sit under a mattress or in a checking account. However, by investing, you can actually turn your $100 into something much bigger than that. Investing for the long term means your money starts working for you, potentially earning you an income.
We know that a person who is new to the world of investing has a lot of questions. The most basic of those questions is: How do I get started investing, and what’s the easiest investing strategy?
Before you go into the steps for investing, here’s what everyone should know before starting to invest.
Getting Started As Early As Possible:
Investing at an early stage of life is one of the best ways to see solid returns on your investment. Thanks to compound interest, which means your returns start earning their own return. Compound interest lets your cash flow to snowball over time.
This is how it works: Let’s say start at $200 every month for 10 years and earn a 6% average annual return. After the 10-year period, you’ll have $33,300. Of that amount, $24,200 is money you’ve invested and $9,100 is the interest you’ve earned on your investment.
There will surely be ups and downs in the stock trade and investing at a young age means you have decades to ride them out and for your money to grow. You have to start now, even if you have to start small.
How Much To Invest:
This depends on your investment goal and your deadline to reach it. One of the most common investment goals is retirement. If you already have a retirement account at work, like a 401(k), and it offers matching dollars then your first investing milestone is all sorted. You just have to contribute at least enough to that account to earn the full match. That’s almost as good as free money, and you don’t want to miss out on it.
As a general rule of thumb, you should be investing a total of 10% to 15% of your income each year for retirement. Your employer will match the counts toward that goal.
For other specific investing goals, you need to consider your time horizon and the money you need. With all these inputs in mind, try to work backwards to break that amount down into monthly or weekly investments.
Open An Investment Account:
If you don’t have a 401(k), then you can always invest for retirement in an individual retirement account, e.g. Roth IRA.
If you’re thinking of investing for another goal, you most likely would want to avoid retirement accounts. This is because retirement accounts are designed to be used for retirement.
Thus have restrictions about when and how you can take your money back out. You can instead choose a taxable brokerage account. One can easily remove money from a taxable brokerage account at any time.
The widespread misconception is that you need a lot of money to open an investment account. That’s a myth. Many online brokers, offering both IRAs and regular brokerage investment accounts, sometimes require absolutely no minimum investment to open an account. There are even plenty of investments available for relatively small amounts.
Understand Your Investment Options:
Whether you choose to invest through a 401(k), similar employer-sponsored retirement plan or in a standard investment account, it’s essential to understand each instrument and to know how much risk it carries. The most popular investments options for those who are just starting out include:
Stock in very simple terms is a share of ownership in an organization. Stocks are also sometimes called as equities.
Stocks can be purchased at a share price, which usually ranges from the single digits to a couple of thousand dollars, depending on the fundamental analysis of the company. A safer option is to purchase stocks through mutual funds, which we’ll detail below.
A bond, in its basic form, is essentially a loan to a company or government entity. The company or the government agrees to pay you back in a certain number of years. In the meantime, you keep getting the interest.
Bonds generally are safer than stocks because you know exactly when you’ll get paid back and how much you are going to earn. However, bonds give lower long-term returns, so they should be only a small part of a long-term investment portfolio.
c) Mutual Funds:
This is basically is a mix of investments packaged together. Mutual funds make the life easier for the investors as they can skip the work of picking individual stocks and bonds, and instead purchase a diverse collection in one transaction. The meticulous diversification of mutual funds makes them apparently safer than individual stocks.
A lot of mutual funds are managed by professionals. Index funds which are a type of mutual fund follow the performance of a specific stock market index, like the S&P 500. Due to the elimination of professional management, index funds charge lower fees than actively managed mutual funds.
Build An Investment Strategy:
Your investment strategy should depend on your saving goals i.e. how much money you need to reach your goals and the deadline for it.
If your deadline is more than 20 years away (like retirement) then you can put almost all of your money in stocks. However, picking specific stocks can be tedious and time-consuming, and hence, for most people, the best way to invest in stocks is through low-cost stock mutual funds, index funds or ETFs.
However, if you’re saving for a specific short-term goal and you require the money within five years, the risk associated with stocks means you should keep your money safe in an online savings account, cash management account or low-risk investment portfolio.
If you still can’t or don’t want to decide about your investments, then you can open an investment account (including an IRA) through a Robo-advisor. Robo-advisor is basically an investment management service that uses computer algorithms to build and look after your investment portfolio.
After reading about the basics of Savings and Investments for the beginners, let’s now read about the 5 easy ways you can start investing with a small amount of money:
1. Start Saving First:
As they say: “The best time for investing was yesterday; the second best is today!”
That’s a great thought to start with, and it explains why starting to save for investing should happen right now.
The best investing tip follows right along with it: you should start setting money aside today. In order to start investing your money actively, you need to actually have money for investing. How much you set aside is entirely your call, but more is always better if you can handle it.
So, the big question is: “How much money should you save if you don’t have much money?!”
The key here is to be practical and start saving as much for investing as you potentially can. This can vary from 10% at first and might even go to as low as 5% but any little bit will help. If you cannot save even that much, just save something! Investing at the initial stage can be as little as $25 a month. Seriously, every little bit does help.
You can work your way up as far as saving is concerned and put a higher and higher percentage of your income to put towards investments. Starting small is an easy and clever way for beginners who wonder how to start investing.
Some people do have financial situations in which they may not be able to save as much money as they would like to. However, there are many practical options to getting out of those negative financial traps. Even while working towards day-to-day financial stability, one can still start investing. Even the smallest amount of money can be a big step towards investing.
2. Find an Online Brokerage:
So, now that you have set aside the required money, you now just want to decide how you will invest it.
There are two basic ways to handle your money. You can either invest your money yourself, such as through an online brokerage, or you can look for an expert to manage your investment portfolio. The biggest part of learning how to start investing surely includes determining the company, platform, or person you will use to invest your hard-earned money.
Also, if your employer provides a retirement plan, then you should definitely look into that as well. If your company does offer a retirement plan match, then this is where you will want to start. The retirement match is pretty much free money!
3. Plan where to Put your Money:
After opening your brokerage account, you should decide how exactly you are going to invest your money. This might be one of the biggest decisions for those wondering how to start investing.
There can be a lot of doubts in the investment world, and a good brokerage firm or an expert will help you navigate through all the doubts as you decide where to put your money.
Essentially, where you invest depends a lot on the level of risk you are willing to take and the time you have to watch your funds mature. A very easy way of explaining this is that more time equals more risk and less time equals less risk.
Even choosing the stocks you want to invest in is not the easiest thing to do. No one has a clue about what will happen in the future. This is why it’s essential to have a diverse portfolio.
Even if you do have a professional helping you, it’s always advisable to do your own research and have your say in the decisions.
4. Monitor your Portfolio:
This is the most important part.
The next and most important step is to regularly track your investments. Due to the volatility in the market, you may eventually have to change what you are invested in and put more money towards something else.
However, do not go crazy and keep checking on your portfolio every now and then. You surely do not want to become a person who checks their investments every hour of the day. That will be a futile exercise as small changes in the stock market most likely won’t matter that much especially if you are investing for your long-term future.
However, occasional checks on your progress are required as things may change in the market which may change your investment interests.
5. Repeat the steps mentioned above over and over again:
Learning how to invest is just the first step, but the final one is to keep practicing and to continue investing well into the future. You should continue these steps over and over again. Once you master these steps, it only gets easier from there.