4 Easy Steps to Start Investing Without Feeling Overwhelmed
Trying to make the most of easy steps start investing? You are in the right place. Below we break it down in plain English, with practical tips you can actually use.
Key Takeaways
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- This is a complete step-by-step guide on how to start investing.
This is a complete step-by-step guide on how to start investing.
For beginners, there are numerous big decisions to make when you’re starting to invest. At first, it can seem overwhelming. But by the end of this guide, you’ll see that successful investing is not complicated. Better yet, you’ll learn the simple strategy that has consistently beat investing professionals for decades.
Here’s exactly what we’ll cover in this guide:
- What is investing?
- Why should you invest?
- When is the right time to invest?
- Different types of investments
- How to start investing in four steps
- Tips for successful investing
What Is Investing?
Investing is how you allocate existing assets and cash flow for a future desired benefit. Understanding this definition is key because it touches on how you should think about investing from the fundamental level.
First, you have to take inventory of your existing assets , mainly the cash you have available to invest. Plus, you should consider your current cash flow situation, which is the amount of money you’re able to invest going forward based on existing income and expenses.
Second, you have to know why you’re investing, and more specifically, the goals you’re trying to accomplish.
Why Should You Invest?
One of the most key financial decisions you’ll make, if not the most key, is whether you allow compound interest to work for or against you.
Having compound interest work for you over your lifetime is like swimming downstream. Better yet, the longer you swim, the easier and faster you’re able to swim.
Not taking advantage of it is like swimming upstream. The longer you swim upstream, the harder and faster the current works against you.
What investing does is it allows you to take advantage of compound interest. Investing $500 a month for 40 years, earning 7% a year (the average rate of return in the stock market), allows you to build a portfolio worth $1,320,562.
Source: Investor.gov.On the other hand, what happens when you let compound interest work against you?
Let’s say you have $10,000 of credit card debt at an 18.9% interest rate. You’re then only able to make a 4% monthly minimum payment on the debt. In total, it will take you 13 years and nine months to pay off that debt, and it will cost a total of $16,357.
Related reading: How to start investing as a teenager.
When Is the Right Time to Start Investing?
To reiterate, investing is how you allocate existing assets and cash flow for a future desired benefit. What successful investing looks like is producing the highest return possible for a given level of risk to achieve your goal.
When you look at investing through this lens, everyone is an investor , even if they don’t own a single share of stock. We’re all constantly deciding what the highest and best use of our money is.
When it comes to investing money in stocks, the right time is when your investment will produce the highest return possible for a given level of risk and desired result.
To put this in context, let’s say your goal is to accumulate wealth and you’re wondering whether you should pay off debt or invest. Historically, the stock market has returned about 7% per year after inflation. If you have high-interest debt at 18%, prioritizing paying that off over investing in the stock market allows you to accumulate wealth faster. Plus, the investment to pay off that debt is risk-free.
Looking at the numbers, it makes sense to start investing in the stock market once you’ve paid off your debts with an interest rate greater than 7%.
One unique situation is a 401(k) employer match. It’s here where you can frequently earn an immediate 50% on your money guaranteed. In this case, the numbers would tell you to maximize your employer match, then use the rest to pay off high-interest debt.
This isn’t a strict rule by any means. There is some wiggle room depending on your goals and financial situation. However, it’s a good break-even point for you to make the decision.
Different Types of Investments
There is an infinite amount of possible investments. Paying off debt over investing is an investment. So is investing in your own education. In each case, you’re sacrificing money today for a future desired benefit.
When it comes specifically to investing in the traditional sense (like for retirement) the four most popular types of investments are:
- Stocks. Also referred to as equities, stocks are a legal claim on part of the assets and earnings of a corporation. Historically, stocks have the highest overall returns of any asset class, but they come with the most risk. (Learn more about how to invest in stocks as a beginner.)
- Bonds. A bond is essentially a loan you make to a company or the government. You then earn interest based on the agreed-upon terms. There is a wide range of bonds available to invest in, but bonds are most frequently used to reduce risk within a portfolio.
- Cash. In investing terms, cash is how you refer to money market instruments, such as savings or money market accounts. Cash has the lowest performance of any major asset class, but also comes with very little risk. Long-term, cash isn’t a good investment because inflation erodes its value.
- Alternatives. Alternative investments, such as crypto and real estate, have become more popular in recent years. In our current low interest rate environment, more investors are turning towards alternatives and away from bonds and cash. There is a wide range of risks and returns available in the alternative space.
Beyond these categories of investments, there are different ways to invest in them.
- Mutual Funds. Mutual funds are how you can invest in a pool of stocks and bonds without picking each individual one yourself. Mutual funds offer investors simple access to managed investing. There are both passive and actively managed mutual funds. Passive funds aim to replicate the performance of an index, whereas active funds employ a fund manager to pick investments in an attempt to outperform their benchmark.
- Exchange-Traded Funds. ETFs allow you to invest in a pool of assets, such as stocks or bonds, similar to how you would with mutual funds. However, unlike mutual funds, ETFs give investors the ability to trade shares (in the fund itself). ETFs are useful when you’re looking to purchase mutual funds through a brokerage account; you’re able to purchase a Vanguard ETF through a brokerage like SoFi, while in order to invest in Vanguard’s Mutual Funds you need an account with Vanguard.
- Robo-Advisors. A robo-advisor is how you can automatically invest in a diversified portfolio of stocks, bonds and cash. They automate this process with algorithms based on your risk tolerance, goals and timeline. Robo-advisors offer investors an simple way to build their own portfolios without hiring a professional financial advisor.
How to Start Investing in Four Steps
Successful investing requires four distinct steps.
Step #1: Know Your Goals
Without a clearly defined investment goal, it’s impossible to have a proper investment strategy.
The most common investing goal is retirement, but there are other goals worth considering.
- Short-term goals (0 to 2 years). Examples include saving for a car or a trip in the short term.
- Medium-term goals (2 to 7 years). Saving for a down payment
Final Thoughts
The bottom line: a little research on easy steps start investing goes a long way. Compare your options, watch for seasonal offers, and never pay full price when a better deal is one click away.
Originally published at thewaystowealth.com.
R.J. Weiss
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