There are people all over the country who want to start investing, but just have no idea where to begin. We get it. There’s a lot of information out there to process and try to understand. Plus, starting anything for the first time can be intimidating—especially when it’s something that can have long-term effects on your finances.
Hear us loud and clear: Anyone can invest—including you. And it’s okay if you have a ton of questions.
How to Start Investing in 5 Steps
Learning to invest doesn’t have to be complicated! Here are five simple steps to help you get started.
1. Make Room in Your Budget for Investing
How much should you be investing for retirement? We recommend saving 15% of your gross household income into retirement savings.
Why 15%? First of all, investing 15% of your income consistently month after month, year after year, will put you on the path to becoming an everyday millionaire thanks to time and compound interest doing its thing. (Try our compound interest calculator that will do the calculations for you!) And second, investing 15% still leaves some wiggle room in your budget to reach other important financial goals—like saving for your kids’ college funds and paying off your house early.
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If you find yourself struggling to get to that 15% mark, start by taking a closer look at your monthly budget. Whether you’re using an app like EveryDollar or an old-fashioned spreadsheet, getting on a budget will help you stay on track with your spending and find ways to cut down your expenses so you can save more for retirement.
Here are some quick ways you can save some money in your monthly budget:
- Pack your lunch instead of eating out with your work buddies every day.
- Cancel your cable package and switch over to a cheaper streaming service.
- Skip the coffee shop and brew your own cup of coffee in the morning.
- Cut down on the brand-name items and go with the generic option when it makes sense.
- Work with an independent insurance agent to see if you can save money on your insurance premiums.
And we’re barely scratching the surface here, people! Trust us, those dollars and cents add up month after month and they can give your retirement savings a huge boost.
2. Start Investing in a 401(k)
If your company offers a matching contribution, start with their 401(k) plan. A 401(k) is an employer-sponsored savings plan that allows workers to contribute a portion of their income into a retirement savings account. We suggest contributing up to the employer’s match. For instance, if your company matches contributions up to 4%, invest that percentage to take advantage of the match—that’s free money, folks!
Taking control of your finances is more about behavior than math. Consistency over time is the key to building a healthy nest egg. You’re running a marathon here, not a sprint.
Good news—contributions to a 401(k) are made through automatic payroll deductions, making saving easy. And 401(k) plans also come with tax benefits. Traditional 401(k) contributions are made with pre-tax dollars, meaning you won’t pay taxes on the money until you withdraw the funds.
However, some companies now offer Roth 401(k) plans. With a Roth 401(k), you contribute after-tax dollars, which means you won’t owe taxes when you withdraw your funds in retirement. We recommend saving through a Roth 401(k) over a traditional 401(k) if it’s available. But if a traditional 401(k) plan is all that’s offered, it’s still a great way to start investing.
3. Contribute to a Roth IRA
Remember, the goal of Baby Step 4 is to invest 15% of your household income. You might not get to the full 15% with a 401(k) alone. That’s why we recommend maxing out a Roth IRA once you’re contributing to a 401(k) up to your employer’s match.
A Roth IRA (Individual Retirement Arrangement), like a Roth 401(k), is a retirement savings account that allows you to pay taxes on the money you put into it up front.
Whenever you hear the word Roth, your ears should perk up. First, the money you invest in your Roth IRA grows tax-free. Second, you won’t owe taxes when you withdraw your money in retirement. So, if your account grows by hundreds of thousands of dollars over time, all that money is yours free and clear when it’s time to use it in retirement! Talk about a win!
As of 2021, the total amount you can contribute to either a Roth IRA or an IRA is $6,000—or $7,000 if you’re age 50 or older.1 A financial advisor can help you sort out all the details to make sure you understand your options.
If you invest directly through a financial advisor or investing firm, you can also automate your monthly Roth IRA savings. This will require an extra step in paperwork, but it’s worth the time you take to ensure that you’re putting money away consistently. Slow and steady wins the race. Once you’ve maxed out your Roth IRA at the annual limit, go back to your 401(k) and invest the remaining amount until you reach 15% of your income.
If those options aren’t available to you, or if you need another avenue to get 15% of your income invested, put your money in a taxable investment account—preferably mutual funds—and leave it alone.
4. Diversify Your Investments With Mutual Funds
As you start to invest, we recommend investing in mutual funds. Mutual funds are the best way to invest for long-term, consistent growth because they allow you to spread your investment among many companies—from the largest and most stable, to the new and fast-growing. This helps you avoid the risks that come with rolling the dice on single stocks.
Mutual funds are the best way to invest for long-term, consistent growth.
A mutual fund is created when a group of people have pooled their money together to buy stocks in different companies. Mutual funds allow you to diversify—one of the most important principles of investing. You want your money to go to work across different kinds of stocks with different levels of risk.
The four main types of mutual funds that we recommend are:
- Growth and income funds: These are the most predictable funds in terms of their market performance.
- Growth funds: These are fairly stable funds in growing companies. Risk and reward are moderate.
- Aggressive growth funds: These are the wild-child funds. You’re never sure what they’re going to do, which makes them high-risk, high-return funds.
- International funds: These funds invest in companies around the world.
One of the biggest myths out there is that millionaires take big risks with their money in order to become wealthy. That couldn’t be further from the truth! We recently talked to 10,000 millionaires, to learn more about how they built wealth, and guess how many of them said single stocks were one of their top three wealth-building tools. The answer? Zero. Not a single one!
In fact, the most common path to wealth creation among the millionaires we studied was—you guessed it—investing in growth stock mutual funds through their employer-sponsored plans like a 401(k). And there’s no reason why you can’t do the same.
5. Work With an Investment Professional
Starting your investing journey can be daunting. But that’s where having an expert to guide you is helpful.
You’ll have questions when you start investing—it’s inevitable. Which are the best funds to choose? How do I manage my 401(k) or set up a Roth IRA? That’s why it’s important to reach out to a financial consultant. An experienced financial advisor or investment professional can show you how to start investing and empower you to make the best decisions possible for your retirement savings.
The right investment professional will:
- Educate you on investment choices so you stay in the driver’s seat
- Empower you to make the right choices with the investing options they provide
- Offer a client-first approach
Because investing is extremely personal, find a qualified investment professional in your area who can help create a retirement plan that’s right for you.
Okay, now that we’ve walked through the steps to help you get started, let's answer some of the most frequently asked questions about investing.
When Should I Start Investing?
Listen to us, you want to wait to invest until you’re debt-free and have three to six months of expenses saved in an emergency fund. Once that happens, you’re ready to start saving for retirement.
Your income is your most important wealth-building tool. And as long as it’s tied up in monthly debt payments, you can’t build wealth. It’s like trying to fill a bucket with water when there’s a hole on the bottom—it just doesn’t work!
Your income is your most important wealth-building tool. As long as it’s tied up in monthly debt payments, you can’t build wealth.
How Can I Start Investing With Little Money?
One of the biggest myths out there is that you need a lot of money to start investing. Wrong! The great news is that you really don’t need a lot of money to start investing. Many mutual fund companies allow you to open an account for as little as $50.
Of course, the more you can invest, the better—but you have to start somewhere. Don’t let fear keep you from taking action on your future! This is something that a trusted investment professional can help you work out depending on your unique financial situation.
What Is the Best Age to Start Investing?
Regardless of your age, you want to be financially ready to invest as soon as you can. That’s because the sooner you begin investing, the more time your money has to grow.
Take Jane, for example. If Jane is debt-free and has her full emergency fund in place, she should be investing 15% of her income. If she started investing $500 a month ($6,000 per year) at the age of 25, she could have between $3.1 million and $5.8 million by the time she’s 65 based on a 10–12% rate of return! Now if Jane waits until she’s 35 to start investing that $500 a month, she could have between $1.1 million and $1.7 million at age 65. Waiting 10 years could cost you millions of dollars at retirement!
And don’t get hung up on rate of return here. Even with an 8% return, Jane could have a $1.7 million nest egg by 65 if she started investing at age 25. That’s nothing to sneeze at! Remember, time and compound growth are your friends. Make the most of them!
Start Investing Today!
As you start investing and working with a pro, keep this in mind: Never invest in anything you don’t understand. It’s your money!
Ask as many questions as you need to and take charge of your own investing education. SmartVestor Pros are a group of financial professionals who want to super-serve their clients. They’re committed to educating and empowering you to create a confident plan for your retirement.