Maybe a friend or coworker told you about how they hit it big investing in stocks. It sounds like easy money, and you fear you’re missing out.
But before you start buying stocks willy-nilly, hear us out: Diligently investing your money, little by little over time, is where real, lasting wealth comes from. Simply put, the best way to get rich quick is to get rich slow.
So, how do you start investing? It’s not as complicated as you might think, and we’ll guide you through the process.
Starting anything new can be intimidating—especially when it’s something that can have long-term effects on your finances—but don’t give up. Anyone can invest—including you. And it’s okay if you have a ton of questions.
When Should I Start Investing?
First thing’s first. Before you start investing, you need to work your way through the first three of Ramsey’s 7 Baby Steps. That means saving $1,000 for a starter emergency fund, paying off all your debt except your mortgage using the debt snowball method, and then saving a fully funded emergency fund of 3–6 months of expenses.
Market chaos, inflation, your future—work with a pro to navigate this stuff.
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. By building a debt-free foundation and stashing a good chunk of savings in the bank, you’re setting yourself up to invest your income to build wealth the right way.
In fact, there’s a whole group of millionaires called Baby Steps Millionaires who’ve followed the 7 Baby Steps to hit the million-dollar mark. They were able to pay off all their debt and reach a million-dollar net worth in about 20 years.
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
Once you reach Baby Step 4, you can start saving and investing 15% of your gross household income for retirement.
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 a Baby Steps Millionaire thanks to time and compound growth doing its thing. If you follow the Baby Steps, you’ll build wealth and get to live and give like no one else.
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.
If you find yourself struggling to get to that 15% mark, take a closer look at your monthly budget. Whether you’re using an app like EveryDollar or an old-fashioned spreadsheet, a budget will help you stay on track with your spending and show you where 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.
- It’s a classic because it’s true—skip the coffee shop and brew your own cup of Joe in the morning.
- Cut back on brand-name items and go with a generic option (there’s no shame eating Fruity O’s instead of Fruit Loops).
- 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! Trust us, those dollars and cents add up month after month, and they can give your retirement savings a huge boost. It all comes down to your choices—you have to make investing for your future a priority, even if it means cutting out little luxuries here and there. That’s why we say if you’ll live like no one else now, you can live and give like no one else later!
2. Invest in Mutual Funds
You’ve probably heard about all kinds of investments—stocks, bonds, cryptocurrency, precious metals. But there’s one type of investment that stands above the rest: mutual funds.
Simply put, mutual funds let investors pool their money together to invest in stocks. Then that money is managed by professionals who buy stocks from a bunch of different companies.
Good growth stock 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. Spreading your money among many companies is an important investing principle called diversification, and it helps you avoid the risks that come with buying single stocks.
Ever heard the expression don’t put all your eggs in one basket? Well, mutual funds put your eggs in many different baskets. And we recommend spreading those eggs out even more by investing in four types of mutual funds.
- Growth and income funds (also called large-cap funds): These are the most predictable funds in terms of their market performance.
- Growth funds (also called mid-cap funds): These are fairly stable funds in growing companies. Risk and reward are moderate.
- Aggressive growth funds (also called small-cap funds): These are the wild-child funds. You’re never sure what they’re going to do, which makes them higher-risk, higher-return funds.
- International funds: These funds invest in foreign-owned businesses.
One of the biggest myths out there is that millionaires take big risks with their money in order to become wealthy. Or that they inherited all their money. That couldn’t be further from the truth!
The Ramsey Solutions research team conducted the largest survey of millionaires ever done, called The National Study of Millionaires. Our team talked to more than 10,000 millionaires so we could finally get a clear picture of what a real millionaire looks like and how they built their seven-figure net worth.
Guess how many of them said single stocks were one of their top three wealth-building tools. The answer? Zero. Not a single one!
3. Start Investing in a 401(k)
If your company offers a 401(k) with matching contributions, start investing there first. A 401(k) is an employer-sponsored savings plan that allows workers to contribute a portion of their income into a retirement savings account that has a selection of mutual funds and other investments. Retirement accounts can be called different things—like a 403(b) for nonprofit organizations and a TSP for federal employees.
To get the most out of your investment dollars, contribute up to the employer’s match, which is usually a percentage of your income. For instance, if your company matches contributions up to 4% of your income, 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, so once you set your contributions, you don’t have to think about them anymore! 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 it in retirement.
Many companies also 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) with a match is your only option, it’s still a great way to start investing.
In fact, the most common path to wealth creation among the millionaires we studied was—you guessed it—investing consistently in their employer-sponsored plans. And there’s no reason why you can’t do the same.
4. Contribute to a Roth IRA
Remember, the goal of Baby Step 4 is to invest 15% of your household income. You won’t get to the full 15% by investing up to the employer match in a traditional 401(k) alone. That’s why we recommend maxing out a Roth IRA too.
A Roth IRA (Individual Retirement Account), 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!
For 2022, the total amount you can contribute to either a Roth IRA or traditional 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 to fill out an extra form or two to make sure 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 you have a Roth 401(k) at work with good mutual fund options, you can invest your entire 15% there. Boom, you’re done! But if you’re not happy with the investment options in your 401(k), then invest up to the match and max out a Roth IRA where you can pick the best mutual funds to invest in.
If those options aren’t available to you, or if you need another way to get 15% of your income invested, put your money in a brokerage account and invest in mutual funds.
5. Work With an Investment Professional
Of course you want to get everything just right when you start investing. And that’s where having an expert to guide you is helpful.
You’ll have lots of questions—it’s a given. Which are the best funds to choose? How do I manage my 401(k) or set up a Roth IRA? Your investment professional can show you how to start investing and answer all your questions so you can 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
- Help you keep your investments on track with regular check-ins
- Offer a client-first approach
Because investing is extremely personal you’ll want to work with a pro you can trust. Find a SmartVestor Pro 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.
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 don’t need a big chunk of money to open an account or start investing in your workplace plan. An initial $50 contribution and signing up for automatic contributions is usually enough.
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. Let’s say Jane is debt-free, has a full emergency fund in place, and is ready to start investing 15% of her income for retirement.
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!2 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!
Curious what your nest egg could grow to? Try out our investment calculator.
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.
To do that, you need to work with a pro who has the heart of a teacher—that’s why we recommend SmartVestor Pros. They’re a group of financial professionals who want to super-serve their clients. They’re committed to educating and empowering you to create a plan to build wealth for your retirement.
These are general guidelines. Your situation may be unique. If you have questions, connect with a SmartVestor Pro.