To get started investing, pick a strategy based on the amount you'll invest, the timelines for your investment goals, and the amount of risk that makes sense for you.
Rent, utility bills, debt payments and groceries might seem like all you can afford when you're just starting out. But once you've mastered budgeting for those monthly expenses (and set aside at least a little cash in an emergency fund), it's time to start investing. The tricky part is figuring out what to invest in — and how much.
As a newbie to the world of investing, you'll have a lot of questions, not the least of which is: How do I get started, and what are the best investment strategies for beginners? Our guide will answer those questions and more.
Here's what you should know to start investing.
Get started investing as early as possible
Investing when you’re young is one of the best ways to see solid returns on your money. That's thanks to compound earnings, which means your investment returns start earning their own return. Compounding allows your account balance to snowball over time.
“Compounding allows your account balance to snowball over time.”
How that works, in practice: Let's say you invest $200 every month for 10 years and earn a 6% average annual return. At the end of the 10-year period, you'll have $33,300. Of that amount, $24,200 is money you've contributed — those $200 monthly contributions — and $9,100 is interest you've earned on your investment.
There will be ups and downs in the stock market, of course, but investing young means you have decades to ride them out — and decades for your money to grow. Start now, even if you have to start small.
If you're still unconvinced by the power of investing, use our inflation calculator to see how inflation can cut into your savings if you don't invest.
Decide how much to invest
How much you should invest depends on your investment goal and when you need to reach it.
One common investment goal is retirement. If you have a retirement account at work, like a 401(k), and it offers matching dollars, your first investing milestone is easy: Contribute at least enough to that account to earn the full match. That's free money, and you don't want to miss out on it.
As a general rule of thumb, you want to aim to invest a total of 10% to 15% of your income each year for retirement — your employer match counts toward that goal. That might sound unrealistic now, but you can work your way up to it over time. (Calculate a more specific retirement goal with our retirement calculator.)
For other investing goals, consider your time horizon and the amount you need, then work backwards to break that amount down into monthly or weekly investments.
Open an investment account
If you don't have a 401(k), you can invest for retirement in an individual retirement account, like a traditional or Roth IRA.
If you're investing for another goal, you likely want to avoid retirement accounts — which are designed to be used for retirement, and thus have restrictions about when and how you can take your money back out — and choose a taxable brokerage account. You can remove money from a taxable brokerage account at any time.
A common misconception is that you need a lot of money to open an investment account or get started investing. That's simply not true. (We even have a guide for how to invest $500.) Many online brokers, which offer both IRAs and regular brokerage investment accounts, require no minimum investment to open an account, and there are plenty of investments available for relatively small amounts (we'll detail them next).
Understand your investment options
Whether you invest through a 401(k) or similar employer-sponsored retirement plan, in a traditional or Roth IRA, or in a standard investment account, you choose what to invest in.
It’s important to understand each instrument and how much risk it carries. The most popular investments for those just starting out include:
Stocks
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A stock is a share of ownership in a single company. Stocks are also known as equities.
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Stocks are purchased for a share price, which can range from the single digits to a couple thousand dollars, depending on the company. We recommend purchasing stocks through mutual funds, which we'll detail below.
Bonds
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A bond is essentially a loan to a company or government entity, which agrees to pay you back in a certain number of years. In the meantime, you get interest.
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Bonds generally are less risky than stocks because you know exactly when you’ll be paid back and how much you’ll earn. But bonds earn lower long-term returns, so they should make up only a small part of a long-term investment portfolio.
Mutual funds
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A mutual fund is a mix of investments packaged together. Mutual funds allow investors to skip the work of picking individual stocks and bonds, and instead purchase a diverse collection in one transaction. The inherent diversification of mutual funds makes them generally less risky than individual stocks.
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Some mutual funds are managed by a professional, but index funds — a type of mutual fund — follow the performance of a specific stock market index, like the S&P 500. By eliminating the professional management, index funds are able to charge lower fees than actively managed mutual funds.
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Most 401(k)s offer a curated selection of mutual or index funds with no minimum investment, but outside of those plans, these funds may require a minimum of $1,000 or more.
Exchange-traded funds
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Like a mutual fund, an ETF holds many individual investments bundled together. The difference is that ETFs trade throughout the day like a stock, and are purchased for a share price.
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An ETF's share price is often lower than the minimum investment requirement of a mutual fund, which makes ETFs a good option for new investors or small budgets.
Pick an investment strategy
Your investment strategy depends on your saving goals, how much money you need to reach them and your time horizon.
If your savings goal is more than 20 years away (like retirement), almost all of your money can be in stocks. But picking specific stocks can be complicated and time consuming, so for most people, the best way to invest in stocks is through low-cost stock mutual funds, index funds or ETFs.
If you’re saving for a short-term goal and you need the money within five years, the risk associated with stocks means you're better off keeping your money safe, in an online savings account, cash management account or low-risk investment portfolio. We outline the best options for short-term savings here.
If you can't or don't want to decide, you can open an investment account (including an IRA) through a robo-advisor, an investment management service that uses computer algorithms to build and look after your investment portfolio.
Robo-advisors largely build their portfolios out of low-cost ETFs and index funds. Because they offer low costs and low or no minimums, robos let you get started quickly. They charge a small fee for portfolio management, generally around 0.25% of your account balance.
About the authors: Brianna McGurran is a former personal finance columnist and staff writer for NerdWallet. Her advice column, "Ask Brianna," was syndicated by The Associated Press
Arielle O'Shea is a NerdWallet authority on retirement and investing, with appearances on the "Today" Show, "NBC Nightly News" and other national media.
Original link: https://www.nerdwallet.com/article/investing/how-to-start-investing