Think you don’t have enough money to start investing? Think again! You can start your investing journey with just $100. Although the amount you invest might start out small, it can be a turning point in your finances.
When you decide to start investing, the most important part of the process is educating yourself. Once you have a better understanding of investing, you will feel more comfortable growing your investments over time.
If you are reading this, then you are in the right place to get started. In this post, you learn about how to start investing.
What is investing?
When you decide to invest your money, you are choosing to put it into a vehicle with the goal of receiving a return down the line. At some point, you hope that the money to put into an investment will grow. In most cases, you plan for little involvement on your part once you’ve invested the money.
Although most people associate investing in the stock market, there are many other ways to invest. For example, you could invest in real estate or your own business. No matter what you choose to invest in, you hope to earn money on that investment in the future.
Why is investing important?
Investing is the way that you can grow your money for the future.
Saving money is an important place to start building a better financial future. However, your savings are diminished each day by the powers of inflation. Although your savings account might have the same balance ten years from now, that money will not have the same purchasing power that it has today.
With investing, you are able to grow your money over time and keep the powers of inflation at bay. Historically, the stock market has provided returns between 6% and 7% with inflation factored in. Those returns can grow your savings dramatically over time.
Plus, the power of compounding can add to your nest egg. If you choose to reinvest your earnings over the course of many years, you’ll benefit from the compounding effect. Compounding is a process that grows your money over time by reinvesting your investment earning.
If you are just starting your journey of building wealth, then investing can help you reach those long-term goals faster. Instead of trading your time for money in order to build wealth, you can have your money work for you. When your money starts to earn money through your investments, you won’t be completely dependent on your day job or your savings.
When should you start investing?
Investing strategies typically involve a long-term timeline. With that, the best time to start investing is as soon as possible. The sooner you are able to start investing, the more time you’ll have to allow your investments to grow.
Generally, you will use these investments to fund your retirement. So it is a good idea to start as soon as you can. You’ll want to give your investments plenty of time to build your wealth.
Investing is an extremely important part of your financial journey. However, there are a few things that you should tackle before you start investing. Let’s take a closer look.
- Pay down debt. If you have any debt that is draining your resources each month, then you should focus on paying that down first. Once you’ve paid down your debt, you’ll be able to invest more comfortably.
- Build an emergency fund. Living one paycheck from the edge is not a good feeling. An emergency fund can allow you to enjoy more financial breathing room in your life. Before you start investing, consider building an emergency fund.
Once you’ve paid down your debt and built an emergency fund, then it is time to invest. If you start young, then the power of compounding can work in your favor. Even if you only have a few dollars to start investing, you should take action today.
How to start investing for beginners with a little bit of money
Investing can change your financial future for the better. You don’t need a lot of money to start investing. In some cases, you only need a few dollars to get started. Of course, you might have a goal of increasing your investments over the long-term. But don’t let limited resources stop you from building your long-term wealth.
1. Try a robo-advisor
A robo-advisor is essentially a virtual financial advisor. With the use of algorithms and technologies, it eliminates the need for a human financial advisor. It will provide automated financial management services and tailor your investment recommendations based on your goals.
The benefit of using a robo-advisor is that the fees are typically lower, even though you are getting customized portfolio recommendations. Most robo-advisory firms offer low minimum investment requirements and take care of portfolio rebalancing automatically.
If you are interested in trying a robo-advisor, then check out Acorns or Betterment.
2. Seek out a brokerage account
There are many investment services available on the market today. Each offers different services and charges different fees. As you sift through your options, consider what matters to you most.
In some situations, you may want to buy and sell stocks on a regular basis. These transactions can add up quickly at some brokerage firms. In other situations, you might choose an index fund with fees built-in. Either way, you'll want to find a brokerage account that minimizes fees for your investment strategy.
3. Look at employer-sponsored investment accounts
If you work for a large company, then you likely have access to some employer-sponsored investment accounts. In general, these accounts are aimed at saving for your retirement in a tax-advantaged way.
Many employers offer a 401(k) or 403(b). If your employer doesn’t offer a retirement account, then consider opening a Roth IRA to start saving for your retirement.
A CD, or certificate of deposit, is a great place to grow your money if you have a low-risk tolerance. Although you will likely miss out on bigger returns through the stock market, you won’t have to worry about any dips along the way.
5. Invest in yourself
Investing in yourself is just as important as investing in the stock market. You might choose to invest in your financial education, which could save you thousands of dollars over the course of your life. You might choose to invest in your business, which could allow you to take control of your income. Or you could choose to invest in your health. After all, a healthy body makes life more enjoyable.
Things to look out for when you start investing
Investing is a great way to build a solid financial future. However, there are some pitfalls to look out for. If you can avoid some of these mistakes, then you stand to save yourself thousands of dollars.
1. Avoid the fees (and understand them)
When you start looking through funds to invest in, you’ll notice that each comes with a set of fees. In many cases, the fees can range from 0.5% to 2%.
Although that tiny swing in percentage points might not seem like an important detail, it can make a big difference in your portfolio’s growth. In fact, a 2% fee could add up to hundreds of thousands of dollars over the course of your investing career.
When you decide to invest, you should make sure to research the fees and minimize them wherever possible.
2. Prepare with your risk tolerance in mind
When you choose to invest your money, you should assume that you might lose some of your investment along the way. The market will rise and fall. Although it historically has risen through the years, that is not an indicator that it will continue to rise steadily. It is likely that there will be some dips along the way.
It is important to understand your risk tolerance and consider that as you invest your money. Take our quiz to gain a better understanding of your risk tolerance.
The best way to mitigate your risk in the market is to diversify your investments. You don’t want to pool all of your investments into one particular company that goes under. Instead, you want your investment spread out in many sectors of the market. If one area of the market falls, then you will not be left with a sinking portfolio.
4. Rebalance along the way
You should stay on top of your investments over time. Make sure that you are still on track with your objectives and the timeline still fits into your goals. The market will rise and fall, you’ll need to rebalance to ensure that you don’t leave all of your eggs in one basket.
5. Don’t try to time the market
Remember, investing is a long-term strategy to build wealth. You should not try to time the market by buying low and selling high. Not even the most advanced investors can consistently beat the market. Instead of looking for short-term wins, focus on the long-term gains.
Although you won’t build wealth overnight through the stock market, you can with many years of continued investment.
6. Don’t forget about taxes
My final tip is to remember taxes when you are planning out your investments. There are different strategies that you can use to lower your potential tax burden, but they require careful planning. If you aren’t sure about the tax implications of your situation, then consider talking to a tax professional.
Mistakes to avoid
If you are hoping to build wealth over time, then investing is the best way to do that. But, investing comes with a series of common mistakes that many people make. Let's take a closer look below so that you can avoid them in the future.
1. Don't wait to invest
Although it is important to educate yourself before investing, you should not wait too long to get started. With investing, you want to have the value of time on your side. The sooner you are able to start investing, your investments will have more time to grow. That time could lead to significant growth due to the power of compounding.
2. Investing can be emotional
When you start to invest, you will realize that you have some big emotions attached to your investments. After all, you are hoping that these investments will lead to a better future.
The stock market comes with highs and lows, you should be emotionally prepared to weather these storms. When the market inevitably drops, you should not pull all of your money out of the market. Instead, you should wait until it rebounds and you are ready to make a withdrawal. However, this is easier said than done.
In order to avoid a painful experience, make sure to understand your risk tolerance before you start investing. With that, you can choose investments that are less likely to cause panic in your life. Stick to what makes you comfortable and always make your investment decisions with a clear head.
3. Don't time the market
The goal of your investment portfolio should be building a long-term plan that aligns with your financial goals. Once you've built a long-term investment plan, then you can adjust appropriately over time.
4. Nothing happens overnight
When you start investing, you should not assume that your money will grow overnight. In fact, it will rise and fall many times on the way to growth.
As you get started, realize that investing is a long-term strategy for wealth building. But it will not make you rich overnight.
The bottom line
The best way to build wealth through investing is to get started as soon as possible. Even if you are just starting with $20, you can build your portfolio over time.
If you want to learn more about investing, then consider taking our course. You’ll learn more about the stock market, how to research your investments, and how to pick the right broker for you.