If you’re looking to start investing, you might be feeling overwhelmed. If so, you aren’t alone. From intimidating financial advisors using complicated jargon to seemingly conflicting advice, it’s a lot to unpack.
But don’t worry. We’re here to help! Remember, everyone who has ever been great at anything was a beginner once – even Warren Buffet.
We have seven simple tips to get you started. Okay, full transparency: We can’t promise gigantic investment returns, but we can guarantee that our tips will help you get started on your investing journey.
Tip 1. Write Down Your Investment Goals
Have you asked yourself what your investing goals are? Start by writing them out.
Maybe you want to save enough for retirement. Maybe you want to buy a house. Or maybe you want to own multiple rental properties. Some of us may settle for being good old-fashioned millionaires.
Well, there are no right or wrong reasons to invest. But you must be honest with yourself. Your financial goals will dictate your investment strategy and investment decisions (and sometimes even change them). We encourage you to write down your goals and refer to them often.
Use your goals like a compass for your money journey. It can be easy to get distracted or impatient, especially with longer-term goals, but Rome wasn’t built in a day.
As long as your strategy aligns with your goals, you can at least be confident you are heading in the right direction even when the going gets tough – especially when the going gets tough.
Decide on long-term investments vs. short-term investments
Once you’ve written down your goals, it’s important to understand the difference between long-term and short-term investments. Your investment strategy should change depending on the timeline.
We created a quick list of short-term and long-term financial goals to give you an idea of what we mean:
Long-term investment goals:
- Saving for retirement
- Paying off a mortgage
- Building a child’s college fund
- Maximizing your earning potential
Short-term investment goals:
- Getting out of debt
- Building an emergency fund
- Saving for a down payment on a house
Another way to think about the difference between short-term and long-term financial goals is to consider when you’ll need the money. The sooner you need the money, the more risk-averse you are generally recommended to be. (FYI: The more risk-averse you are, the more conservative you are with money.)
Let’s say you want to buy a house. If you’re saving up to make an offer and a down payment in the next 2 years, you wouldn’t want to expose that cash to the volatility of the stock market. There could be a downturn in the market when you need to liquidate that cash, devaluing it when you need it most.
If you are saving for retirement – well, that’s decades away. You’ll have more time to recover from potential losses. Inflation will likely pose a greater risk 30 years from now than 3 years from now. IRL, that means $5 will buy you less in 30 years than it will in the next 3.
Your goals and timelines should dictate your strategy.
Tip 2. Take Stock of Your Current Finances
Honestly assessing your financial situation will help you create a budget and figure out how much you have to invest. When it comes to financial planning, honesty is always the best policy. Your goals are where you want to go, but you need to be transparent about where you’re starting from.
Tempting as it may be, try to resist the urge to compare yourself to others or worry about where you think you should be with your investing goals. Beating yourself up over credit card debt or feeling inadequate because you don’t have a house is wasted energy.
Does thinking about money stress you out? Would you rather avoid looking at your bills, budget and bank accounts? We’ve all experienced some anxiety about facing our financial reality, but living in denial won’t change a thing. Making a realistic plan that manages your financial situation can be empowering and give you confidence. Here are some questions to ask yourself:
- How much debt do I have?
- What strategies should I try to pay off my debt?
- How much money do I have saved?
- How much money do I have left to invest after I pay my bills?
Because there is always some element of risk when it comes to investing, we humbly offer this pro tip: Never invest money you can’t afford to lose.
Tip 3. Pay Yourself First
Consider setting up automatic deposits into your savings account for each pay period if you get paid through direct deposit. Saving money is hard. We get that. That’s why one of the savviest things you can do is automate saving.
Automatic deposits are not sexy. But part of investing responsibly is practicing good financial habits. If one of your goals is to save for an emergency fund, it’s usually the unexciting strategies that’ll get you there.
BTW, if saving for an emergency fund isn’t on your radar, you should add it to your list of goals. As we all know: life happens. With an emergency fund to protect you, you can avoid dipping into an investment account to cover financial emergencies or unplanned expenses.
Tip 4. Determine Your Risk Tolerance
Whether you are working with a financial advisor or enrolling in your job’s 401(k) plan, you will need to assess your risk tolerance.
How would you feel if you started losing the money you invested? To assess your risk tolerance, you’ll need to understand the risk levels different types of investments have.
For example, stocks are considered riskier investments than government bonds, but historically, stocks usually have a higher rate of return. Cryptocurrency is considered one of the higher-risk investments you can make. Yes, some investors have made fortunes with crypto, but a lot more have lost it all.
Which type of investor are you?
Tip 5. Start Investing as Soon as You Can
The sooner you start investing, the longer your money has to make more money for you. Check out this example:
Let’s say you’re 20 years old and you’ve miraculously got some money to invest – so you do. You make a $5,000 investment. Based on a 5% interest rate, your $5,000 would grow to over $16,250 by age 65.
Okay, same investment and interest rate, but you’re a full decade older. Because you invested at age 30, your nest egg grew to $13,750. Still nothing to sneeze at, but you made $2,500 less. That could have been a vacation, a fancy new leather sofa or your final student loan payment.
Investing early allows you to take advantage of a pretty neat magic trick: compound interest. Compound interest lets you earn interest on interest. It’s an easy way to grow your money for the long term.
Skeptical? Use our compound interest calculator to see for yourself.
Tip 6. Diversify Your Investments
When it comes to investing, diversification is such an important strategy. It protects you from the unforeseeable and the unknown. We can’t predict the future. And today’s hot stock (we’re looking at you Amazon and Facebook) may be unseated by a new online retailer or social media platform.
That’s why – at the most basic level – you shouldn’t spend 100% of your money on Netflix stock, no matter how much you love “Stranger Things.”
Here are some ways to start diversifying your investment portfolio:
- Invest in different asset classes: Stocks, bonds and cash are considered different asset classes. By cash, we mean certificates of deposit (CDs), not the money you may (or may not) be stuffing under your mattress. Invest in a mix of all three types of investments, and vary the allocation (aka distribution ratios) depending on your risk tolerance.
- Buy stocks across various industries: In case you missed our warning about putting all your money on Netflix, we repeat: It’s a good idea to mix up your holdings. The more companies you buy stocks in, the better protected you are when stock values drop for some of them.
- Vary investments by geography: Buying stocks in international companies and emerging markets like South America are another way to diversify.
- Invest in exchange-traded funds (ETFs) and mutual funds: If researching companies you want to buy stock in is not for you or you don’t have the time, ETFs and mutual funds are professionally managed collections of individual stocks or bonds.
Don’t forget about investing in real estate
In addition to the stock market, real estate investments can be a great way to diversify. Keep in mind that buying property is not the only way to accomplish this. You can also invest in real estate investment trusts or real estate ETFs.
This can be a great way to start investing in real estate if you don’t have the cash for a down payment or rental property.
Tip 7. Be Strategic, Not Reactive
Here’s a secret: The most successful investors are in it for the long haul. Unexpected events like the war in Ukraine or the coronavirus pandemic will happen. Savvy investors know how to keep things in perspective.
Make sure you aren’t making knee-jerk investment decisions based on headlines. Keep your long-term goals in mind. Hire reputable financial advisors you trust. After some time, thought and consultation, you’ll be in a better place to decide whether it makes sense to switch your strategy.
Stay focused, but don’t forget to revisit your goals periodically. You may or may not know it, but 25-year-old #goals can look very different from 35-year-old #goals. You may want children or decide to open a business. Your financial goals and strategies should align with your life – not the other way around.
Invest in Your Future Today
If you’re feeling overwhelmed, that’s okay. Remember, the only way to climb Mount Everest is one step at a time.
Commit to: establishing your goals, making a plan, creating (and sticking to) a budget and revisiting it periodically. Follow these steps, and you’ll become a seasoned investor in no time.
And consider working with a financial advisor. Your advisor can be an ally in this process. There’s no shame in getting help – we’re all in this together.
The Short Version
- One of the most straightforward ways to gain wealth is to begin investing early and prioritize high-quality, long-term investments. A 401(k) can be a great place to start
- Never invest money you can’t afford to lose. Honestly assessing your financial situation will help you create a budget and figure out how much you have to invest
- In addition to the stock market, real estate can be a great way to diversify. Keep in mind that buying property is not the only way to invest in real estate