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5 essential steps to start investing
Disclaimer: The following article is an informative piece, intended to educate our audience about how to start investing. It is not financial or investment advice.
Investing is one of the most fundamental ways to build your wealth. If you are currently in your prime working years and not putting those earnings to work for later, you’ll never have more than what you’re able to make and save.
A lot of people neglect investing. They may feel intimidated by the concept of investing, or they may think investing is only for the wealthy. Neither of these obstacles should prevent you from putting your money to work now.
Anyone can invest, regardless of limitations such as income or timing. It may take some strategic planning, but if you can learn the ropes, then you’ll be able to start investing. The following are a few steps that anyone can take to get started on the investment game.
Step 1: read up as much as possible
When it comes to investing, one of the first obstacles is feeling intimidated or overwhelmed. Combat this by learning as much as possible. Start asking questions about investing and the different options including stocks, bonds, mutual funds, etc. The more you know, the more empowered you are.
Here at Finstead, you can ask questions about any investment concept or notion. When you learn and research, you’re more equipped to make smart, long-term strategic decisions. You will get over that hump of intimidation and feel much more confident about investing.
In addition to self-education, you can also speak with a professional investment or financial advisor. Keep in mind, most advisors will not charge you for their first meeting with you; however, many advisors will screen you to understand whether you fit their client profile. The good news is, you don’t have to make any decisions or buy into what those advisors recommend, and you won’t have to sign up for any services or plans they offer.
Step 2: get your finances in order
Once you’ve started on a path of education, you can start planning how you’ll invest. However, if you don’t have extra cash, you can’t invest. For many people, this means they have too much debt, so the goal should be paying off debt as quickly as possible. When done, you can gradually set aside more cash towards your investments. Here are a few scenarios with some tips.
If you’re struggling to pay off high-interest debt, there are options available that can help you pay it down more easily. For example, low interest personal loans are an option to creditworthy borrowers, allowing them to pay off the old debt and leaving them with a new loan.
Alternately, balance transfer credit cards can help pay off credit cards and leave you with low-rate debt, but these are mainly limited to credit card debt and subject to fees. Keep in mind that both options are subject to credit approval and come with their own risks moving forward.
At other times, some would-be investors have too many loans or credit cards to pay off. Some people rely on debt consolidation loans to pay them all off – leaving them with one payment instead of several. Debt consolidation loans can keep you organized and on track with your goals, reducing the chance of late fees.
There are other debt repayment tactics such as the snowball method. Using this method, you start by paying off your smallest debt first and then gradually work up to paying off larger debt.
Another popular tactic is the debt avalanche method which focuses on high-interest debt first and works towards paying off low-interest debt later. These are great because you rely on your own budgeting skills for repayment.
That being said, budgeting is important overall. You need to sit down and realistically think about what money is coming in versus what’s going out. Determine where you may be able to cut spending and then put that money towards debt repayment (or investing).
If you’re investing even a very small amount each week or month while you pay down debt, you will have a psychological advantage to accelerate once you wipe out all your debt. More importantly, you will learn important investment lessons throughout this process.
Step 3: study different investment vehicles
An investment vehicle is a term referring to a type of investment that can be made. Here are a few examples of commonly utilized investment vehicles:
- Stocks: stocks allow investors to buy shares in a company, who benefit when the company’s stock price goes up. Many stocks also pay dividends. Stocks are a risky way to invest, however, since they aren’t diversified. Not many new investors go with single stocks, and instead invest in diversified options like mutual funds and ETFs.
- Mutual funds: a mutual fund is an investment vehicle that pools money from many investors. A mutual fund manager invests in stocks, bonds or other vehicles. There are passively managed mutual funds that track certain indexes, like the S&P 500, and actively managed where the manager hand-picks the stocks and other investments in the fund. New or smaller investors can gain the benefits of diversification in a relatively low-cost way with mutual funds.
- ETFs: an ETF is in many ways like a mutual fund, but they’re traded on the stock exchange like individual stocks. Most ETFs are passively managed in that they track certain indexes like the S&P 500.
These are just some of the more common investment vehicles, but there are many others. For example, a real estate investment trust (REIT), which are similar to mutual funds, pools funds from investors together to buy properties.
Step 4: get started slowly
When you’re a new investor, and especially if you have a small budget for investing, you want to start slowly and be cautious. Don’t dump all of your savings into the market – that would be classified as a high risk move. Lead of by investing smaller amounts and observing their performance.
Additionally, you may not want to invest in one single investment vehicle. Diversification is one of the most important ways to protect yourself. You don’t want to invest in single stocks, nor do you want your investments to be too heavily focused on one sector. That’s where mutual funds and ETFs are helpful—they inherently give you diversification in a simple, easy format.
There are various ways to get help during this stage. At Finstead, we welcome your questions. If you’re looking for a more automated way to invest, without your extensive personal involvement, it might be good for you to explore robo-investing tools available at Vanguard, Charles Schwab, Betterment and Wealthfront.
Robo-advisors are an efficient way to invest that will take care of your risk preferences and tax situation (i.e., they are a tax-efficient way to invest).
If your employer offers 401K or other retirement plans, we highly recommend you pursue this option. Retirement planning is something young people typically tend to neglect. However, investments accumulate exponentially over time, and the money invested today will pay ‘dividends’ in the future.
Step 5: learn from your experiences
The concept of investing is something that should always be evolving. You can start small and be fairly risk-averse in your strategy. Over time, as you learn more and gain more experience, you can integrate more risk exposure into your portfolio since higher-risk investments can often lead to higher returns.
The key is to start somewhere. Everyone has a starting point when they become an investor, and it doesn’t matter how little money you have or how little experience you have. Once you get started, you can gain more experience and learn from your past performance as you go forward and build out your long-term strategy.
By Andrew Rombach, a Content Associate from LendEDU – a consumer education website bent on helping everyone learn more about personal finance.