How to Start Investing: A Beginner’s Guide

Investing is putting your money into assets such as stocks, bonds, or funds to grow it over time.

Saving money in a Savings account keeps it accessible and safe, but it usually earns minimal interest. Investing involves greater risk but also offers the potential for much higher returns than a Savings account over time.

When you invest, you’re making your money work for you by buying a share of a company, lending to a government, or purchasing other assets that can increase in value.

The biggest reason to invest is to combat inflation. The cost of goods and services rises over time, which means your dollar buys less than it used to.

If your money sits in a traditional savings account, the interest it earns likely won’t keep up with these rising costs.

Over long periods, stocks have historically provided returns of 10% – way ahead of inflation – though there is no guarantee this will happen.

Here’s how powerful investing can be: $100 invested at an average annual return of 10% grows to $673 in 20 years. If you add $100 at the beginning of each year for 20 years, you’ll have almost $7,000.

Whether you want to build wealth for retirement or reach another long-term financial goal, investing is one of the most powerful tools available.

One of the biggest myths about investing is that you need to be rich to start. Many investing apps let you begin with as little as $1, and most retirement accounts don’t have minimum deposit requirements.

If you have $100, you’re already in a great position to begin building a portfolio. The most important thing isn’t how much you start with, but that you actually start – the sooner, the better.

Before you jump in, do a quick financial check-up. You’re likely ready to invest if you have:

• Steady income: A reliable paycheck helps you contribute consistently.
• Emergency savings: Enough to cover unexpected bills so you won’t need to sell investments
• High-interest debt under control: Pay down credit card balances first, since virtually no investment will match the high interest rates many credit cards charge

You don’t have to be completely debt-free to start. If you’re paying off lower-interest debt like a car loan or mortgage and have your emergency fund sorted, you can invest at the same time.

The idea of investing can be overwhelming for a beginner. This step-by-step guide walks you through getting started so you can set yourself up for success.

Step 1: Set your investment goals

Decide what you want to achieve before opening an account. Setting clear financial goals helps you stay focused and choose the right investments.

Your goal might be:

• Saving for retirement in 30 years
• Building wealth over the long term
• Generating additional incom

Your timeline and goals will shape which investments make sense for you. Consider talking to a financial advisor for personalized guidance tailored to your situation.

Step 2: Choose your investment tools

Once you know your goals, consider how you want to invest your money. Different types of investments have different purposes and risk levels:

• Stocks have higher return potential but also higher risk.
• Bonds are lower-risk investments with typically lower returns.
• Retirement accounts like 401(k)s and Individual Retirement Accounts (IRAs) offer tax advantages for long-term saving

You may need a brokerage account, depending on your investments. A brokerage account works like a bank account but is specifically designed for buying and selling securities, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs) – more on those later.

Step 3: Determine your ideal investment amount

Never put your entire savings into investments or borrow to fund your portfolio. Instead, use your extra money once you’ve built an emergency fund and paid your monthly bills. Creating a budget can help you identify how much you can comfortably contribute to your investment account each month.

If you’re investing in a traditional IRA, your annual contribution limit will determine how much you can invest. If you’re diversifying across multiple accounts, budget a total monthly amount and divide it among your investments.

Step 4: Figure out your comfort level with risk

Risk and reward go hand in hand in investing, but you should never take risks that make you uncomfortable. Conservative investors typically prefer lower-risk options like bonds, while those comfortable with volatility might choose individual stocks with higher potential returns.

Consider taking a risk tolerance assessment to figure out your preferences. This helps you build wealth at your own comfort level and in your own timeline.

Step 5: Decide your investment approach

You can choose between active and passive investing.

• Active investing means picking specific investments to outperform the market, which requires significant time, expertise, and analysis.
• Passive investing aims to match the market by investing in index funds and holding them for the long term.

While active investing can generate much higher returns, it often involves higher fees, and all investment strategies carry risk. Most beginners start with passive investing through index funds.

Step 6: Build a diversified portfolio

You’ve heard the expression, “Don’t put all your eggs in one basket.” Diversification means spreading your money across different types of investments, or baskets, rather than putting it into a single investment. If one investment declines, diversification can prevent your entire portfolio from taking a hit.

The best approach often includes a mix of the following assets:

Stocks

When you buy a stock, you own a small piece of a company. If the company performs well, your stock price increases – but if it performs poorly, your stock price will decrease.

Stocks offer potential for compounding returns, where you can reinvest dividends to buy more shares and grow your portfolio over time. However, stocks are volatile, and their values fluctuate with economic conditions and company news.

Carefully select stocks that fit your risk tolerance and investment goals.

Bonds

A bond is a type of security in which you lend money to a business or government in exchange for a fixed interest rate. Bonds offer lower returns than stocks, but their fixed rates make them less risky and less affected by market fluctuations.

Different bond types include government, corporate, and municipal bonds. U.S. Treasury bonds are among the safest options, while corporate bonds carry more risk but offer higher returns.

Mutual funds and ETFs

Mutual funds and ETFs let you invest in a basket of stocks and bonds at once to diversify your portfolio. If one of your holdings decreases, your entire portfolio will be less affected, remaining more stable.

Some funds focus on specific industries, such as real estate or technology, so you can invest in different sectors without picking individual stocks.

Step 7: Review and adjust your portfolio as needed

Review your portfolio periodically to make sure it still aligns with your goals and risk tolerance. Rebalancing helps ensure your investments stay diversified as some holdings grow faster than others.

A financial planner can help with ongoing management. Or if you use a robo-advisor, it can automatically monitor and rebalance your portfolio.

Here are three beginner-friendly options to start investing without needing expertise in picking individual stocks and bonds.

401(k), IRA, or other retirement accounts

If your employer offers a 401(k) plan, this is a great place to start. Key benefits include:

• Employer match: Many employers partially or fully match your contributions, which is like getting free money for retirement.
• Automatic contributions: Money comes straight from your paycheck, so you don’t have to remember to invest.
• Tax advantages: In a traditional 401(k), elective deferrals are not taxed, which can reduce your taxable income

Don’t have an employer plan? You can open an IRA on your own. These accounts are tax-advantaged and can provide tax benefits for long-term retirement saving.

Many retirement accounts let you invest in target-date mutual funds. You simply enter when you want to retire, and the fund automatically picks a mix of stocks and bonds based on your timeline.

Robo-advisors

Robo-advisors are automated investment platforms that use algorithms—built and overseen by financial experts—to manage your portfolio at a lower cost than traditional advisors. Benefits include:

• Low minimums: You can often start with much less money than traditional advisors require.
• Simple setup: You’ll answer a quick questionnaire about your goals and risk tolerance to determine the best path forward.
• Hands-off management: The platform automatically invests and rebalances for you, so you don’t need to think about it.

Investing apps

Investment apps like Acorns or Robinhood let you start investing with as little as $1. These apps make it easy to buy individual stocks, bonds, and ETFs directly from your phone, giving you more control over your specific investment choices.

Watch out for these common pitfalls as you start investing:

• Timing the market: Trying to buy and sell at the perfect moment is nearly impossible, even for pros. Focus on staying invested for the long haul instead.
• Lack of diversification: Putting all your money in one stock means you could lose big if that company struggles. Spread your investments across different assets for greater stability.
• Panic selling: Your account balance will go up and down – that’s normal. Selling when the market drops locks in your losses instead of letting your investments recover.
• Waiting for the “perfect” time: It’s easy to wait for the perfect moment, but many experts say the best time to start was in the past. The next best time is today – even if you only have a small amount.

Have exactly $100 to invest? Here’s how to put it to work:

1. Max out an employer 401(k) match: If your employer matches contributions, put the money there first – it’s an instant return.
2. Open a Roth IRA: Contribute $100 now and add more when you can. If you satisfy the requirements for a Roth IRA, qualified distributions in retirement are tax-free.
3. Use a robo-advisor or investing app: Platforms like Betterment or Acorns often have no minimums and will automatically diversify your $100 across multiple investments.

Remember: the amount matters less than building the habit. Starting with $100 today beats waiting until you have $1,000.

Investing isn’t a get-rich-quick strategy – it’s a smart way to combat inflation and build wealth over the long haul. There are plenty of options for beginning investors, and starting small helps build your confidence over time.

To learn how to align your portfolio with your personal values, read our guide on ethical investing.