Learning how to invest can be a valuable skill, no matter what the stock market is doing at any given moment.
As a newbie, you might also have a lot of questions: How much money do you need to start investing? How do you get started? What are the best investment strategies?
Our guide distills the basics into five easy steps to help you start investing.
Step 1: Start now, even if you have to start small
Investing as far in advance of your goal as you can is one of the best ways to see solid returns on your money. Compound earnings, which occur when your investment returns start earning their own return, allow your account balance to snowball over time. The longer you stay invested, the more compound earnings you might see.
How compound earnings work
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'd have over $33,000. Of that amount, roughly $24,000 is money from those $200 monthly contributions. Around $9,000 is in investment gains you would have earned for merely parking it in the account to grow over time.
If you’re hesitant to invest because you're unsure whether your contribution is enough, focus instead on what amount feels manageable given your financial situation and goals, and start with that. The important thing is to build the habit. You can always increase your regular contribution amount over time.
Investing with smaller dollar amounts is also easier than ever. Many brokerage firms offer low or no investment minimums, zero commissions, and the ability to buy fractions of stocks for a lower price instead of the whole share. There are a ton of other investments also available for more affordable amounts, such as index funds, exchange-traded funds and mutual funds.
» Curious to see how much your money could grow? Try our investment return calculator
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Step 2: Learn about different investment accounts
Where you choose to invest your money can depend on your financial goals and timeline.
If you want to save for retirement: If your main objective is to save for retirement, experts recommend contributing to accounts like a 401(k) and an IRA first. Because these plans are meant to encourage long-term savings, they come with several built-in tax advantages that general investment accounts don't have. For example, when you contribute to a traditional 401(k) or IRA, you may be able to take a deduction on your taxes for that contribution. On the other hand, Roth 401(k)s and Roth IRAs are funded with money you've already paid taxes on, but you get to withdraw all your contributions and earnings on a tax-free basis once you've hit retirement. Retirement accounts generally come with annual contribution limits and withdrawal rules. (Learn how to choose the right retirement plan for you.)
If you want to save for college and beyond: Saving for your kid's education or future can be daunting, but there are several accounts designed to help you navigate this goal. One of the most popular vehicles used by parents and caregivers is a 529 account. These tax-advantaged savings plans have high contribution limits, and the money you put in can be used toward qualified expenses such as tuition, textbooks, and room and board. If you're interested in saving for your child in other ways, you can also consider a custodial brokerage account or a custodial Roth IRA. (Learn more about investment accounts for kids.)
If you want to invest for long-term goals: If you're looking for an additional place to park some money to fund longer-term financial goals, a brokerage account is the key to getting started. Brokerage accounts have no limits on how much you can contribute to them annually, and they offer a greater degree of flexibility than retirement accounts. You can choose your own investments, build your own portfolio, and buy and sell investments at will. Brokerage accounts also come in many flavors and variations: a traditional brokerage account allows you to have hands-on experience trading and purchasing your own investments, while robo-advisors (also known as automated investment management services) are more hands-off, meaning they can curate and manage your investment portfolio for you. Robo-advisors often offer IRAs, too. (Learn how to open a brokerage account.)
Step 3: Decide how much to invest
How much you should invest depends on your financial situation, investment goal and when you need to reach it.
If you're saving for retirement and have a 401(k), your first investing milestone is easy: Contribute at least enough to earn the full match, if offered. A match is a contribution from your employer that's based on the amount you contribute — for example, an employer might match 50% of your own contributions, up to 6% of your salary. That's free money, and you don't want to miss out on it, especially since your employer match counts toward that goal.
After that, experts recommend that you aim to invest a total of 10% to 15% of your income into a 401(k) or other retirement plan. If that sounds unrealistic, you can work your way up to it over time.
For other investing goals, such as purchasing a home, travel or education, consider your time horizon and the amount you need, then work backward to break that amount down into monthly or weekly investments.
» Not ready for long-term investing? Learn where to park short-term savings
Step 4: 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 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.
» Learn more about index funds, ETFs and more: 5 best investments for beginners
Step 5: Open an account and begin investing
Once you've decided how much you'll need to invest to reach your goal and selected a type of account, the last step is to actually open your account of choice to get started.
When choosing a brokerage provider, consider what's important to you as a beginner investor. Do you value in-person customer support? Do you want to work with an intuitive and easy-to-use app platform? Do you think you'll want access to a financial advisor? All of these questions can help guide you toward the right brokerage firm for you.
The process of opening an account is simple and straightforward — it's very similar to opening a bank account. You'll provide some personal information, then decide how to fund the account. This is often done through a bank transfer. Once you have money in your account, you are ready to begin purchasing investments that match your risk tolerance, timeline and goals.
» Ready to get started? See our list of the best online brokers for beginners
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