Rent, utility bills, debt payments and groceries might seem like all you can afford when you’re just starting out. But once you’ve mastered budgeting for those monthly expenses (and set aside at least a little cash in an emergency fund), it’s time to start investing. The tricky part is figuring out what to invest in — and how much.
As a newbie to the world of investing, you’ll have a lot of questions, not the least of which is: How do I get started investing, and what’s the best strategy? Our guide will answer those questions and more.
Here’s what you should know to start investing.
Get started as early as possible
Investing when you’re young is one of the best ways to see solid returns on your money. You probably can’t count on Social Security to provide enough income for a comfortable retirement, so having your own long-term savings will be crucial. Even for shorter-term financial goals (like buying a home), investments that earn higher returns than a traditional savings account could be useful.
There will be ups and downs in the market, but investing young means you have decades to ride them out.
Investing in the stock market is a do-it-yourself way to plan for a comfortable old age. There will be ups and downs in the market, of course, but investing young means you have decades to ride them out — and decades for your money to grow, thanks to compound interest, which means your investment returns start earning their own return. Compound interest allows your account balance to snowball over time, even if you’re not contributing.
Decide how much to invest
If you have a retirement account at work, like a 401(k), and it offers matching dollars, your first investing milestone is easy: Contribute at least enough to that account to earn the full match. That’s free money, and you don’t want to miss out on it.
As a general rule of thumb, you want to aim to invest a total of 10% to 15% of your income each year for retirement (your employer match counts toward that goal). That might sound unrealistic now, but you can work your way up to it over time. If you don’t have a 401(k), you can invest that money in an individual retirement account, like a traditional or Roth IRA.
A common misconception is that you need a lot of money to get started investing outside of a 401(k). That’s simply not true. (We even have a guide for how to invest $500.) Many online brokers, which offer both IRAs and regular brokerage investment accounts, require no minimum investment to open an account, and there are plenty of investments available for relatively small amounts (we’ll detail them next).
Here are a few of our recommendations for brokers with low or no account minimums:
» Get the details: How to open a brokerage account
Understand what you can invest in
Whether you invest through a 401(k) or similar employer-sponsored retirement plan, in a traditional or Roth IRA, or in a standard investment account, you choose what to invest in.
It’s important to understand each instrument and how much risk it carries. The most popular investments for those just starting out include:
- A stock is a share of ownership in a single company. Stocks are also known as equities.
- Stocks are purchased for a share price, which can range from the single digits to a couple thousand dollars, depending on the company. We recommend purchasing stocks through mutual funds, which we’ll detail below.
» Learn more: How to invest in stocks
- A bond is essentially a loan to a company or government entity, which agrees to pay you back in a certain number of years. In the meantime, you get interest.
- Bonds generally are less risky than stocks because you know exactly when you’ll be paid back and how much you’ll earn. But bonds earn lower long-term returns, so they should make up only a small part of a long-term investment portfolio.
» Learn more: How to buy bonds
- A mutual fund is a mix of investments packaged together. Mutual funds allow investors to skip the work of picking individual stocks and bonds, and instead purchase a diverse collection in one transaction. The inherent diversification of mutual funds makes them generally less risky than individual stocks.
- Some mutual funds are managed by a professional, but index funds — a type of mutual fund — follow the performance of a specific stock market index, like the S&P 500. By eliminating the professional management, index funds are able to charge lower fees than actively managed mutual funds.
- Most 401(k)s offer a curated selection of mutual or index funds with no minimum investment, but outside of those plans, these funds may require a minimum of $1,000 or more.
» Learn more: How to invest in mutual funds
- Like a mutual fund, an ETF holds many individual investments bundled together. The difference is that ETFs trade throughout the day like a stock, and are purchased for a share price.
- An ETF’s share price is often lower than the minimum investment requirement of a mutual fund, which makes ETFs a good option for new investors or small budgets.
» Learn more: How to buy ETFs
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 stock mutual funds, 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. We outline the best options for short-term savings here.
If you can’t or don’t want to decide, you can open an investment account (including an IRA) through a robo-advisor, a portfolio management service that uses computer algorithms to build and look after your investment portfolio.
Robo-advisors largely build their portfolios out of low-cost ETFs and index funds. Because they offer low costs and low or no minimums, robos let you get started quickly. They charge a small fee for portfolio management, generally around 0.25% of your account balance.
Here are a few of our recommended robo-advisors: