How to Start Investing: A 7-Step Action Plan

Congratulations, you have done the hard work of creating a budget and sticking to it. You have your debt under control and are meeting your savings goal. And you have an emergency fund. You are ready to move forward with other financial goals—putting your money to work for you. But how do you start investing?

1. Develop Investment Literacy

Before you start investing your money, take time to learn investment lingo. You need to understand the differences between types of investments. For instance:

  • Bonds
  • Mutual funds
  • Stocks
  • Commodities
  • ETFs
  • Real estate
  • Cash equivalents

There are important investing terms to understand too.

  • Investment portfolio
  • Diversification
  • Asset allocation
  • Rebalancing
  • Dividends
  • Fees
  • Inflation
  • Roll Overs
  • Investment Time Horizon

Once you are literate in the language of investing, you will be able to set reasonable expectations and avoid mistakes.

2. Decide on Your Investment Goals

What are you investing for?

  • Your children’s college education.
  • Retirement. When do you want to retire?
  • To buy your first home. When do you want to do this? What kind of home do you want? Is it a starter home or for the long-term?
  • To travel around the world.

Mapping out your life goals will help you establish financial goals to drive your investment goals.

3. Establish Your Risk Tolerance

Here is where you need to be honest about your relationship with money. Does the idea of possibly losing money stress you? Are you looking for maximum growth and are emotionally comfortable with potential losses?

When you invest your money, you need to be prepared for the ups and downs of the market. You may see your portfolio gaining nicely and then the next month see it collapse. This is normal. As you do your research, learn about the risks associated with each investment type.

4. What Kind of an Investor Do You Want to Be?

Your tolerance risk might help you decide what kind of investor you want to be. If you are comfortable with the ebbs and flow of the market and enjoy reading the financial news, you might want to do everything yourself. All you need is a brokerage house.

If you do not have the time or prefer not to be in daily contact with your gains and losses, you might want to choose a robo-advisor or investment manager to do the work for you.

5. How Much do You Have to Invest?

You do not need a lot of money to start investing. There are platforms such as Ellevest where you can invest with as little as $20. If you open a brokerage account, you will need to maintain an account minimum. The amount of money you have matters less than your commitment to investing as much as you can every month.

6. Where to Start?

Start by investing in your retirement if you have not already done so. Take advantage of your employer’s 401(k) plan and match your employer’s contribution. Consistency can be achieved through automatic payroll deductions. Not only are you saving for your retirement, but you save on taxes.

If a 401(k) is not an option, invest in a Roth IRA. Contribute the maximum amount each year allowed by law. Your investment will earn money tax free and if you wait until retirement to withdraw, you will not owe taxes on it.

If you already have your retirement accounts set up, you might consider investing in a taxable investment account, such as mutual funds.

7. Diversity

Diversify your portfolio. Invest in as many different sectors as possible so that when there is an economic disruption in one, your other holdings will cover the shortages. Mutual funds make it easy to do this.

The key takeaway is commitment and consistency. Seek out advice and utilize the services of financial advisors and investment counselors to help you develop the best strategies for you.