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.
How to start investing?
Get started investing as early as possible
Investing when you’re young is one of the best ways to see solid returns on your money. That’s thanks to compound interest, which means your investment returns start earning their own return. Compound interest allows your account balance to snowball over time.
Compound interest allows your account balance to snowball over time.
How that works, in practice: 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’ll have $33,300. Of that amount, $24,200 is money you’ve contributed — those $200 monthly contributions — and $9,100 is interest you’ve earned on your investment.
There will be ups and downs in the stock market, of course, but investing young means you have decades to ride them out — and decades for your money to grow. Start now, even if you have to start small.
If you’re still unconvinced by the power of investing, use an inflation calculator to see how inflation can cut into your savings if you don’t invest.
Decide how much to invest
How much you should invest depends on your investment goal and when you need to reach it.
One common investment goal is retirement. 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.
For other investing goals, consider your time horizon and the amount you need, then work backwards to break that amount down into monthly or weekly investments.
Open an investment account
If you don’t have a 401(k), you can invest for retirement in an individual retirement account.
If you’re investing for another goal, you likely want to avoid retirement accounts — which are designed to be used for retirement, and thus have restrictions about when and how you can take your money back out — and choose a taxable brokerage account. You can remove money from a taxable brokerage account at any time.
A common misconception is that you need a lot of money to open an investment account or get started investing. That’s simply not true. . 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.