5 Basic Steps To Investing


You have a great job and make a good income. You’ve paid off your student loans and credit card debt. Now you’re ready to save and invest. But you’re not sure how to start investing. I have good news.

I’m going to introduce you to six basic steps on how to invest your money. Before you think about investing a dime, we need to set the foundation. Without it, it will be difficult, if not impossible, to have a successful investment strategy.

I’ll list the steps first and then get into some detail to help you navigate each one.

They are:

  1. Work from your budget
  2. Determine how much you can save
  3. The best accounts to start – taxable vs. tax-deferred
  4. Find the best investment options
  5. Diversify
  6. Monitor and rebalance

Now let’s get into the details for each to get you started.

Build Wealth With Discipline

Personal finance principles are not complicated. Executing them takes practice and discipline. If you want to build wealth, you will need to do these three things:

These are common sense things. Living within our means, being disciplined about saving and investing and minimizing debt will allow us to build wealth over time. There are no get rich quick schemes that work. There are no short cuts. Doing these three things over a long period will give you the best opportunity to build wealth.

Here’s where to start.

1. Work from a budget

If you want to invest like a hero, you need to get the money from somewhere. The place most people get money to invest is from working. That means you need to use a budget to save as much of your money as possible. Having a budget isn’t the only way to get money (401k company match comes to mind), but everyone should be keeping their expenses lower than their income.

You need to know where your money is going every month to know to analyze areas where you might be able to reduce expenses and increase the amount available to save and invest.

Many people use spreadsheets to budget. In fact, you can find our awesome budget template here. If you’re not a spreadsheet person, consider some of the budgeting apps available. Mint and EveryDollar) are two of the most popular. Both programs allow you to connect your bank accounts to pull expenses into the app. You can then set up categories to better manage where cash is going.

If you’ve been disciplined enough to pay off your debt it’s likely you have some budgeting mechanism set up. If not, these two apps can help you get started.

Regardless of the method you use, the #1 thing you can do to accelerate your investing is to earn more money and put it to work.

2. Increase Your Income

Your budget tells you how much you can save and invest. That’s the foundation that must be in place to assure you can contribute a consistent amount to grow your wealth. However, you need more money coming in the door if you plan to really create serious wealth.

Increase income

You are never going to penny-pinch your way into an extravagant lifestyle. Having the life of your dreams is going to require that you take some risks and increase your income. This could mean working your way up the corporate ladder and earning promotions. Or it could mean starting your own company and giving yourself a shot to make a substantial amount of money.

Without taking risks, you won’t get outsized rewards.

If you love your job, look for ways to gain income outside of work. Find a side hustle or part-time work that has flexible hours and can bring in more money. The more money you make, the more you can save and invest.

Earning a few extra hundred bucks a week will translate to tens of thousands or even more money one it’s invested over a long time horizon. You might laugh at your friends who pick up extra shifts, but they’ll be the ones laughing when they have a million bucks in their investment accounts.

Emergency fund

Most of this article is related to investing, but we can’t ignore the fact that you need to take care of yourself and your family before you invest a penny. This means having an emergency fund. If money for an emergency fund is not part of your budget, it needs to be.

What’s an emergency fund? It’s money you keep in a high-interest savings, checking, or money market account that you can access in the event of an emergency. Use this money to pay cash for unexpected expenses. If your car breaks down, you have an unexpected medical bill or lose your job, don’t pay for these on a credit card. Use the cash from the emergency fund.

The emergency fund should have a minimum of three to six months of monthly expenses in it. So, if your monthly expenses are $1,500, you would keep from $4,500 (3 months) to $9,000 (6 months) in the account. If expenses are $2,000, you’d keep $6,000 or $12,000 in it.

Some people keep one or more years of expenses in their emergency fund. Whatever amount you choose, be sure not to compromise that number. Financing unexpected expenses on a credit card will put you right back into the hole you just dug out of.

If you have a partner or kids, you also need to have a solid term life insurance policy in case you die unexpectedly. One thing the COVID-19 pandemic showed us that life is fragile. If something were to happen to you, do you have enough money saved up to provide for your family? That’s why you need life insurance.

3. Finding the right type of account

Most people learning how to invest their money should start with retirement accounts first. These retirement accounts have tax benefits that normal investment accounts at places like Robinhood don’t offer.

If you have a career, it’s highly likely that your company offers its employees a 401k or 403b retirement plan. The plans offer a way for employees to contribute money every paycheck to an investment account where the money invested grows tax-free as long as it remains in the plan.

Employer Matches Are Like Free Money

In most cases, the employer contributes money to your account as well in the form of a matching contribution. They agree to match what you put into your account with their own money up to a certain percentage.

Here’s a common example. They offer to match your contribution up to 50% of the first 6%. That’s a 50% return on the first 6% you put into the plan. There is no other investment out there that offers a 50% guaranteed return. Take it and run like a bandit!

Plus the money you contribute is tax-deductible, meaning it reduces your taxable income by that amount. You pay tax on the money at the time you withdraw it at retirement It’s free money and a tax deduction. It’s truly the best investment you can make.

The IRS allows you to contribute up to $19,000 of your own money into employer-sponsored plans. That means you can put a chunk money toward saving for your retirement.

Roth IRA

You should also consider contributing to a Roth IRA

Unlike employer plans, contributions are not tax deductible. The money you contribute to a Roth IRA has already been taxed. You can contribute $6,000 to a Roth. Earnings on the money while it remains in the account grow tax-free.

You can withdraw contributions at any time without penalties or taxation. Earnings are a little different. If the Roth account is five years old, earnings can be taken out without paying any taxes. However, if you are under age 59 ½ at the time you withdraw, you will pay the IRS a 10% penalty.

The great thing about a Roth IRA, especially if you start one when you’re younger, is that money withdrawn after five years and when you’re over age 59 ½ is tax-free income. That’s a huge benefit when you’re calculating retirement income. Having tax-efficient or in this case, tax-free income in retirement is a major advantage of the Roth IRA.

Here’s an overview on how to open an IRA.

4. Find the best investment options

If you’re investing in your employer’s retirement plan, the options you have are the ones available in the plan. In the vast majority of plans, these are mutual funds.

Mutual Funds

Mutual funds are portfolios of stocks and bonds. They are professionally managed, offer some diversification, and a variety of choices in the types of stocks and bonds available. Most plans have a lot of choices (sometimes too many) of funds. Your benefits department can provide information to help you decide which funds to select.

For any money you’re investing outside of the employer plan, mutual funds are also a very good option. You aren’t limited to a set of funds chosen by your employer. In many cases, you can find lower-cost funds offering better performance.

There are other options to consider as well.

If you love the idea of investing in mutual funds, you’ll want to learn how you can easily build a 3 fund portfolio. It’s an easy way to build a diversified portfolio to meet your investment needs.

Individual stocks and bonds

You can also purchase individual stocks and bonds on your own. When you’re just starting out investing and have smaller amounts of money, it’s hard to diversify a portfolio of individual stocks. It takes a significant dollar amount to buy enough stocks to diversify your portfolio.

Picking stocks and bonds on your own is also riskier. There are a variety of stock picking newsletters and services to help you make the choice. Many of these services tout their ability to beat the market and provide higher returns.

If you’re just learning how to invest or just starting out, you need to know that buying individual stocks is a high-risk proposition. You can use brokers like Robinhood, Acorns, M1 Finance and Webull to start investing!

Index funds

Index funds are a specific type of mutual fund.

These index funds invest in many different stocks and bonds in bundles. The index you’ve likely heard of and are familiar with is the S&P 500. The index is made up of the largest 500 publically traded companies in the U.S. The size of the companies is based on the market value of their stock. The larger companies have a much greater impact on the return of the index.

An S&P500 index fund invests in all 500 of these companies and mimics the overall returns of the market. Humans don’t decide on how much to put into each company. Rather, the amount they put in each aligns with the size of each company in relation to the total index. There are dozens of stock and bond indexes available for investment.

Index funds are among the lowest cost funds you can own. The lower costs mean more of your money gets invested. Expenses on professionally managed funds are much higher than index funds. 

Index funds are the #1 investment recommended by professional investors like Warren Buffet because they understand that the average person doesn’t have the ability to beat the market. So if you can’t beat it, the next best thing you can do is match it.

Robo Advisors (Automated investments)

Robo advisors are a fairly new entrant to the investment landscape. They’re called robo advisors because they use algorithms to build and manage portfolios. These technologies automate the investment process. The investment vehicle most use to create their portfolios is exchange-traded funds (ETFs). ETFs are, in many ways, like mutual funds. They pool together investor money and purchase a diversified portfolio of stocks or bonds.

Top robo advisors include M1 Finance, Betterment, and Wealthfront.

ETFs also give robo advisors the ability to easily diversify their portfolios at a very low cost. Investing with one of the many robo advisors offers a ready-made, broadly diversified portfolio of stocks and bonds. Most of them require investors to complete a short risk questionnaire to determine which portfolio is a good fit.

Professional Advisors

If you love the sound of investing but would rather leave it to the pros, that’s understandable. Facet Wealth and SmartAsset are two great options for that. Facet Wealth has a team of certified financial planners who will work with you remotely to set up and execute a professional investment strategy for a fixed monthly fee.

If you’d rather meet with someone in person, SmartAsset will have you take a short quiz and match you with a local financial advisor.

5. Diversification

In its simplest form, diversification means having your money invested across different types of asset classes (stocks, bonds, cash) to help lower the risk of owning individual securities. The goal here is to increase your risk-adjusted returns. This means that it’s possible to create a portfolio that has the same expected returns as another portfolio without having the same amount of volatility or expected risk. It’s a no-brainer.

With regular monthly investments, it’s next to impossible to get proper diversification with individual stocks and bonds. And with mutual funds, you need to have a good understanding of the asset classes and how they work together.

To that end, when you’re learning how to invest or investing smaller amounts of money, your two best options are index funds or automated investment programs (robo advisors).

They allow you to invest smaller amounts of money in a broadly diversified portfolio. In the case of robo advisors, there is also some effort put into finding a portfolio that fits your tolerance for risk.

Monitoring and rebalancing

Last but certainly not least comes the need to monitor and rebalance your investments.

Monitoring, as the name suggests, means watching the investments to make sure they are doing what they said they were going to do. It’s making sure your diversification and mix of investments stay close to where you wanted it to be when you started. If it sways from that mix, you could be taking on more risk or compromising the performance you wanted when you started.

Rebalancing means that if parts of your portfolio grow or fall in value beyond what the managers targeted, you should sell the ones that have gone up and buy the ones that have dropped. In other words, bring the portfolio back into the balance (mix of stocks, bonds, cash) you designed when you started.

Rebalancing does not need to be done every month. In fact, once a year is probably enough. With markets going up and down a rapidly as they do these days, the market often rebalances the portfolio on its own with its up and down moves.

Final thoughts

My thoughts on investing were targeted to those who may be just learning how to invest. It’s also applicable to those who may have some knowledge of investments but not a lot of money to invest.

I’m one who believes that the best way to invest in today’s markets is to own the market. The best way to do that is through index funds or robo advisors. These two options are low cost. They offer an easy way to own pieces of the entire market. There are index funds available for any market, stock or bond, around the world.

Take advantage of employer plans and Roth IRAs to the extent they are available. Be consistent with your investing. Put money in regularly in good and bad markets. Keeping costs low, owning a broadly diversified global portfolio, staying invested in that portfolio, and periodically rebalancing as needed will bring you investment success.

There are no guarantees when investing. Following this formula offers you the best chance for investment success.