how to start investing guide

How To Start Investing

Learning how to start investing is intimidating. At least, it was for us. In fact, a very large number of American’s say that the fear of losing money keeps them from investing. Learning how to invest doesn’t have to be complicated, but it’s usually portrayed as something only professionals should do.

The fact is that investing is something that anyone can and should be doing. You don’t need to be some sort of math whiz in order to put your money to work. Does that mean that investing is safe and you’re guaranteed to not lose any money? Not at all. But there’s a few things you can do to start investing that are simple, easy to understand, and effective.

If you aren’t sure if you even have enough money to even start investing, you probably don’t realize that you can start with very little money. We used to worry about that too. We both got our first jobs when we were 16 years old. One of us worked at a car dealership cleaning cars and the other worked as a grocery store cashier. Eventually we picked up 2nd jobs over summer breaks to save up money for college.

And even though we started getting regular paychecks so early, we didn’t start investing until 6 years after we started working. We worked so hard for that money that we didn’t want to risk losing it. The though of buying stocks also sounded extremely complicated. Honestly, we didn’t even know where to start.

We thought investing was only for rich people. We didn’t realize we were wasting precious time.

This guide would have been all we needed, which is why we created it for you and anyone else looking to learn how to start investing for the first time!

how to start investing

Investing Your Money Is Important

A lot of people talk about wanting to start investing their money, but they can’t really articulate why it’s better than just keeping their money in a checking account.

Well, the reason is actually pretty simple. To begin, let’s define what the word ‘invest’ even means. At a basic level, to invest is simply to spend money with the expectation of getting more money in return. That’s it. To invest you simply buy something in the hope that you’ll earn more money in investment returns.

This is important because it explains why it’s so important to invest. Let’s say you are worried about having enough money for retirement. You might be stocking away every dollar you can into your bank account so that it’s there when you turn 65.

Investing Helps Protect Your Money From Inflation

But the problem with that is that checking accounts or most savings accounts pay virtually (or literally) nothing in interest. So your money is actually losing value due to inflation (the gradual increase the prices of things at stores). A hundred years ago a can or bottle of Coke or Pepsi cost 5 cents. Today it a bottle of Diet Coke could cost you $1.99. The increase in price is inflation.

So if your money isn’t invested and growing, it’s actually losing value since the prices of things will increase.

We’ve also had a few people say that they don’t want to invest because they are afraid of paying more taxes. This is nonsense, because you will usually only pay taxes on profits, so in the end you will still have more money (after taxes) than if you hadn’t invested at all!

Investing is an awesome way to grow your money over time (hopefully it will grow much faster than inflation does), so that when you are ready to retire, you won’t have anything to worry about besides which new hobby you want to try out.

Learning How To Start Investing Is Less Complicated Than It Seems

Movies make the stock market look like a crazy flurry of activity and we just didn’t want to lose the little money that we had.

I guess growing up with little money made us weary of the ‘financial system’.

Now that we understand how simple it is to invest your money, we wish we would have started right away.

If you are looking to learn how to start investing, then this article is for you.

Before you finish this article, use our easy retirement calculator to figure out how much you should be saving for retirement. If you’re anything like us, seeing that number might be all the motivation you need to start investing for the future.

You might be overwhelmed by that number, but don’t worry because you still have a lot of time on your side. If anything, it should highlight why you should be focused on saving and investing as much money as you can!

The truth is that learning how to invest in stocks is simple, but most people assume it’s complex and confusing. 

Before we start learning how to start investing, here’s some good news: You don’t need a degree in finance or to have worked on Wall Street to invest wisely! We learned that lesson the hard way, so you don’t have to!

The first step is to decide which type of account you want to use to invest your money.

Step 1: Choose An Account Type: Tax-Favored vs Taxable Investing Accounts

To invest your money, you’ll need to open an investment account. The process is almost identical to opening a new bank account. Within this account you’ll be able to transfer money in from your bank and decide what you want to invest in.

Let’s break down the 2 major types of accounts you’ll use.

There are multiple types of accounts you can use to get your money invested in the stock market. We like to first group them into two main categories: Tax Favored and Taxable Investing Accounts.

Tax-Favored Accounts

Tax-favored (aka tax-advantaged) accounts are investing accounts that are given tax advantages by the government to encourage people to save for their own retirement. The big ones are the 401(k) and the IRA (including Roth IRA). Here’s our guide on how to open an IRA.

Taxable Investing or Brokerage Accounts

On the other hand, Taxable Investing Accounts can be invested in the same way as 401(k)s and IRAs, but do not get the same tax advantages. The profits you earn in these taxable brokerage accounts get taxed as capital gains. This is in addition to the income tax you already paid on the money you put in! They do however have the advantage of being able to be withdrawn penalty free at any time.

Regardless of which type of account you use, you will choose how your money is invested. You can buy stocks, bonds, index funds (basically a group of many stocks), or any other type of security (fancy word for investment that can be traded).

Which Type of Investment Account to Use To Start Investing

We suggest opening investment accounts and investing in the following order in order to minimize your tax bill:

  1. 401(k) up to the employer match (if your employer has one)
  2. Roth IRA until you max it out ($5,500 limit in 2018)
  3. 401(k) beyond employer match until you max it out ($18,500 limit in 2018)
  4. Taxable accounts (no annual dollar limits)

The reason we recommend investing in this order, is because it will help you minimize the amount of taxes you’ll pay over your lifetime. This isn’t the right order for everyone, but for most, it will be more than enough.

Remember that the tax-advantaged accounts like a 401K and Traditional IRA have limits and cannot be withdrawn before retirement without paying a penalty. If you are hoping to save money for 10 years and then use that money before you retire, then a Roth IRA might be the perfect account for you because you can take the money that you invested out of the account (this doesn’t include your profits) without a penalty.

If all of this is confusing and you can’t get a 401K through your job, it’s probably a safe bet to start with a Roth IRA.

Step 2: Open An Investment Account

Whether you want to open a tax-advantaged or taxable brokerage account, you have to select a brokerage firm where you will deposit your money and select your investments. There are a ton of different firms that you can use. Here’s our guide to opening an IRA.

The only exception here is that if your company offers a 401K retirement savings program, you must use the 401K service company that they select.

Some of the standard names in the industry are Vanguard, Fidelity, Charles Schwab, and the list could go on. There are also ‘Robo Advisors’ out there like Wealthfront and Betterment, which are basically brokerage firms that decide what to invest in for you. And there are also start-up brokerage firms like Robinhood, though they offer more limited options.

Ultimately, which one you pick is a personal decision.

We like Vanguard and Fidelity because they offer a range of low fee investment fund options as well as the ability to handle both tax-advantaged accounts and standard taxable accounts.

If you don’t ever want to even think about your investments, a ‘Robo Advisor’ could make a lot of sense, since they take your money and invest it for you (for a fee, of course).

Step 3: Choose Your Investments

This step is where the fun begins. Everyone assumes that learning how to invest is complicated. But it doesn’t have to be. Actually, the data shows that it shouldn’t be.

The dirty little secret that some of the big financial institutions don’t want you to know is that you shouldn’t pick individual stocks. Just don’t do it.

We don’t care how much you love your Apple iPhone or Samsung TV. Or how good of a stock you think TESLA is.

That’s not a good reason to go buy those stocks. You’ll be taking too much risk by putting all of your eggs in one basket.

If you aren’t convinced that you shouldn’t pick individual stocks you can read this.

Picking Investments Is Easy

If you aren’t trying to pick individual stocks, then investing becomes extremely simple and you may even find it boring. And that’s a good thing.

You’ll want to pick low cost index funds.

These are essentially single investments that contain slivers of many different stocks. In effect, you’ll own nearly the entire stock market.

The beautiful thing is that if you stick with diversified, low fee index funds, you’ll outperform the majority of professional investors.

Remember, the best investments are the most simple.

If you are wondering how to invest when the stock market is going up, here’s a solid guide: How To Invest In A Bull Market.

If on the other hand, here’s what to do when stocks go down.

Step 4: Deciding How Much Risk To Take When Learning How To Start Investing

Once you’ve decided what to invest in, you’ll want to decide how risky to make your portfolio.

Again, this is less complicated than it sounds.

In a passive index-fund based investment strategy (the easiest and best way to invest), you’ll only need to pick as few as 2 or 3 different investments.

To lower the risk of your portfolio (the collection of all of your investments), one of those investments will be bonds. In general, the more bonds you invest in, the less risky your portfolio will be.

But that doesn’t mean you should only invest in bonds to lower the risk. Bonds also have lower expected returns, which means you are less likely to make more money.

There’s a trade-off between risk and reward.

Our guide on how to master asset allocation (the fancy word for the balance between stocks and bonds) will break it all down for you.

In closing, just remember that investing is a lot less complicated than it seems.

If nothing else, create a simple three fund portfolio, or invest in a target date fund (a fund which automatically adds more bonds as you age).

The only thing you need to know is that the sooner you start investing, the better off you’ll be.

But you don’t have to take our word for it. This is the same advice you’d get from Warren Buffet.

how to start investing

11 thoughts to “How To Start Investing”

  1. Your suggestions leave out Traditional IRAs. Why is that? Financial Samurai, a financial blogger, says that one should always invest in Traditional IRAs over Roth. I would be interested in yoyr thoughts after you read his article. It is called “Disadvantages of the Roth IRA: Not all is what it seems.”

    1. Hi Ani, at the end of the day, deciding between a Traditional IRA and a Roth IRA is a win-win because it means you are saving for retirement. Our view is that based on the federal deficits that have been building up, at some point taxes will have to increase to pay for them. Maybe not this year, next year or even in the next 50 years, but at some point somethings got to give.

      I just read the article you mentioned and his entire argument is “don’t pay the government your money until you have to – at all costs.” He doesn’t think taxes will ever increase, so it’s easy to see why he’d think the Traditional IRA is superior in that sense. We just don’t happen to agree.

      At the end of the day, whether you invest in a Traditional or Roth IRA, you’re on the right path. The majority of your wealth will be based on your savings rate, since it will dictate how much you’ll have to invest.

    1. I think the apps that make it easier to invest are great — if you need them. If you don’t need them, then you’re paying fees that you don’t need. But if the alternative is to not invest at all, the fees are a small price to pay for a brighter future. It really depends on how much accountability you need. It might make all the difference for some.

    1. Hi! Our site is based in the U.S. so our content is geared to this market. A lot of the principles (like investing 20% of your income or creating a budget) are universal.

    2. Nice post! I agree that index funds and mutual funds are a great way for people to get a toe in the water with investing.

      Canadians have RRSPs and TFSAs that are similar to IRAs and Roth IRAs. The Canadian versions are a little less punitive about early withdrawals.

        1. Mr. Pacino, we are big fans. A pleasure to have you here. Surely you have enough money from your movies to not be affected by early withdrawal fees (not to mention you are nearly 80 years old!). Thanks again for joining us!

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