How To Start Investing For Beginners

Investing is essential for building long-term wealth, helping you combat inflation, increase your net worth, and achieve your financial goals. In this short guide, I will walk you through the essential steps to help you start your investment journey and achieve your financial goals.

Table of contents:

1. Specify Your Goals
2. Assess Your Risk Tolerance
3. Create a Foundation
4. Understand Different Investment Options
5. Start Investing
6. Conclusion

Chose your situation

Before we dive in, it’s important to emphasize that investing should be done with funds designated for the long term. I have prepared the most common situations for your inspiration:

Too Early Situation – no emergency fund, have a wedding in a couple of months, and a lot of debt. In this case, consider dealing with the issues first before even considering risking your money in any kind of investment. If you are excited about gaining experience now, try to look for a demo account in the brokerage account and start from here.

On the right track situation – a 3-month emergency fund is in place, and near-term expenses are covered while the mortgage and debt still significantly reduce your monthly income. In this case, you can prioritize debt repayment, starting with the highest interest rate, build a more resilient emergency fund, and begin an investment journey with the remaining money.

All set situation – 3-12 month emergency fund, all future major expenses are covered or planned, no debt or debt payments are covered with income. You are ready to start! (I am here!).

For all in the correct category, let’s move forward!

Step 1: Specify Your Goals

Understanding your financial objectives and setting short-term and long-term goals is crucial in the investment process. Whether saving for retirement, buying a house, or funding your children’s education, clearly defining your goals will give you a roadmap for your investment journey.

As an example, I want to provide the long-term and short-term objectives I specified at the beginning of my investing path.

Long-term goals

1. Financial independence: I want to no longer rely on a traditional job and have the flexibility to pursue my passions and interests.
2. Wealth preservation: I focus on preserving wealth and protecting it from potential risks.
3. Retirement Comfort: I want to be able to help my kids as well as myself during retirement.

Short-term goals

1. Emergency Fund: I want to build an emergency fund to cover at least three to six months’ worth of living expenses.
2. Skill Development: I plan to invest in improving my skills(courses, certifications, etc.)
3. Travel or Leisure: I want to allocate some funds for traveling or trying new hobbies.

Step 2: Assess Your Risk Tolerance

At this point, you know why you want to invest and are ready to think about the risks. Here are some questions to ask yourself (my answers are provided for your inspiration):

1. How comfortable am I with the idea that my investments might lose some value? (I have 6 months of savings, so I’m okay with this).
2. What would I do if I lost a lot of money from my investments? (I’d check my mistakes and improve my strategy accordingly).
3. How’s my overall financial situation? (I have a stable job, savings, and skills to find another job if needed).
4. Have I thought about what I owe and own? (I don’t have a lot of debts, so I’m in a good position).

Asking these questions at this stage of your investment journey serves as your financial compass. Assessing your comfort with risk, evaluating your overall financial health, and developing strategies to handle losses will help you later when times get tough.

Step 3: Create an Emergency Fund and a Proper Budgeting

Emergency Fund

Do you have an emergency fund in place? In case not, it can be from 3 months to 12 months of your monthly expenses. We need to prepare it to avoid unplanned withdrawals and eliminate emotional discussions. Emergency funds should be stored in an easily accessible account, such as a high-yield savings account.

Proper Budgeting

How to create a proper budget? Start by examining your short-term financial goals after receiving your paycheck. Allocate a portion of your income to meet these goals, whether it’s saving for an upcoming vacation, paying off debt, or building an emergency fund.

Here is an example of deduction before investing:

1. Current Spending – cover your essential expenses like rent, utilities, and bills to ensure your basic needs are met.
2. Debt Repayment – pay off high-interest debts to improve your overall financial health.
3. Emergency Fund – set aside some money in a savings account.
4. Short-term goals – allocate funds for short-term goals, such as saving for a vacation or fulfilling personal wants and needs.
5. Investments – finally fund your brokerage account.

Step 4: Understand Different Investment Options

With your investment funds in place, you’re now ready to explore the wide array of opportunities that the financial market offers.

Here is a list of the most common investment options for regular people.

1. Stocks

Stocks represent ownership in a company. When you buy the stock you own a small part of the company and can benefit from its profits if it does well.

2. Bonds

Bonds are working like loans you give to companies or governments. They pay interest over time. It’s a way to earn regular income.

3. Mutual Funds

Mutual funds are like investment pools. Many people put their money together to buy a mix of stocks, bonds, or other assets. A professional manages the fund for you.

4. Exchange-traded funds (ETFs)

ETFs are similar to mutual funds but are traded on stock exchanges. They offer a simple way to invest in a wide range of assets.

5. Real Estate

Real Estate (Including REITs): Real estate involves buying property like houses or apartments. You can earn money by renting or selling these properties. Additionally, you can invest in Real Estate Investment Trusts (REITs), which are like investment pools.

6. Commodity

Commodities are raw materials like gold, oil, or crops. People invest in them hoping their prices will go up, often as a hedge against inflation.

Step 5: Open an investment account

We are well-educated and ready to take action. To buy something we need to open a brokerage account. Consider benefiting from the special account type provided by your country of residence.

US: 401(k): 401(k) is an employer-sponsored retirement account where you can contribute a portion of your pre-tax income. Your contributions grow tax-deferred until retirement, and some employers offer matching contributions.

EU: Individual Savings Accounts (ISAs): ISAs offer tax-free savings options in some EU countries, allowing you to save and invest without paying taxes on your returns.

Registered Retirement Savings Plan (RRSP): An RRSP is a tax-advantaged retirement account where you can contribute a portion of your income each year. Contributions are tax-deductible, and investments grow tax-free until withdrawal in retirement.

In case you don’t have those options choose the broker you like. I started my journey with Interactive Brokers. From here you are ready to invest in whatever asset you like, just be consistent with your strategy and deposit and you should be good over the long term.

Conclusion

Congratulations on finishing this beginner’s guide to investing! You now have a solid understanding of how to start investing and achieve your financial goals. These foundational steps set the stage for your investment strategy. It is never too late to begin but the earlier you start the more advantageous it is for long-term financial growth. Now, it’s time to take action. Open your investment account and make that initial investment. Maintain consistency and discipline.As you move forward, continue to expand your financial knowledge and learn more about investing in stocks.