How to Start Investing: A Guide to Investing for Beginners

Want to start investing but afraid to make a mistake? Relax. Investing doesn't have to be complex or scary. In this guide to investing for beginners, we explore how to start investing, define basic investing concepts in language you can understand, and explain why you should start investing now.

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“How do I start investing?”

For beginners, it can be an intimidating process to tackle.

Risking our hard-earned money for a chance to earn more scares us. The buzzwords and jargon used by investment gurus overwhelm us. And, don’t even get us going on investment strategies. It’s all enough to make us believe that investing is far more difficult than it actually is.

Thankfully, learning how to start investing doesn’t have to be complicated. While there are many different types of investment options to consider, the simplest solutions are often the best.

You don’t have to be a finance guru or a millionaire to start investing, either. It’s possible to start building your own investment portfolio with as little as $500.

Yep, you read that right – you can start investing with only $500.

These days, investing is for everyone.

In this guide to investing for beginners, we’ll explain why investing is important to your long-term financial health. We’ll cover a few different types of investment strategies, explain why these strategies matter, and explore some different investing options you should consider.

Most of all, by simplifying this topic into easy to understand concepts and actionable steps, we hope to shatter the myth that investing is too complex to understand. We’ll go beyond the jargon and show you that it’s not as complicated as you might think.

We’ve got a lot to cover, so let’s get started! (Psst…If you’d like to skip ahead, just click on a link in the table of contents below.)

Investing for Beginners: Our Top Picks

M1 Finance [Editor’s Choice] – M1 Finance makes investing easy, plus they offer free trading with no commissions. You can choose your own stocks, funds, or over 80 expertly picked porfolios. They also offer budgeting and money management software. Get started here | Read the review

Betterment – Betterment is like an “easy button” for investors. That’s why we’ve made it our Editor’s Choice for investment programs! Just complete a short survey, and Betterment does all the heavy lifting for you. They’ll help you choose a portfolio of investments that meets your needs, risk tolerance, and time horizon. Then, they’ll automatically make adjustments as needed. With Betterment, you can practically put your investments on autopilot. Get started here | Read the review

Fundrise – Start investing in real estate with as little as $500 through Fundrise. If you’ve always wanted to invest in real estate but balked at gathering a huge down payment, Fundrise can help. Through crowd-funded real estate investments, you’ll spread your money across multiple properties, automatically diversifying your investment. To top it off, you won’t even have to deal with tenants or repairs. Get started here | Read the review

Investing Money: Why It’s Important

Want to start investing but afraid to make a mistake? Relax. Investing doesn't have to be complex or scary. In this guide to investing for beginners, we explore how to start investing, define basic investing concepts in language you can understand, and explain why you should start investing now.

What are the two biggest “secrets” millionaires use to build wealth?

First, they create multiple streams of income. Instead of relying on a single paycheck, they earn money from multiple sources.

Second, they find ways to earn more by using the money they already have. In short, they put their money to work for them.

Investing helps them accomplish both.

The truth is you don’t need a million bucks to start investing. You don’t even need to do it on a large scale. But, if you hope to build real wealth and retire someday, it’s important that you learn how to start investing right away.

Understanding Compound Interest

As a beginner, you’ll probably want to invest in opportunities that provide long-term residual income. Since you only have so many hours in the day, the more passive the income, the better.

It might sound obvious, but the earlier you start investing, the better off you’ll be. What might not be quite as obvious, however, is the enormous impact starting early can have on your long-term growth potential. This is due to the “magic” of compound interest.

You’ve probably heard the term “compound interest” before, but what does it really mean?

  • Compound interest – This is interest that is paid on both your “principal” investment (the original amount you’ve invested) and the amount of interest it has generated. Over time, the cumulative effect of this compounding can have an enormous effect.

Here’s an example.

Example #1 – Let’s say you want to save as much money as you can in a single month. Starting with just $0.01, you plan to double the amount you save each day. On Day 7, you’ll need to save $0.64, leaving you with a grand total of $1.27 saved. That’s not much, right?

However, by Day 14, you’ll need to save $81.92, leaving you with a running total of $163.83. Now, you’re getting somewhere!

Would you believe that by Day 21 you’ll need to save $10,485.76 in a single day?!? It’s true. By the time Day 30 rolls around, you’ll need to save $5,368,709.12 in one day just to keep up.

That’s the magic of compound interest!

Obviously, this is an extreme example, but it illustrates the effect that compounding interest has over time. The longer you can stretch the timeline, the larger effect compounding has. For instance, if you bump our example out to Day 31, you’d need to save over $10,700,000 on just that day alone!!!

Example #2 – Starting at age 20, let’s say you invest $100 a month and earn a 7% interest rate. At age 60, you will have invested a total of $48,000 out-of-pocket…but those investments will now be worth over $264,000. Keep going until you’re 65 and you’ll have invested $54,000 of your own money but your investments will be worth about $385,000.

So, over the first 40 years you made a total of $216,000 on your investments. But, if you stretch it out just 5 years further, you make an additional $115,000 over only 5 years.

So, what’s this all mean for you?

Since the compounding effect increases exponentially over time, it’s important to start investing as soon as you can, for as long as you can. Using Example #2, had you waited to do the same thing until you were 30, by age 60 you’d only have a total of $122,700 – less than half as much as the $264,000 you’d have had if you started at age 20.

The moral of the story – start investing now!

Strategies to Protect Your Investments and Minimize Loss

Before we move on, it’s important to note that all investments include some type of risk. There is almost always the potential to lose some (or all) of your money, so it’s usually a good idea to invest in a way that minimizes these risks.

Generally speaking, markets are more volatile over shorter periods of time than they are over years and decades. The more volatile a market, the greater the risk.

Thus, a “buy and hold” strategy is often something beginners should consider.

  • “Buy and hold” strategy – Employing a buy and hold strategy means holding onto your investments for a long period of time. (In my opinion, if you’re not planning to hold the investment for at least 5 to 10 years, it’s probably not a good fit.) This strategy helps you ride out any short-term fluctuations in the market and (hopefully) avoid selling at a loss. While it is by no means a guarantee, the idea is that your investments will steadily increase in value over time – even if they are losing money in the short-term.

It’s also important to note that the type of investments you make should also match your tolerance for risk. If you’re somebody who would lose sleep over losing a few bucks, it’s probably best to avoid the most volatile investments.

Now, risk isn’t necessarily a bad thing. Although risk carries the potential for larger losses, it also carries the potential for greater profits. That’s why it’s also important to consider your “time horizon.”

  • Time horizon – This represents the amount of time you have to build your investments before you need to start using them. Essentially, it is the amount of time you have to invest.

Your time horizon is especially important when it comes to retirement planning. Generally speaking, a longer time horizon allows you to take on greater risk because you’ll have more time to recover from any potential losses. Shorter time horizons often call for less volatile investments.

Diversification and Asset Allocation

You’ve heard the phrase, “Don’t put all your eggs in one basket,” right? The same goes for investing.

Putting all of your money into a single company, stock, or other investment increases your risk. Because your risk is higher, your potential for loss is also higher. If that company was to fold, you’d lose everything you’ve invested in it, right? That’s why it is important to diversify.

  • Diversification – This is a fancy term for not putting all your eggs in one basket. By spreading your money across different investments, you decrease your risk of loss due to any investment going belly up. Make sense?

When we think about diversification, the first thing that comes to mind is usually securities. A “security” is basically a fancy term for something you have ownership in (like stock in a company) or a debt you are owed (like with a government bond).

To achieve diversification, you don’t just want to invest in separate securities; you also want to invest across different types of securities. You may also want to invest across different sectors of the market.

For instance, investing only in energy stocks leaves you susceptible to disruptions in the energy sector. In an effort to diversify, you may also want to consider investing in technology companies, companies who produce consumer goods, and more.

Ideally, you’ll likely want to have a diversified mix of investments that meet your goals and fall in line with both your risk tolerance and time horizon. The process of determining this mix is called “asset allocation.”

Since you’re just learning how to start investing, keep in mind that diversification doesn’t end with securities. Too often, we only think about stocks and bonds as investing. However, there are lots of other investments you can make to further diversify your investments and (hopefully) decrease your risk.

Personally, we invest in our individual 401(k)s, physical real estate, crowd-funded real estate, and our own business. For us, securities are only one part of the equation.

Types of Investments to Consider

Want to start investing but afraid to make a mistake? Relax. Investing doesn't have to be complex or scary. In this guide to investing for beginners, we explore how to start investing, define basic investing concepts in language you can understand, and explain why you should start investing now.

Whew! Did you get all that? 😀

Now that we covered some of the basics of investing, let’s take a look at some types of investments you might want to consider!

#1) Employer-Sponsored Retirement Accounts

When it comes to investing for beginners, this is where you should start. Employer-sponsored retirement plans (like a 401(k), SIMPLE IRA, SEP IRA, etc.) are the perfect place to begin investing your money.

These types of accounts are usually easy to set up, and – typically – you can have money deducted directly from your paycheck. In most cases, your contributions include tax benefits as well. Any money you contribute pre-tax reduces your taxable income for the year. (You’ll pay taxes on it when you withdraw the money.) After-tax money contributed to a Roth-style account means that your money grows tax-free.

Best of all, many of these plans allow your employer to contribute free money toward your retirement! Some plans allow employers to match your contributions up to a percentage of your income. Other plans allow for profit-sharing, and some allow for both. With that said, you’ll likely be required to leave all of your personal and matching contributions in a retirement account until a certain age (usually 59 1/2) or the money that is withdrawn is subject to taxes and heavy penalties.

We like to suggest saving somewhere between 15-20% of your income for retirement. If you have an employer-sponsored retirement plan with a company match, consider investing at least enough money to meet the match. So, if your match is 4%, invest at least 4% of your income into the account. Once the employer match is included, you’ll effectively be saving 8%.

Free 401(k) Analysis – Is your employer-sponsored 401(k) healthy? Get a free 401(k) check-up here.

#2) Individual Retirement Accounts (IRAs)

Here’s the deal: Even if you’re investing in your employer-sponsored retirement account, it may not be enough. Not only that, but many 401(k) plans charge a ridiculous amount in fees. Plus, I always think it’s a good idea to spread your money around (remember diversification?), so opening an IRA account can help you on all fronts.

An Individual Retirement Account (IRA) is a retirement account you open for yourself. Don’t worry, though! They are super simple to set up, and they make a great supplement to your existing employer-sponsored retirement plan.

There are two types of IRAs you need to know about – Traditional IRAs and Roth IRAs. With a Traditional IRA, your contributions are tax-deductible on both your federal and state income taxes. Thus, you’ll pay less income tax up-front but you’ll end up paying taxes when you withdraw the money. The idea behind it is that your tax rate will (hopefully) be lower during retirement because you’ll be earning less. (Please note that, if you or a spouse are also covered by an employer-sponsored retirement plan, your eligible IRA tax deductions may be limited based on your income.)

Roth IRAs are funded with after-tax money. Therefore, you’ll pay income taxes on everything immediately, but your money grows tax-free. You can also withdraw the principal at any time; growth on your money, however, is subject to taxes and penalties if withdrawn before age 59 1/2. Roth IRAs are also subject to income limits, so high earners may not be eligible to open one.

Additionally, both types of IRA accounts place limits on the amount you can contribute each year. The IRA contribution limit for 2018 is $5,500 in combined contributions toward Traditional and Roth IRAs. If you are age 50 or older, you’re allowed to make a “catch up” contribution of $1,000 more for a total of $6,500.

Where to Open an IRA – Our Picks

Betterment – Betterment is a great option for opening an IRA. They charge fees as low as 0.25% of your account balance, and there is no minimum balance to open. After completing a short survey, Betterment will provide advice on how much to invest, where to invest it, and more. You can set up automatic deposits, and they’ll even help you make necessary adjustments by automatically rebalancing your portfolio when needed. Learn more here.

Vanguard – If you’re looking for the lowest fees possible, Vanguard offers some of the lowest cost investment products on the market. Keep in mind, while you’ll likely save money on fees, this site is completely DIY. Vanguard does not automate the process for you, and – while they do provide some tools – you’ll need to handle all portfolio rebalancing on your own. If you go this route, other free tools like Personal Capital can also help.

#3) Real Estate Investment Trusts (REITs)

Owning real estate is a great way to diversify your investment portfolio. With physical properties, however, the cost of a down payment, maintenance, and dealing with tenants can be a major barrier to entry.

Real estate investment trusts (REITs) allow you to start investing in real estate while avoiding the cost and hassle of being a landlord.

REITs are companies that own and manage a portfolio of income-producing real estate properties. These properties can be either commercial or residential in nature (or both). They may also provide financing for them.

There are several different types of REITs. Some can be traded publicly like stocks and are typically listed on stock exchanges (Equity REITs). Others are privately traded and do not need to register with the Securities and Exchange Commission (SEC). Those that provide financing are known as “Mortgage REITs.”

Personally, I like investing in REIT-like options. Rather than investing in a REIT company who reinvests my money (like holding a stock), these REIT-like companies allow me to have direct ownership over specific properties. So, I actually own a part of the physical property rather than a share of the REIT company. It is essentially crowd-funded real estate investing.

Where to Invest in Real Estate – Our Picks

Fundrise – Fundrise is a REIT-like company allowing you to invest in crowd-funded real estate for a minimum investment of just $500. You read that right: You only need $500 to get started. Although we do own our own rental properties, we have also invested money through Fundrise to gain more exposure to the real estate market. Learn more >>

Groundfloor – Groundfloor is slightly different, allowing you to invest in real estate debt investments with a minimum investment of just $10. You then earn a return based on the interest rates charged to borrowers. Again, you do not need to be an accredited investor to get started. Learn more >>

PeerStreet – With PeerStreet, you can also invest in real estate-backed loans. However, you do need to be an accredited investor to participate. Learn more >>

#4) Peer-to-Peer Lending (P2P Lending)

If you’ve ever wished you could own a bank, peer-to-peer lending (P2P) may be for you.

With P2P lending, you help provide personal loans to borrowers that need them. These are crowd-funded loans, and – similar to a bank – you’ll make money on the interest rate charged to the borrower. Interest rates are typically determined based on the borrower’s creditworthiness. Ideally, you’ll spread your investments across several different loans in order to minimize your risk and increase profits.

Lending Club is one of the most popular P2P lending sites. They offer competitive returns and require only $1,000 initial deposit to get started. Additionally, you can choose either a regular investment account or an IRA as the vehicle to save your money.

#5) Bank Products

Bank products aren’t what they used to be. These days, you have the opportunity to earn significantly higher returns through other types of investments.

With that said, investing in bank products tends to carry a lot less risk – especially if your investments are FDIC insured. It also provides much greater access to your money than you’ll find with most other investments.

If you’re going to keep a bunch of money in the bank, at least keep it where you can earn a decent interest rate. Whether you’re considering a high yield savings account, CDs, or money market accounts, online banks tend to offer far better rates than traditional brick and mortar banks.

Find this month’s top bank rates here.

#6) Physical Real Estate

We’ve already covered REITs, but owning your own real estate properties can also be a good investment. In fact, owning rental properties is a great option for making long-term money three different ways.

First, you can “make” money when you purchase the property by finding a good deal. Then, you’ll make residual income from rent payments while you own it. When you get ready to sell, you hope the property has appreciated ub value so you can make money then, too.

Of course, owning rental properties also costs money. You’ll typically need to provide about 20% of the purchase price as a down payment. You’ll also need to set aside money for maintenance, repairs, and taxes. Once you have the property, however, these are all things you can build into your rental prices.

Personally, we own two single-family units. Outside of our employer-sponsored retirement accounts, these were our first major investments. We love owning rentals and consider our properties two of the best financial decisions we’ve ever made.

#7) Educational Savings Accounts and 529 Plans

This may not be an investment for you, per se – although it could be. Regardless, it may save your children from thousands of dollars in crushing student loan debt.

With college costs nearing astronomic levels, opening a Coverdell Educational Savings Account (ESA) or a 529 Plan is definitely something to consider. These plans allow parents (and others) to contribute money that can be used later for qualified educational expenses. Contributors to the accounts often gain tax advantages for doing it.

Since we get a hefty tax credit from our state, personally, we use a 529 plan to save for college. However, the rules for 529 Plans vary widely and are administered by each individual state. Thus, you’ll need to research the options in your own state to determine whether a 529 Plan or ESA is the right vehicle for you.

#8) Own a Business

Starting your own business is another excellent way to start investing. Becoming a business owner can provide huge opportunities for returns – both in a financial sense and in your quality of life.

Unlike many of the other options we’ve listed, starting a business can also come at an enormous cost. Opening a business often takes tons of your time, energy, and capital – so it is likely the least passive idea we’ve listed here. However, it also provides one of the best opportunities to grow your wealth and work for yourself.

These days, businesses look a lot different than they did in the past. Yes, you can still own and operate a business with a storefront, but – depending on the type of business you open – it may not be necessary. The rise of the web and the gig economy make starting a business easier than ever.

One of the best ways to start your own business is to try it out as a side hustle first. This allows you to build your clientele and your income streams before you branch out from your 9 to 5 job. You may even be able to start your own business from home like we did. Here are some legitimate work-from-home jobs you might want to consider starting in your free time.

#9) Individual Securities

We’ve saved investing in individual securities for last because, quite frankly, it’s beyond the skill set of most beginning investors. While trading stocks may be the most recognizable form of investing, it can be far more complicated and risky than many of the other suggestions we’ve provided.

When it comes to investing in individual securities, your goal is to outperform the market. That is extremely hard to do.

In fact, Warren Buffet actually says that the average investor would be much better off investing in simple index funds (funds which attempt to mimic the market) than with any other investment. And this comes from, arguably, the best investor in the history of the world. You do the math.

While investing in individual stocks and bonds is an option, if you’re learning how to start investing, you may want to look elsewhere.

If you just want to play around with a few bucks, at least do it at a site where trades are cheap. Again, M1 Finance allows you to build your own portfolio by choosing stocks, funds, or from dozens of expert portfolios!

How to Start Investing: Final Thoughts

Want to start investing but afraid to make a mistake? Relax. Investing doesn't have to be complex or scary. In this guide to investing for beginners, we explore how to start investing, define basic investing concepts in language you can understand, and explain why you should start investing now.

Investing for beginners doesn’t have to be difficult. It doesn’t have to be clouded in mystery, either.

There’s no secret sauce that only the wealthy maintain. These days, investing is for everyone.

When you start investing early, you give yourself more opportunity to take advantage of compounding interest. You may also be able to handle more risk, which could mean higher returns because you have more time to recover from any losses.

As you’ve seen, there are a plethora of investment types that cater to almost any interest. In fact, we didn’t even come close to touching on them all!

Want to start investing but afraid to make a mistake? Relax. Investing doesn't have to be complex or scary. In this guide to investing for beginners, we explore how to start investing, define basic investing concepts in language you can understand, and explain why you should start investing now.

Don’t let the number of investments overwhelm you. Remember to diversify, but – most importantly – choose the types of investments you like and get started.

Although we couldn’t possibly cover everything there is to know, we hope this guide on how to start investing has been helpful. Good luck and happy investing!

Have you started investing? What were your first investments? Let us know in the comments below! 

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One Comment

  1. A very thoughtful and thorough article! I like the idea of broadening the idea of investment vehicles. May I also suggest that since you included starting your own business and 529s as possible investments – investment in your own education through continuing education courses or other tools?

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