Updated: Apr 14
I remember when I was younger, Ashley and I didn't want to get into investing because we didn't understand the "market" and it was complicated. We lost out on $1000's in compound interest throughout our early twenties because we were afraid. Investing can be intimidating for beginners because there are so many options out there. But, the good news is that investing doesn't need to require any special skills or even a large amount of time commitment. With this investing guide, you'll have all the information necessary for taking your first step into the world of investing - no matter how much money you want to invest or how much time you're willing to spend on it!
This article will cover topics such as:
1. What is investing?
Have you ever wondered how the rich get to be so rich? It’s no secret that investing is one of the keys to building long-term wealth. But investing can seem complicated, confusing, and risky when you don’t know what it really is. This guide will take you through everything you need to know about investing in stocks, bonds, or other assets. It will explain investing basics like why it’s important for your financial future and how investing works. You'll also learn how much money you need to start investing with a brokerage account and where to find an investment style that fits your needs. Finally, this guide will show you how often should invest so that your investments grow over time instead of sitting around doing nothing.
Investing is investing your money or other assets in companies, securities, or other ventures in the hope of making profits. Investing also allows you to limit the amount of risk associated with investing by investing it in lower-risk instruments like bonds.
2. What is the difference between a savings account and investing?
Savings accounts and investing are two different things. Savings accounts usually offer a lower interest rate than investing, but you don't have to worry about the risk that investing entails. Investing can be profitable if done correctly; however, there is always the possibility of loss with investing. There's also an emotional difference between saving money for something versus investing in something. Saving money means putting money away so as not to spend it on anything else until you need it, whereas investing means buying assets such as stocks or bonds in order to make more money from them later on down the line when they appreciate in value or provide dividends. It takes discipline and patience with investing because you're waiting for your investment to grow and give back what you put in, as opposed to a savings account where you know exactly how much money is in it and when you can access it. However, investing offers the potential for greater returns than what's available with typical savings accounts.
One of the major factors affecting savings is inflation. Inflation is a word that gets thrown around often, but how many people know what it really means? Inflation refers to the process of prices rising over time. This happens because there are more dollars in circulation than items available for purchase. As prices rise, the purchasing power of each dollar you have dereases. It's not just about money either - inflation affects everything from stocks and bonds to commodities like gold and oil. And unfortunately, investing isn't always enough to keep up with inflation rates - sometimes investing can even be worse off due to investing-related fees! Fortunately, investing doesn't need to be complicated or expensive if done correctly.
The average inflation in the United States is around 3-4% annually. This is an average so it can be higher or lower in any given year. Inflation can slowly "eat" away at the purchasing power of your money. Imagine back in the 1920's where the price of goods were drastically different:
Bacon 1 lb. 52¢ 1920
Bread 1 lb. 12¢ 1920
Cheese I lb. 38¢ 1926
Eggs 1 doz. 55¢ 1925
Potatoes 10 lbs. 36¢ 1925
If you're interested check out more goods HERE
Prices are a bit higher now days, right? That is because the cost of goods, services, cars, etc. have increased over time due to inflation. Imagine having a job paying $1,000 a month in 1920, you'd be considered extremely well off. The average income in the United States in the 1920's hovered around $3,269 a year!
Imagine saving $10,000 in 1920, the purchasing power of that money would only be $7,000 by 1930 and only $4,000 by 1940 using 3% as inflation. You would still have $10,000 in your bank account but due to inflation you could only afford "$4,000" worth of goods.
3. How investing can benefit you
Investing is a great way to grow your money and investing can help you reach all of your financial goals. Investing allows you to buy stocks, bonds, or other assets with the hope that they will increase in value over time so that you can sell them for more than what you paid. But how does investing benefit someone? There are many benefits to investing including: it helps build wealth, provides a sense of control and security, offers diversification, returns more than investments like cash savings accounts or certificates of deposit (CDs), and helps provide income through dividends and interest payments on certain types of securities such as CDs or U.S Treasury Bonds. It's also possible to receive an inheritance through investing if the person who left it behind was invested in their estate. When you invest, you are investing in yourself and your future. Investing can help provide a more comfortable life for you and your loved ones both now and in the future. It's important to start investing as soon as possible so that you can take advantage of all the benefits it has to offer.
One major advantage to investing is the chance of a higher rate of return. This factor helps you earn more from the effect of compound interest.
Compound interest is when your money earns interest then you earn interest off those values combined. Below is an example:
Let's say you invest $100 at 10% return annually.
The first year you would earn $10 in interest bringing your total to $110
Year two you would earn $11 in interest now since you have $110 invested. Your new total is $121 invested.
Year three you would earn $12.10 in interest. This would bring your total to $133.10 invested.
Imagine if you had kept your money in a savings account where the return was around 1%. Instead of earning $33.10 in three years you would have only earned $3.03!
Take a look at the chart below to see the effects of compound interest.
This example shows a starting investment of $10,000 and then adding $500 a month.
You can see the 1% return only ended with $265,505 after 35 years. Compare that to 8% return and you would have $1,309,867 after 35 years. You are potentially leaving $1,044,362 on the table by not investing!!
It's important to consider how much you can invest and how early. Investing as much as possible as early as possible will help you build wealth faster in your later years when using compound interest.
You can see from years 5 to 10 you only compound $63,000~ at 8% in five years. Later after years of investing and compound interest you build more wealth in the same amount of years. Take years 30 to 35 for example, your wealth increases around $900,000 in those five years. That's a huge difference!
4. The different types of investments to consider
Investing in stocks, bonds, or other assets can seem intimidating to beginners. But investing is really just a way of making money work for you over time by investing your capital. The key is not to panic and make rash decisions when the market goes down because investing requires patience. Here are four different types of investments you should consider investing in: Stocks, Bonds, Mutual Funds/ETFs, and cryptocurrencies.
...are one type of equity investment that represent ownership shares in an underlying company that can be traded on public exchanges like the NYSE or NASDAQ at any time during trading hours. They are riskier than bonds but offer higher potential returns so they’re appropriate for investors who have a long-term horizon (5+ years).
...are another type of debt investment that represent a loan to an underlying company or government. They are generally less risky than investing in stocks but offer lower potential returns so they’re appropriate for investors who have shorter time horizons (less than five years).
Mutual funds and ETFs
...are mutual investing pools where many different clients pool their money together in order to invest in various assets like bonds, stocks, real estate, etc. These investments can be very diversified which reduces risk while also offering slightly higher potential returns on average compared with investing directly into the asset class itself.
...are digital currencies that do not require any central authority or bank to process transactions between individuals instead using cryptography techniques used by computers. This allows cryptocurrencies to be decentralized and immune to censorship or manipulation. Cryptocurrencies are extremely volatile and risky so they’re only appropriate for investors who have a high-risk tolerance and long-term investing horizon.
To summarize, there are four different types of investments you should consider when starting out: stocks, bonds, mutual funds/ETFs, and cryptocurrencies. Each type of investment has its own unique risks and rewards, so it’s important to do your own research before investing in any one particular asset class. And remember, investing requires patience so don’t panic when the market goes down!
5. Budgeting your income and expenses - how much should you save, spend, invest, etc.?
One of the most important steps in financial planning is creating a budget. A budget allows you to track your income and expenses, which makes it easier to see where you can save money and how much you can afford to invest. It's also important to have a budget in place before investing, because investing can be risky if you're not careful you could overextend yourself. Having a budget will help you stay disciplined with your investing and avoid any costly mistakes.
Creating a budget can be a daunting task, but it's important to remember that it's not as hard as it seems. When creating a budget, I recommend using your NET INCOME which is how much you make after taxes, healthcare, and more. Simply, this is the amount deposited in your account each pay period. Essentially, the amount available for you to use. Here are the steps you need to take to create a budget that works for you:
1. Figure out your income and expenses - this includes both your fixed and variable expenses. Your fixed expenses are those that don't change month to month, like your rent or mortgage payment, while your variable expenses vary, like your grocery bill. Making a list of all of your recurring monthly bills is an easy first step and will show you where a majority of your money is going. Next, I recommend gathering all of your bank statements and seeing where you are spending your money. Once, you start paying attention you can easily figure out how much to allocate for variable expense like gas and groceries. Ensure you include categories like eating out, "fun money", or other hobbies. It's important to design a budget that doesn't make you miserable. You wouldn't make it far if you said you'd live off only ramen noodles and you're never going to leave your house.
2. Track where all of your money is going - this can be done with a simple spreadsheet or even a pen and paper. Write down how much you're spending on groceries, gas, entertainment, etc. Once you have a good idea of where your money is going, you can start to see how much money is left over that you can use to save, invest, or allocate to your emergency fund.
3. Once you have an accurate picture you can see if you are positive or negative. Maybe, you need to lower your "fun money" or cancel a subscription service you don't use anymore to free up cash flow. Typically, I shoot for a net zero a month on my budget. This means every single dollar is allocated to something like savings, vacation fund, investing, etc.
6. Pay off debt
The investing world can be a confusing place for beginners. And the more confusing things get, the less likely you are to take any action at all. That's why it's important to start investing with a clear head, free of worry about debts or other financial stressors that could derail your plans. Paying off debt is one of the most important steps on the road to investing success because it helps make sure you don't fall victim to these mistakes:
Putting money in high-risk investments when you're barely scraping by financially. You need some breathing room before investing in anything risky or speculative - otherwise, you'll risk losing everything if your investment tanks and leaves you broke at the same time.
Paying too much in investment fees. This can be a huge drain on your profits, so it's important to find a brokerage that doesn't charge exorbitant fees and also offers a wide range of low-cost investing options.
Investing without having any plan or strategy in place. Even if you're starting with just a few hundred dollars, it's important to have some idea of what you're trying to achieve with your investments. That way, you won't be making emotional decisions based on market fluctuations (which is how most people lose money investing).
Not investing regularly. One of the best ways to ensure healthy long-term growth is to invest regularly, regardless of whether the markets are up or down. This helps average out the highs and lows of investing, which helps you build up a solid nest egg over the long term.
Below are TWO debt pay off strategies you can use to help pay off debt quicker:
The Snowball Method
The snowball method is a debt pay off strategy that can be used to help you pay off your debts quicker. With this method, you will focus on paying off your smallest debt first, while still making minimum payments on all of your other debts. Once the smallest debt is paid off, you will then move on to the next smallest debt, and so on. You snowball your payment from a paid off debt and roll it into your next smallest debt, so you are now putting more toward that debt, thus paying it off quicker.
The Avalanche Method
The avalanche method is a way of paying off debt that can save you thousands of dollars in interest. Under the avalanche method, you pay down the debts with the highest interest rate first. Once they are paid off, you put any extra money to pay off your next highest-interest-rate debt, and so on. The Avalanche Method will force you to feel better about investing in yourself because investing in yourself is investing in wealth. This is similar to the snowball method except you start at the top first vice the bottom.
7. How to create an emergency fund and why it's important to have one
You should always have an emergency fund to help you in times of need. You never know when a major expense will come up and it’s good to be prepared for such events. You could use your emergency fund for unexpected medical expenses like an MRI or if you need to visit the urgent care center, property damage, tickets, or sudden vehicle issues without having to sell investments or take on credit card debt. The amount that you set aside for emergencies is really up to you, but I would recommend at least three months' worth of expenses saved away so that if something bad happens, you can live off your emergency fund until the next paycheck or until whatever disaster has passed. When investing in stocks and bonds, there’s no guarantee how much they will go up or down- investing can be risky business! And even if investing was 100% safe, what if the company goes bankrupt? Your investments SHOULD NOT be your emergency fund! It's hard having a large sum of money sitting on the sidelines as you see the stock market going up, but you need to be disciplined.
Here are THREE easy steps on how to create an emergency fund:
1. Pay off all of your debts
2. Open a savings account at a bank or credit union separate from your checking account so that it becomes a habit to save;
This is where you will put the money for emergencies and investing. Some banks even allow you to have multiple savings accounts. I have three labeled differently: Emergency Fund, Vacation Fund, and one for Taxes. The third one is used to account for taxes in my taxable investment account since brokerages don't pay your taxes like your employer does.
Where all of your income goes in, bills get paid out, groceries bought...basically everything else! You can have multiple accounts with different banks if one has better interest rates than another. It just depends on what works best for you!
3. Draw up a budget and try to save at least 10% or more of your take home pay or what you can until you meet your three-month or six-month goal.
It may be daunting to save three-six months initially so break it up into smaller goals. Try savings $1,000 first if you have nothing in your emergency fund. This is an easier and more attainable goal when first starting out. Once you've met your emergency fund goal it's safe to start investing!
8. Investing styles
The best investing style for you depends on a few factors. A great way to start investing is by investing in your own abilities, skills, talents, and knowledge. These investing types require an acquisition of knowledge, skills, and excellence that may be capitalized on as well as investing in assets.
It is very important for investing beginners to always have a plan.
When most people think about investing, they think about purchasing stocks off the stock market. On the stock market you can purchase shares of any company that is traded public like Google, Microsoft, Apple, or Johnson and Johnson. The easiest way to start investing in the stock market is to use ETFs or Exchange Traded Funds. Exchange Traded Funds are baskets of stocks that are bought and sold like a stock on an exchange. ETFs often have low investment requirements, fees, and commissions. ETFs allow you to get "instant" diversity which is good for lowering risk. One ETF, $VOO, is an ETF comprised of the SP500 (The top 500 public traded companies in the United States). You could buy one share of $VOO and get 500 tiny pieces of each of these companies. $VTI is another example which is the entire United States stock market under one ETF!
There are multiple different types of stock market investing strategies to include value investing, growth investing, income investing, and more.
Value investing is investing in stocks that are undervalued because of their low stock prices, investor sentiment, or negative feelings. This investing strategy requires the investor to analyze stocks and to buy those which they deem as being undervalued. Value investors often look for stocks that are trading below their intrinsic value because the market may be undervaluing them for various reasons. Value investing is an illiquid investing style wherein the investor needs to remain patient with the holding period because it typically takes time for value investing to show profits. For examples, Warren Buffett often looks for companies whose shares are priced below their fair price range and then invests in them when they become available at a lower price than usual.
Growth investing is investing in stocks of companies that are expected to have above-average growth rates in the future. This investing style requires the investor to analyze a company's financial statements to identify which companies are growing at an above-average rate. Growth investors often look for companies with high earnings growth, high sales growth, and high stock prices.
Income investing is investing in stocks that provide a dividend or interest payments to the investor. This investing style requires the investor to analyze a company's financial statements and identify which companies have above-average dividend rates. Income investors often look for stocks with high dividend yields because this means that the company has a high return on their investment. One example of an income investing strategy is investing in individual bonds – or debt – from either a corporation or municipality. These investments often offer fixed interest rates which are not affected by inflation.
It's important to note that there are other styles, and you can combine styles if they suit your investment goals.
My personal investing style is dividend growth investing. I'm building a portfolio around dividend paying companies to build a passive income stream I can use in retirement. If you interested in this style of investing, check out my Ultimate Guide to Dividend Growth Investing.
9. How to choose a brokerage, what should you consider?
Most new investors today don't know where to begin when choosing a broker. There are quite a few reputable brokers on the market today. Which broker is the best fit for you? What should you look for when selecting a broker? In this post we'll discuss six features that should be reviewed when considering a broker.
Most brokers on the market today don't charge fees or commissions on stock transactions. It wasn't long ago that self-serve brokerages would charge $5 per trade. Those fees can really add up. Due to the number of available brokers most have gone away from this model. Ensure you review fees on margin, options, crypto, etc. You should avoid margin (a mini loan from your brokerage) all together until you really understand the world of investing. Some brokers have lower fees or ways to "buy" into lower fees with subscriptions. Reviewing and understanding those fees can help you, should use features like margin in the future.
Look into what assets are available on the platform you're looking into. A popular option today is crypto. Not all brokers offer buying and selling crypto, so that might sway you away from a particular broker. Most brokers will offer Stocks, ETFs, and mutual funds but some have restrictions on which they offer or even restrictions to when you can trade these assets.
Ease of Use
Do they have an app or is the broker a desktop only platform? How intuitive is the interface? These are important considerations. You don't want to download an app that overwhelms you as a new investor. Remember, you will learn and grow into it, so bare bones isn't great either. Another aspect to consider is access to pre-market and after-hours trading. Some brokers don't allow access to any trading time other than when the market is open. This could mean a decent difference in stock price on both the buying and selling side under certain conditions. Having that extra option for trading enables flexibility on your end.
Connectivity with your bank
This is hard to figure out before signing up completely but can be searched easily with google if you use a large, well-known bank. It's important to be able to fund your account easily to help with consistent investments. Equally, you want to be able to get your money out quickly if you need it as well. Most brokers allow Electronic Funds Transfers (EFTs) to and from your bank. Another key factor is fund settlement time or how long your money will take to be available for use. Some brokers still have a 48hr+ settlement periods for stock sales. This means your money won't be available for withdrawal or use to for 48hrs+ after the sale. That can seem like forever if you're looking to put that money to work in the stock market quickly.
Some brokers have brick and mortar stores while others just have a customer service number. Review customer services records on google to see how other people experienced the brokers service when they needed them. Nothing is worse than having money issues with no one to call or talk to. You'll feel the pain of poor customer services if you choose a broker with a poor track record. Research a brokers customer service before you need it.
Fractional shares are the ability to purchase pieces of a share vice the whole share. Investors that are interested in stocks like Tesla (TSLA), Apple (AAPL), Google (GOOGL) or Amazon (AMZN) may not always have the money available to buy a full share. That's where fractional shares come in. You could buy a $10 piece of a share and you would own a small percentage of your chosen company. This allows investors to buy companies they want even when they can't afford full shares. Not all brokers allow the purchase of fractional shares so if that's something that interests you make sure your potential broker has this option.
Lastly, most stockbrokers are nearly identical in today's day and age. It's the subtle differences that can help you decide which one is the best fit for you. Take your time and do your research, future you will thank you. Also, stockbrokers aren't permanent either, most can transfer your entire portfolio for a small fee (around $100) to another broker. The important factor is to find one that meets your needs and to start compounding those investments. It takes time and money to build wealth with compound interest, so the earlier the better.
10. Investment Schedules
To be a successful investor, you'll need to follow investing schedules. Knowing when to buy, sell, and hold onto stocks is just as important as investing itself. Some investors choose to set investing schedules that put them on autopilot with their investing. This is because investing takes time and energy, and most people don't want to spend all of their time managing it.
An investing schedule for an automated investing system is made up of the following:
1. Calculating how much money can be invested in stocks or other types of investments
2. Buying shares based on how much money the investor chooses to invest
There is an old saying that "Time in the market beats timing the market". Most investors can't time the market, period. Attempting to time the market can substantially impact the long-term return of your portfolio. Typically, reoccurring investments on a weekly, monthly, or quarterly schedule will help you obtain better returns because of what is known as dollar cost averaging. DCA'ing is just averaging out the ups and downs of the stock market because sometimes you buy low and sometimes you buy high. For more information check out this article by Charles Schwab. Investopedia also shows that missing the top 10 trading days can cut your returns by as much as 40%.
The following can be found HERE at Personal Finance Club, a great resource for investing! It tells the tale on how it's extremely hard and almost impossible, to time the market.
In conclusion, make sure to invest often in low-cost investments that are also in line with your investment goals and risk tolerance. Do not put money into high-risk or speculative investments when paying off debt because it could lead to financial ruin if they tank during an investing drought for example. Find a brokerage that has no fees associated with investing so you can keep more of what you earn rather than having them eaten away by unnecessary charges. Create a strategy before investing so there's some idea of how much risk is involved and whether these types of investments fit within your overall plan for achieving success financially. Invest regularly without regard to market volatility trends so you have a chance of earning compound interest on your money.
I hope this helped you all start your own personal investing journey. If you have any questions, please let me know or put it in the comments below!