How To Start Investing: A Beginner’s Guide
Everything you need to know to start investing and stay ahead
|Written by Tom Yeung, CFA | CDFA|
Investment Advisor & Fund Manager, Jurnex Financial Advisors
Learning to invest can feel strangely overwhelming. There’s a lot of information out there, and it’s hard to know how to start investing.
But don’t put off investing because you aren’t sure where to begin. No matter your age, it’s never too early or late to watch your savings grow.
Since investing is so important, I always suggest people reach out to an investment pro first. Not only can a great advisor help you invest better, but they can also make sure you’re avoiding financial pitfalls. That’s important because financial mistakes today often won’t show up for decades in the future when it’s far more difficult to change course.
But to help you get started, here’s my advice about how to start investing.
What is investing?
Investing means using your money to buy investments that will generate profits over time.
These profits can be used to buy even more investments, and so on.
- Investing for dividends. Over the long-run, investments should pay its owners some type of financial return. Companies and mutual funds pay out dividends, bonds pay out coupons, and real estate pays out rents.
- Investing for profits. Great investments should also rise in value over the long run. You can sell them for profit and use the cash to fund goals or reinvest.
What about companies without dividends?
I’m often asked: are companies that don’t pay dividends still investments?
They can be! That’s because as they mature, most companies follow a couple of paths:
- Start paying dividends
- Get bought out, giving shareholders a large one-time payout
- Merge with another firm or go bankrupt and cease operations
For example, a successful biotech company might eventually pay dividends or get bought out by a larger firm.
Speculation ≠ investing
Speculation is where you’re buying and selling securities quickly to generate immediate profits. Some high-frequency traders hold assets for barely a couple of microseconds before selling them for tiny gains. Others might hold securities for a couple of months or years in anticipation that prices will rise.
You might generate great profits if you have the right skills and information. But speculation is NOT investing. That’s because investing suggests a longer-term holding of a profit-generating asset.
When clients aren’t sure if something is an investment, I give them a simple exercise. This starts with having people channel their inner Rip Van Winkle. Imagine buying an asset and then falling asleep for 20 years. If you can sleep soundly, it’s probably an investment. But if you have nightmares about NOT being able to check the asset’s value, then it’s probably speculation of some kind.
Why is investing important?
At Jurnex, we have a saying: “work for your money, but also let your money work for you”.
People might work 8+ hours a day to earn a paycheck. But with the right planning, your savings can actually earn even more than your day job! A $2 million nest egg can easily produce $100,000 of investment income per year.
And it turns out building a $2 million nest egg is actually quite achievable, thanks to the power of compound interest.
Investing harnesses the power of compound interest
If you’re reading this article, you’re probably starting to accumulate more money than you know how to invest. Seeing cash sit in your bank account might feel great at first. But you’ll quickly realize that cash is a nonproducing asset.
In other words, your money isn’t growing by itself.
Investing changes this. The magic of compound interest means every dollar you invest today will grow faster and faster with time. In fact, $1 invested in your 20’s turns into $7 (in today’s dollars) by retirement. And even if you’re older, $1 invested in your fifties still doubles in value by retirement age.
Investing will help you achieve financial goals
Goals are far easier to achieve by investing your savings. That’s because you can use investment profits to fund goals, rather than using the savings itself!
These goals might include:
- Retirement. It’s become essential to save for retirement. In 2019, the average income from social security was only $1,461 per month or $17,532 per year. Having additional savings can help fill the shortfall.
- Supporting children and family. If you plan on having kids, remember that each child will cost about $230,000 to raise. That might seem like a lot, but that’s because you’ll be paying for a larger house as well as food, tuition, and childcare. Private schools and colleges can add an additional $100,000+ to each kid.
- Future spending. You can save for more than just retirement. Goals, such as a house, travel, or charitable giving are also great goals to invest towards.
When to start investing?
I’ll tell you what I tell everyone I meet: you should start investing as soon as possible!
But before you open an investment account, there are two things you should do.
- Pay off high-interest debt. Identify any debts above 8% APR and pay them down fast. This will make it easier to save more of your income later on.
- Have 3-6 months of emergency savings. Before you invest, you should also have at least 3 to 6 months of cash set aside for emergencies.
But once you have those two covered, it’s time to start saving and investing!
What should I invest money in?
You want to invest in things that will help your savings grow in the long-run.
But investing involves making some very personal choices. That’s because want to invest in a way that’s aligned with your risk tolerance, time-frame, and goals.
- Stocks. Stocks are one of the best ways to generate income over the long run. Not only have stocks generated 10% returns per year over the past century, but they also have the benefits of diversification. It’s easy to own shares in dozens of different companies.
Low-Cost ETFs. For those who are less confident about stock investing but still want to invest on their own, low-cost ETFs can be a great option. ETFs don’t eliminate market risk, but they are still a great option for long-term investors.
- Real Estate. Depending on your time-frame, buying property can also be a great source of wealth generation. And if you’re a first-time homebuyer, make sure to watch our tutorial to check if you’re eligible for special first or second-time homebuyer deals.
Where to find more help?
If this seems like a lot of information, don’t worry. The great news is that you don’t have to do this alone. You can find a qualified investment pro who understands the importance of protecting and growing your nest egg. These people can help you choose the right investments to put your money in.
The best investment pros can also help you learn how to start investing. In fact, that’s what we do here at Jurnex every day for people just like you.
The Five Steps on How To Start Investing
While I do recommend you reach out to an advisor before investing, here are my five steps that can help you get started with investing.
1. Save 15% of your income
When it comes to responsible investing, there is no substitute for hard work. And that involves saving at least 15% of your income.
You can start by creating a savings plan. And since budgets are so hard to follow, my favorite plan is actually the 50-15-5 rule. This is where you take your after-tax income and divide it as follows:
- 50% goes to essentials, such as housing, food and transportation
- 15% goes to investment and savings
- 5% to an emergency fund for unexpected expenses like car repair and medical needs
The remaining amount can be used for absolutely anything else!
2. Invest in your 401(k)
Most employers offer 401(k) investment plans. These are tax-advantaged investment accounts that defer taxes until you retire. That means your investments can grow tax-free! The only time you have to pay taxes on your 401(k) is when you finally withdraw it as ordinary income.
In addition, many employers also offer 401(k) matching. That means for every dollar you put into your 401(k), your employer will contribute an equal amount up to a certain percentage of your salary.
401(k) matching means getting free money from your employer. And I’ve never met anyone to turn down free money.
3. Contribute to your IRA
Once you have maxed out your 401(k) matching, you should consider contributing to an IRA as well. This is especially true if you qualify for a Roth IRA. That’s because once you contribute to a Roth IRA, you never have to pay taxes on that money again.
IRAs are one of the most powerful investing tools out there. That’s because they’re flexible AND tax-advantaged. You can use your IRA to buy things like real estate, private businesses, and even gold bullion. And with any of these investments, you can defer capital gains taxes.
4. Open an investment account with a low-cost brokerage
To save for retirement and other goals, I generally recommend people open an investment account with a low-cost brokerage. These are online accounts that you can use to buy stocks, bonds, and ETF’s for little to no cost.
The largest four in the US include
- Charles Schwab
- TD Ameritrade
And if you’re unsure which of these to open, check out our article where we review the top four brokerages and determine which is the best.
All four of these online brokerages have very low trading costs, thanks to their scale. Stock trades cost just $2-7, and they also offer hundreds of zero commission ETF’s. These are great for long-term investors who want to invest with the lowest fees possible.
5. Choose your investments
When it comes to picking investments, there’s nothing more important than making sure they’re right for you. A young, single college graduate would invest very differently from a retired couple.
My article on creating an investment portfolio can help you get started. But because investing for retirement is such an important long-term decision, I recommend you touch base with an investment professional before finalizing your plan. This can help you both make sure you’re on the right track and that you’re avoiding underperforming investments. And you should seek out a pro who truly cares for you.
Hiring an investment pro is much like finding a great personal trainer, lawyer, or tax accountant. They can get you started on the right track, and then it’s up to you whether you want to continue or do things yourself. Either way, the key is to start investing on the right foot.
Want more help investing?
If this seems like a lot of information, don’t worry.
Fortunately, there’s another option for savers out there. Rather than worry about investing yourself, you can invest passively, or invest with the help of a financial advisor. Life’s too short to do things we don’t enjoy. And if finance or poker is on that list, then there’s no harm in passing the torch to someone else to carry for you. In fact, all it takes is a phone call to get in touch with a pro investment advisor today.
Where to find more resources
If you’re looking for even more investment tips, you’ve come to the right place.
That’s because I’ve helped invest client money for over a decade in the same old-fashioned way: seek out great companies in great industries that can be purchased at a discount to their fair value. Sounds too simple to be true? Give me a call today and I’ll show you that it’s still possible after all these years.
We are an independent registered investment advisor and asset manager. We have the securities backing of Charles Schwab, yet we retain our operational independence from any third party. This means you can have the confidence your money is safe with one of America’s best brokerages and still receive knowledge and advice from an independent firm focused on YOU.
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