How to Start Investing: A Guide for Beginners

True or false? Forgoing your daily Starbucks coffee can make you a millionaire.

The answer? It’s totally true. In fact, it’s even better than that…

Indeed, investing $5 a day (at a 10% annual return) would lead to $2.3 million over 50 years.

The trick? To start as early as you possibly can and save as long as you can.

Sure, that all sounds great. But what if you don’t know the first thing about investing? The whole world of investing can feel daunting, risky, and off-limits.

We wanted to help demystify the process. Anyone can invest, no matter how little experience or start-up capital they have.

Interested in learning more? Keep reading for some top tips explaining how to start investing.

1. Start Early (Leverage Compounding)

The first tip is one we’ve addressed in the intro.

Essentially, the sooner you start investing, the better. This is showcased in the example we used. Just $5 a day for 50 years can make you a multi-millionaire!

Of course, 50 years is a long time. That’s exactly why starting early is so advantageous. Anyone can stand to gain from investing. But starting later requires more cash investment to reap the same end reward.

Why? It’s all to do with compounding.

This is a buzzword of investing. Compounding describes the process of investment increasing in value exponentially over time. An account that pays 10% interest (which is fairly high, but by no means unheard of) snowballs your initial investment over time. Hence how you can turn $5 into 2 million by retirement!

2. Understand Your Options

Obviously, you need to know what exactly you can invest in too.

There are masses of possibilities and the terms can get confusing! Here’s a brief outline of a few of your main options:

Stocks

You’ve probably already heard of stocks and shares.

Buying stocks means you literally own a proportion of a company. The company then uses the money you pay to expand, or pay down debt.

Bonds

Investing in bonds is the same as loaning an entity (such as a company) money.

You get paid back over time, with interest on top. They’re generally safer investments, but with a lower return as a result.

Mutual Funds

To invest in a mutual fund means investing in an array of particular investments.

It’s akin to a portfolio, which is managed by a company or individual. Think of it like spreading your bets. Rather than selecting one particular stock, the mutual fund takes you money and invests it in a mixture. As such, there’s less risk involved.

For beginner investors, mutual funds are a good bet.

3. Stop Spending Money

To start investing you don’t need as much money as you think.

But you definitely need some!

If you don’t have any to hand, then saving up first will be an essential step. To do that, you’ll have to cut your monthly expenditure.

Living paycheck to paycheck may not seem like a choice. Yet there’s almost always scope to cut costs. This starts by creating a budget. Sit down and audit everything you spend money on. From monthly subscriptions, shopping, and bills, to the little treats you allow yourself.

Saving requires a level of sacrifice. Short term pain for long term gain makes it worthwhile though! Dine out less, entertain at home, downgrade your phone, sell your car…do whatever it takes to get the initial investment capital you need.

4. Decide Upon a Strategy

With some money behind you, it’s time to start.

There are different ways to go about the investment process. It’s for you to decide which is best for your needs. You can opt for a hands-on or hands-off approach.

Hands-on means you manage the money alone. This might sound daunting, and be risky with zero knowledge or experience. Another option is to turn to a brokerage company. Here, you task an advisor to manage your money for you. It’s hands-off, but they’ll charge for you for the service.

A Robo-advisor is a third option. These pieces of software use algorithms to select a diversified portfolio for you. You’ll pay fees here too, but it’ll be cheaper than a human financial manager!

5. Open and Fund an Account

It’s time to get to the fun stuff: the investing itself.

This begins by starting an investment account.

As always, there are options at your disposal! Your options depend entirely on whether you’re going solo or using a Robo/human advisor.

Taking the hands-off approach is likely to lead to one of 4 main companies: Wealthfront, Betterment, Wealthsimple or Ellevest. A hands-on approach opens up far more doors: there are masses of brokerages to choose from.

Find one where your money can go further. Look for low transaction fees and low deposit requirements. That means you can get started with less money, and be charged less for moving it around (aka buying and selling).

With your decision made, all that’s left to do is start paying into your account. The recommended level of investment is around 10 to 15% of your annual income. However, as we’ve seen, even $5 a day can go a long way!

6. Play the Long (and Diverse) Game

Find investments with reputable companies (be wary of investment fraud ) with a long track record of success.

Invest in companies that pay you money (dividends) based on your investment. Spread your investments to create a diverse portfolio (or invest in mutual funds that do it for you).

And then be patient. Set up monthly direct debits to keep buying up more stock. Avoid taking money out. Those who win at investing see it as a longstanding game.

Expect fluctuations in the market. That’s natural. For swift wins, the stocks will never work. It’s too risky, especially for a beginner. Over time, with trust, patience and ongoing investment, it’ll average out in your favor.

Final Thoughts on How to Start Investing

There you have it: 6 top tips on how to start investing as a total beginner.

Investing is a fantastic way of ensuring your long term financial freedom. Play the game right, and by the time you come to retire, you can have hundreds of thousands of dollars lined up.

Literally, anyone can do it! Hopefully, these tips will help you get the ball rolling.

Looking for financial inspiration? Head to the TV celebrities section of the blog to see what real money looks like!

Enjoy Plunged in Debt?

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