To build real wealth and make a happier future a reality, we must start saving and investing now.

Here is our comprehensive guide on How to Invest for Beginners. Don’t let the information overwhelm you, use this as a resource to not only get you started, but to keep hitting goals on your Journey.

This guide will focus primarily on the stock market and the types of investments there.

Investing Basics

The best place to start with investing is to know what your goals are. By setting goals, you gain insight into what you should invest in, timelines, and what type of accounts to open.

Ask yourself these questions:

What is my ultimate goal? The answer to this one will usually include, saving up for a home, retirement, or for college expenses for your children. No matter the goal, make sure you have something in mind to save for.

What are my risk tolerances? This matters because if you can’t handle short term fluctuations in the market, you will be at risk of pulling your money out, which is a huge no-no!

What time frame do I need? If you need the money to grow for 30 years or you’ll need the cash again in 6 months, this will affect how and where you invest.

How much do I have to Invest? Make sure you have something in hand and ready to invest, there are places that you can start with as little as $1, but most brokerages will start at $100 or more.

Now that you have an idea of what your investing goals are, let’s look at some investment vehicles.

What to Invest In

Stocks– Stocks (or Equities) are an individual share of a company that sells on a market, or stock market.

Bonds– Bonds (or Notes) are like purchasing the debt of a company or entity, also sold on markets.

Mutual Funds– these are a collection of stocks or bonds, usually curated by a person or brokerage to follow goals or strategies.

ETFs– these are also a collection of stocks or bonds, however they are contained in a stock that can be traded on a market.

Now that we have an idea what kind of investment vehicles are out there, we need to determine how to invest in them directly.

Brokerages

Brokerages are the investment firms that put your money into the investment vehicle you choose. They are governed by the Securities and Exchange Commission (SEC).

The brokerage you choose will be based on how you answered your goal questions earlier. Some brokerages require a lot of money upfront to get started.

Start researching a brokerage by determining your needs. Here are some examples of reputable and long standing firms:

Vanguard – John Bogle, the founder of Vanguard, was the first to create Index Mutual funds. Vanguard has some of the lowest costs in the industry.

Fidelity– A very well respected brokerage with over 50 years in business and over 27 million customers. Has similar offerings to Vanguard, but a few more actively managed funds to choose from.

T Rowe Price– Having over 80 years of managing money, this well respected firm puts even more emphasis on active management of funds. They still have Index Funds as well, if you need a lower cost option.

Robo-Advisors

Here are some Online Brokerages who offer apps and robo-investing abilities. Robo-investing is when the money you put in is automatically balanced for you based on the investment selections you make.

Betterment– This online brokerage allows you to choose an investment style and then they will take care of the rest, very easy for beginners and you can start with just $1.

Wealthfront– While Betterment and Wealthfront offer similar services, Wealthfront differs by offering individual stock and fund choices if you invest more than $100,000. Wealthfront does require $500 to start though.

M1 Finance– A beautiful app with “pies” allows you to invest in any fund or stock that you like, all with no commissions or fees. They also offer professional picked funds that you can set and forget. Check out our review!

A look at the chart for the S&P 500 over a 20 year span.

 Returns

So how much money can we expect to get back from our investment? Good question!

Historically, the total stock market has returned about 8% since 1900.

However, this is almost never a smooth ride and some days and weeks are better than others, but one of the advantages of investing in an index fund is setting it and forgetting it.

Add money every payday and try not to look at it too often. Watching it will cause emotions you don’t want to deal with, so invest confidently and watch the money grow over time.

While 8% sounds great and it destroys any savings account, it also isn’t the whole story.

We should always be concerned with inflation and the 2-3% it steals from us every year. This means that every year our money is worth a little less due to rising prices. We fight this by being in the highest earning accounts we can be.

A savings account is safe and easy, but inflation will easily outstrip any interest you would earn. We only recommend enough savings for emergencies and immediate needs, otherwise get that money to work in the market!

Compounding will help to accelerate your return and will grow your wealth exponentially.

What is Compounding?

Investopedia has a wonderful and very technical article on what compounding is and what it does for your money.

Very simply, compounding allows your money to make more money which in turn makes more of it’s own money.

Like happy workers out earning money for you and the more workers you put to work the more you’ll earn!

401(k) or 403(b)

A 401(k) plan is a tax sheltered account set up by a private employer for employees to contribute pre-tax funds into for the purpose of retirement.

A 403(b) plan is a tax sheltered account set up by public schools or non-profit organizations for employees to contribute pre-tax funds into for the purpose of retirement.

If your employer offers these accounts, you should be taking advantage of the tax benefits. The funds go into your account before taxes are taken out and are allowed to grow in these accounts tax free.

Employers may also give you a match on your money, for example you contribute 6% and they match 50% and give you 3%. This is free money!

Always take advantage of these accounts and get the full match before starting a taxable investment account.

We have a full article on IRA Accounts as well. Check it out.

Pay Yourself First

Use this principal of saving to help you get started to invest.

By “Paying Yourself First”, you allow for money to be invested or saved on your behalf immediately from any incoming funds.

For example, if you were to budget your next paycheck, you would set aside 20% to go directly into an account for saving or investing.

This is how we get the funds ready to be invested and to help reach our goals. This all important step gives you the necessary cushion to start investing and hitting the goals you set.

Invest Wisely

Now that we learned the basics, what do we invest in? The stock market here in the United States can be a frightening proposition to a new investor.

We hear horror stories of losing money or being swindled in some way. To be honest, those stories could be true, but we will steer you away from the hazards and get you started.

The easiest and least expensive way to get started is by investing in Index Funds, specifically Exchange Traded Index Funds.

These funds group together a large group of stocks or assets and allow you to diversify easily.

Best of all they cost very little to own! As little as .04%! Try to avoid high cost mutual funds with fees in excess of 1%. These funds will drag your returns down over time.

As a new investor, it is difficult to decide where your money should go within this group of funds. The difficulty lies with being given too many options, which leads to Analysis Paralysis.

Our recommendation is to follow a large swath of the market, for example the S&P 500 or a Total Market Index.

These funds will limit your risk and allow you to follow the markets efficiently.

The reason we do this, is because investing in one or two singular stocks or companies can be risky.

These investments could go to zero and create one of those horror stories you’ve heard of,  but by investing in a large part of the market we are almost assured it will not go to zero.

How To Invest

Now that you have an idea of what needs to be done, where should you do it?

M1 Finance offers a way to get into Exchange Traded Funds with no transaction costs, and you can start for as little as $100. M1 offers fractional shares and helps you get started easily.

Remember, if your company offers a 401k or similar tax advantaged account, always start there.

You can’t outrun the tax man, but you can delay him getting his hands on those funds. We explore tax advantaged accounts here.

We want to hear from you! Please tell us about your adventures in investing and if you are ready to start(today!).