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How to Start Investing: A 5-Step Guide for Beginners

  • Reading time:18 mins read

I’m happy to see that you’re interested to take on the challenge and start investing! If you’re reading this blog post it means you’re eager to dive into the interesting world of investing and start building your way towards financial freedom.

Investing is definitely something that everyone should educate themselves about. Investing wisely can help you reach your financial goals, whether you’re saving for retirement, a down payment on a home, or just want to increase your net worth.

But then why are there so few people who can actually say that they invest regularly? Well, the answer is that most people are just too scared to even start, or think investing is something that only the smartest people on earth can do.

I know how overwhelming it can be to start – when I started investing I was so confused and didn’t know which types of investments to choose from, and what to actually focus on when choosing my investments.

But trust me, it’s actually easier to get started than you may think, and all you really need to get started is a basic understanding of investing.

And that’s why I created this step-by-step guide for beginners that will help you get the basic knowledge of that’s needed to enter the world of investing and start growing your wealth.

So, let’s dive right in!

Step 1: Set Your Goals

It’s important to think about why you want to invest before you actually begin investing.

Establishing clear goals for yourself will help you decide what types of investments fit you as an investor, and make it easier to monitor your progress toward your goals.

Here’s why it’s important to set investment goals for yourself:

  • Having specific investment goals can help you stay motivated and focused, which can lead to better investment choices and sticking to your plan.
  • Your investment goals will influence your investment strategy and determine the types of investments you want to make.
  • Setting clear, measurable goals means you can monitor your progress and make necessary adjustments to your investment strategy.

Your financial situation, stage of life, and personal preferences can all influence your investment goals. Here are a couple of examples of investment goals that you can get some inspiration from:

Retirement: One of the most popular reasons to invest is to save for retirement. The idea is to build up enough savings to keep up your lifestyle in retirement.

Education: Putting money into a child’s education is another common goal. The purpose is to save up enough money for college or other higher education costs.

Short-term savings: Saving for a short period of time in order to finance a goal such as buying a car or going on a trip.

Striving towards financial freedom: People who are looking to become financially free are in it for the long-term game – their goal is to build a diversified investment portfolio that generates regular returns, so that eventually they may even able to live off entirely of their investments!

How do I Set Realistic and Achievable Goals?

When setting your investing goals you should keep in mind that it’s better to set realistic and specific goals, rather than expecting unrealistically high results. Here are some pointers to help you set reasonable and achievable investment goals:

  • Be precise: Set measurable goals that are simple and clear, such as “save $50,000 for a down payment on a house in five years.”
  • Think about your timeframe: Depending on your goals, decide on your investing time horizon. How long do you need to invest for? For instance, investing for retirement means investing for a longer time than saving for a car purschase.
  • Think about your risk tolerance: This determines how much risk you’re comfortable with when deciding how to invest your money. This will help you choose the right strategies and types of investments for yourself. (More about risk tolerance in the next step)
  • Talk to a financial advisor: Someone who already knows a lot about investing can help you figure out reasonable investment goals that fit your money situation and personal preferences.

Step 2: Understand Your Risk Tolerance

Investing always comes with some level of uncertainty. Before you put your money into investments, it’s crucial to understand how much risk you’re comfortable taking.

Assessing your risk tolerance will help you make smart decisions that match what you want to achieve with your finances.

What does Risk Tolerance mean?

Risk tolerance means the amount of risk you are okay with taking when choosing how to invest your money.

Each person has their own level of comfort with taking financial risks. This can be affected by things like age, income, what they want to achieve with their investments, and what they personally prefer.

Why is it important to assess your risk tolerance?

Knowing how much risk you can handle is important to picking the right investments that match what you want to achieve.

If you’re too conservative and don’t take enough risks with your investments, you may not make enough money to reach your financial goals. But on the other hand, if you invest your money too aggressively, you could lose a lot of money and get discouraged from making any future investments (and we definitely don’t want that).

How to figure out how much risk you can handle?

There’s more than one way to find out how much risk you can handle. But the easiest way is to take a risk tolerance quiz on the internet or through your financial advisor.

The risk tolerance tests usually ask you about your financial goals, investing time horizon, income, and so on.

If you don’t want to take a quiz then another way to assess your risk tolerance is to think about your own personal preferences and what you have experienced in life.

If you feel confident about your finances and don’t mind taking risks, your risk tolerance is likely on the higher side. If you don’t like taking risks and prefer stability and slow growth over fast growth that comes with more risk, then you probably have a lower risk tolerance.

Step 3: Understand Your Investment Options

After you decide what you want to achieve with your investments and how much risk you are willing to take, it’s time to learn about the different investing options out there.

After familiarizing yourself with the basic types of investments you’ll be able to choose the ones that match your goals and your risk tolerance.

If you’re interested to learn more about what types of investments are considered to be the best (and get some general money tips), here are the top 5 finance books to read.

Here are some common types of investments to consider:

  • Buying stocks allows you to become an owner of a small part of a company. Stocks have a high return potential, but they also have a high degree of risk.
  • Investing in bonds essentially means you’re lending money to someone who will pay you back with interest. Bonds are usually safer than stocks, but they also have a lower return.
  • Mutual funds allow multiple investors to pool their money together to buy a mix of diversified investments like stocks and bonds. This can help lower the risk of losing all your money in one place. Mutual funds are managed by professionals who know how to make good investments and diversify portfolios, but they also come with fees and expenses.
  • Exchange-traded funds (ETFs) are similar to mutual funds as they’re both diversified and include different types of stocks, bonds, and other securities. ETFs are like stocks that you can buy and sell on an exchange. They usually have cheaper fees than mutual funds. However, ETFs trade like stocks on an exchange, and their fees are usually lower than those of mutual funds.
  • There are many ways to go about real estate investing. You can buy and rent out properties, invest in real estate trusts (REITs), or crowdfunding platforms.
  • There are also alternative investments that don’t fall into the traditional asset classes like stocks, bonds, and real estate. For example, commodities, hedge funds, and private equity.

Step 4: Create a Diversified Portfolio

One of the most important rules in investing is to have a diversified portfolio.

Spreading your money across different asset classes will help to reduce the overall risk of your portfolio.

Here are some things to keep in mind when building a diversified portfolio:

  • Think about your asset allocation: Meaning how are you dividing up your investments and what percentage of your money is invested in different asset classes like stocks, bonds, and cash. The best way to divide your investments depends on the financial goals you’ve set, how comfortable you are with taking risks, and how long you want to invest your money for.
  • Pick different types of investments: In each asset class, it’s crucial to choose a variety of investments. For example, if you have decided to invest in bonds you should consider investing in government bonds, corporate bonds, and high-yield bonds.
  • Consider alternative investments: You may want to put your money into other things besides stocks and bonds. Adding investments like real estate, commodities, and private equidity can help to diversify your portfolio further and help to reduce overall risk.
  • Check and adjust your portfolio regularly: Some investments may do better than others which may cause your portfolio to become unbalanced. That’s why it’s a good idea to regularly check your investments and rebalance your portfolio accordingly in order to stay aligned with your investing goals.

Step 5: Start Investing!

Congratulations, if you’ve completed the previous steps you’re ready to start investing!

Here’s what to do next:

  • Open an investment account: To begin investing, you must first create a brokerage account. To choose a brokerage that best suits your, make sure to consider factors like fees, investment options, and customer service.
  • Put money into your account: After you create an investment account, you have to add money to it in order to start investing. You can do this by transferring the money from your bank account or by setting up automatic contributions.
  • Start small: Invest in the asset classes you’ve chosen. If you aren’t used to investing, it’s best to start by investing small amounts and increase your investments slowly over time. This way you can learn about investing without putting too much money at risk right at the beginning.
  • Be focused and patient: When you invest money, you need to stay disciplined and focused on your goals. Avoid making emotional decisions based on short-term market fluctuations, and keep following your investing plan.
  • Monitor your investments: Check your investments often to make sure they are doing well. This can help you make informed decisions on when to buy or sell investments.

Final Words

Investing can help you achieve your financial goals and ensure a secure your financial future. For investing newbies, starting out can be overwhelming, but hopefully this guide helped you realize there’s nothing to be scared of!

After all, it’s more important to start rather than get everything done the right way right from the beginning. You’ll learn in the process!

Stay consistent with investing, adjust your portfolio if needed, and always stay eager to learn more. If you stay focused and patient, you can become a successful investor and make enough money to live the life you want. Happy investing!

Psst! Now that you’ve started your journey towards financial freedom, check out these 9 habits of successful people that you can incorporate to your life!