Investing isn’t just for the 1%. In fact, investing in the stock market is one of the most common ways average Americans become millionaires.
Learning how to invest for the first time can feel intimidating, but it’s not nearly as scary as you might think once you take your first steps.
This article will help you answer the following common questions about how to invest you want to know:
- Am I ready to start investing?
- What investments should I consider as a beginner?
- Where is the best place for a beginner to invest?
- How do I open an investment account?
Am I ready to start investing?
As long as you can pay all of your expenses and have at least a bit of money left over at the end of the month, you’re ready to start investing.
But before you start investing, it’s important to have the rest of your financial house in order. You should:
- Be comfortable with your budget – how much you earn, spend and save each month.
- Be free of any high-interest debt, especially credit card debt.
- Have an emergency fund equal to a few months’ expenses saved in a liquid savings accounts.
You don’t have to wait until you are completely debt-free to start investing — just make sure debts with the highest interest rates are paid off. But if you have any doubt about whether you’re ready to start investing, refer to my article on How to be financially disciplined before returning to this guide.
Why you should invest
Investing is essential if you want your savings to grow over time. Although keeping money in a savings account appears fine and safe on the surface, the interest you’ll earn isn’t enough to keep up with inflation over many decades.
While riskier in the short-term, over the long-term the stock market delivers compound returns that not only keep up with inflation, but outpace it.
Take a minute to learn how compound growth works in our guide. It’ll help you quickly understand why you simply must start investing today. Or check out our video:
If you put $5,000 in an account with an interest rate of 7% and contribute an extra $200 a month, after 30 years you’ll have a little over $284,000. As another example, if you invest $500 a month starting when you are 22 and earn an average of 7%, when you are 65 you’ll have about $1.3 million.
What are your investment options?
You can invest in real estate, starting a business, the stock market or even art. For most new stock market investors, index funds provide the best combination of simplicity, risk and return.
Stock market investing
Investing in stocks and bonds is the easiest way to start investing, especially given the number of options for stock trading and investment apps out there today. If done wisely, it can also be the least risky (although no investment is without risk). Any investment you make could lose value and many investments will drop in value at least part of the time.
Via the best online brokerage accounts, you can invest in:
- Individual company stocks you may decide are the best stocks to buy for you at a given time (e.g., Apple, Tesla, Target or Walmart).
- Stock funds that bundle different investments by theme or investment goal.
Individual stock investing
Buying individual stocks can be fun because you get to own a piece of companies you love. But it’s also the riskiest type of stock market investing. Despite plenty of people claiming otherwise, very few people — even professionals — are able to pick stocks that outperform an average of the entire stock market.
While it’s fine to invest a small amount of money in a few companies for fun, we caution trying to “beat the market” by picking stocks.
Index funds are “baskets” of hundreds or thousands of different investments (like stocks). An index fund may contain stocks based on a theme (such as all stocks in the S&P 500 index or stocks focused on renewable energy) Or, an index fund may contain a mix of investments based on a certain goal (such as a target-date fund that’s designed for someone planning to retire in a certain year).
The beauty of index funds is that they provide a great amount of diversification. You’ve heard “don’t put all of your eggs in one basket”. That’s exactly what index funds do — they spread your investment through many, many different investments. This way, when some investments do poorly, you’re protected by the winners. Also, when one company goes to the moon, you make sure you own it, even if you wouldn’t have known to pick it yourself.
Bonds & bond funds
Bonds are, essentially, loans to companies or governments where the investors are the lenders. When you buy a bond, you are collecting principal and interest payments from the bond issuer.
Buying individual bonds is an advanced investing strategy. You can add bonds to your portfolio with a bond index fund. Historically, bonds earn less than stocks but more stable — bond prices don’t go up and down as wildly as stock prices. Bonds also provide a predicable source of income as the issuer makes payments every monthly or quarter (this is known as the bond yield).
As a beginning investor, you probably shouldn’t concern yourself with bonds. They become a more important part of your investment strategy as you get older and 1) have fewer years left to invest and 2) want to draw income from your investments in retirement.
Real estate investing
Real estate can be a great investment, too. To be clear, we’re not talking about your primary residence as an investment. Real estate investments refer to apartments or commercial buildings that you own and then lease. Although most real estate appreciates over years and decades, the power of real estate investing lies in the cash flow from tenants.
If you can charge more rent than you pay in mortgage, taxes and maintenance, owning real estate can create income you can put in your pocket or reinvest.
Learning how to invest in real estate is a much larger topic that we can cover here, but there are ways to get started quickly on a modest budget. Roofstock is a real estate investment platforms that crowdsource investment opportunities. You can invest as little as $5,000 alongside other investors and share in the profits coming from large, multi-unit apartments or office buildings.
These investments are not without risk, and the companies’ fees eat into returns. But they may be attractive if you want to add real estate exposure to your portfolio without taking on the work and expense of buying and managing properties yourself.
» MORE: Best real estate investment apps
Investing in art
Taking a dive right in and learning how to invest in art isn’t for everyone. There’s quite a bit to know, like what exactly to look for and where, and consider, like how illiquid art can be.
But, if you’re not counting on a quick return and you’re an art lover who can take pleasure in the beauty and talent, investing in art can be an investment option that takes up a small part of your portfolio.
Investments to avoid
Two “investments” I intentionally didn’t mention are cryptocurrencies and options.
Buying cryptocurrencies like Bitcoin is speculating, not investing. Almost everyone confuses these two concepts. You invest in something that has inherent value: a piece of real estate, a company, a bond. Cryptocurrencies don’t have inherent value. While it can be fun to speculate that crypto might be the future of money and put a few dollars into them, it’s not something anybody should bet their entire future on.
Trading stock options is another example of speculation. This is not investing. This is better on whether the price of a stock will go up or down by a certain date. This can be fun, but it’s essentially a kind of gambling. People will try to sell you ways and courses to make a living trading options, but don’t take the bait. Are there professional options traders out there? Yes. Just as their are a few professional gamblers in the world.
Both are much less common and much more difficult than you think with the profitable ones not seeking to teach others for a set fee.
Where to invest: The best ways to invest money
Personal finance is personal. The best way to invest money for you is going to be different than the best way to invest money for me.
Some things, however, are universal.
Everybody should invest money for retirement that you won’t touch for many decades. It can be difficult to feel the need to plan for retirement when you’re in your 20s or 30s. But we need to take care of our future self and squirreling away enough to live a comfortable retirement is no easy task. The sooner you start investing, the easier it will be.
If you want to keep things as simple as possible, consider the best robo-advisors. Robo-advisors use technology to invest your money in a broadly diversified portfolio of stocks and bonds that’s tailored to your goals and risk tolerance. Opening an account is as simple as answering as answering a short quiz and providing your anticipated tolerance for risk.
In comparison of robo-advisors to financial advisors, robo-advisors are inexpensive and frequently don’t minimum balance requirements or ones that are very low.
The downside is that you’re limited to a handful of investment strategies. With most robo-advisors, you can’t customize your portfolio beyond their recommended portfolios. You also cannot purchase individual stocks (though some, like Acorns, offer this in their highest pricing tier).
Acorns makes it easy to start investing (even if you know nothing) and provides helpful tools to help you save more automatically. In under 3 minutes, start investing spare change, saving for retirement, earning more, spending smarter, and more.
- Effortless automated investing
- Easy-to-use savings features
- Low-cost solution to manage money
- Flat monthly fee more expensive for smaller accounts
- Can use more robo-advisor features
If a robo-advisor is like a restaurant that serves a menu of prepared meals, brokerages are like investment supermarkets; you can buy (almost) anything you want, but you must know how to cook. When you want to buy a lot of different stocks or you’re looking for a specific investment, this is a good thing. If you don’t know what you’re looking for – or you can’t cook right now — it can be overwhelming.
With a stock brokerage, you can design your own buy-and-hold portfolio with a few exchange-traded funds. Of course, you can also trade individual stocks as often as you want.
Why choose a brokerage? Two reasons: Customization and cost.
- If you feel comfortable choosing index funds, you can build a portfolio that’s more customized to your goals than you can buy at a robo-advisor.
- Doing this will cost you less. Investment funds (ETFs and mutual funds) charge annual fees as a percentage of how much you invest. Good index funds cost very little – as little as a few hundredths of a percent (for example 0.05% would cost $50 per $10,000 invested). But robo-advisors charge slightly higher annual fees on top of the fund fees. For example, a robo-advisor might charge 0.25%, or $250 per $10,000 invested, in addition to the fees charged by underlying funds. Buying funds directly with a stock brokerage can avoid this additional cost.
There are dozens of stock brokerages to choose from, including some apps that are possibly best-suited for frequent trading. Unless you’re a power user looking for specific features to help you with advanced trading strategies, it’s hard to go wrong. We’ve also compiled this list of the best brokerages to consider.
Interactive Brokers is a longstanding favorite trading platform for professional and serious individual investors alike. IB gets you access to institutional-grade trading tools, foreign stock markets, and popular cryptocurrencies.
IB features commission-free stock trades, $0.65 options contracts, and there's no minimum to open an account.
- Professional-grade trading tools
- Trade on foreign markets
- Low margin rates
- Institutional features can be overkill for basic investors
Investing for retirement at work
The easiest (and, arguably, best) way to start investing is to enroll in your employer’s 401(k) or similar retirement saving plan if they offer one.
You specify how much money to invest, and your employer deducts the amount directly from your paycheck. There are tax benefits to these accounts and, sometimes, your employer may match a percentage of your investments.
You will have the opportunity to specify how you want this money invested, which I’ll cover in a later section.
Be aware that money you invest in a 401(k) or similar retirement account is not supposed to be withdrawn until you retire (after age 59 ½). Withdrawing money earlier may require paying income tax and a 10% early withdrawal penalty.
Investing for retirement on your own
If you do not work at an employer that offers a retirement plan, you can still take advantage of retirement tax incentives by investing in an individual retirement arrangement (IRA) account.
Like 401(k)s, IRAs allow your investments to grow tax-free but funds cannot be withdrawn without penalty before age 59 ½. You can open an IRA at any stock brokerage, robo-advisor, or mutual fund company. Most investors can invest up to $7,000 in an IRA in 2024 (up to $8,000 if you’re over 50), but IRA eligibility phases out for taxpayers with high incomes.
If you’re thinking about opening an IRA, your next step should be to learn about the tax difference between traditional IRAs and Roth IRAs.
Investing for short-term goals
Everybody should invest for retirement, but you will likely have some short-term financial goals, too.
In general, don’t invest money you want to use for a goal that’s less than five years away. All investing involves risk. The stock market goes up and down like a roller coaster – sometimes violently – but smooths out over time. The longer you stay invested, the better your probability of strong returns.
Savings accounts are one of the better places to hold your money if you’ll need it soon. You can easily transfer that money to a checking account in an emergency, and you’ll earn a trickle of interest while your money sits in the account. If you don’t yet have a savings account paying a competitive interest rate, opening one takes 15 minutes and is probably the best thing you can do for your money.
Investing for long-term goals (besides retirement)
Let’s say you have some non-retirement goals that are more than 5 years away. Should invest the money you’re saving for them? Yes!
Over time, the cost of everything slowly goes up. Just ten years from now, one dollar will buy you less than it does today. In 20 years, one dollar will buy you a lot less. This is inflation, and it’s almost as guaranteed as death and taxes.
The interest rates banks pay on savings accounts are almost always much lower than the average inflation rate. For example, let’s say your account is paying just 0.5% interest or less (just an example), while inflation is running at 2% or 3%. This means that – in terms of real value – money sitting in a savings account in that hypothetical is losing somewhere between 1.5% and 2.5% a year!
In order to build wealth, you need your savings to grow at a rate that not only keeps pace with inflation but beats it. In the long run, a well-diversified stock portfolio should provide average annual returns between 5% and 8% (per a handy sheet on the historical returns on stocks, bonds and bills from NYU Stern School of Business). There will be years when stock gains are much higher and years when stocks lose money and deliver a negative return. But if you assume a 7% average annual return and a 2.5% average inflation rate, the real value of your money will grow by 4.5% per year.
Opening an investing account
Opening a top investment account often takes a matter of minutes and is fairly similar to opening a checking or savings account.
There are dozens of platforms to choose from, some of which have no minimum requirement to get started without commissions, making them perfect for young investors.
You’ll need to have the following when you set up your account (exact requirements more or less will depend on the account you set up):
- A sense of what your risk tolerance is.
- Clear investing goals.
- Social security number.
- Contact information.
- Marital status.
- Driver’s license number (for some, but not all accounts).
DIY investing vs. working with a financial advisor
How do you find a great financial advisor? Here’s our best advice on How to find find the best financial advisors.
For most new investors, a do-it-yourself approach is best. Hiring a financial advisor is a significant expense. Also, many advisors only want to work with clients who have 6- or even 7-figure amounts to invest.
On the other hand, if you have a significant amount of money and are anxious about how to manage it, there’s no substitute for a professional. A good advisor will take the time to understand your needs and help you design and execute a tailored investment plan.
The bottom line
Investing doesn’t have to be intimidating or something you stray away from.
If you want to outpace inflation, learning how to invest and starting to invest with the right tools, accounts and strategies to fit your future plans is key.