Do you want to start investing but you’re not sure how to start? Don’t worry that you don’t have enough to start investing. Remember, everyone had to start somewhere and you can still learn the same lessons whether it’s $1,000 or $100,000. Everyone is a little bit different, and it ultimately depends on how comfortable you feel taking risks and about your own personal finances. Before you do start investing though, what should you consider?
Feel Comfortable With Your Finances
First, you need to feel comfortable with your finances. What does comfortable mean? It means if an emergency comes up you have cash on hand to cover it and don’t have to go into additional debt. When you invest, money isn’t as liquid. If you invest in stocks for example and you need to sell stocks it takes a few days to get the cash from the sale. In addition, the price of the stock may not be the price you want to sell it at.
Have Manageable Debt or No Debt
You can invest if you’re in debt and you should invest even as you’re paying the debt off. How much depends on how high your interest rate is. The average return of the stock market historically is 10% before inflation, which is why 7% is a better benchmark to use. That doesn’t guarantee 7% return per year but it’s a good benchmark to use. If the interest on your debt is less than 5% it may be worth it to invest extra money instead of paying extra to pay down your debt faster. On the flip side, if the interest on your debt is 20% you will have a better return putting money towards paying down this debt faster.
Learn About Different Types of Investments
The easiest investments to start with are stocks, mutual funds and ETFs (electronically traded funds). Stocks are passive investments and they have decent liquidity. You can start very small, buying only a share or even fraction of a share. It may seem small to start, but the investment will hopefully grow over time either by appreciated or investing more money in the stock. If you’ve never invested, start your search by looking into ETFs (exchange traded fund that tracks a stock index) and companies you know well on Google and Yahoo Finance. These investments can also be bought as part of tax advantaged retirement savings accounts like 401(k) and Roth IRA.
There are also alternative investments, like investing in real estate, REITs and private companies. However, there are certain restrictions here which make them harder as a first investment. If you’re investing in real estate there is more capital required to get started. Crowdfunded REITs also have certain minimum investments and charge you a fee if you try to sell the investment within a certain time period. You’re required to be an accredited investor to invest in most private companies. There are certain exceptions to this including crowdfunded investments.
See Also: How to Generate Passive Income
Learn About Where to Purchase These Investments
Stocks, mutual funds, bonds and ETFs can all be purchased through companies like Charles Schwab, e-trade and Robinhood. Crowdfunded REIT companies include Rich Uncles, Fundrise and Realty Mogul.
Real estate can be bought with the help of a broker. However, knowing people in the industry will get you farther as often real estate investors have access to buying real estate before it’s even listed.
Set Financial and Timeline Goals
How much do you want to save? If you don’t have an emergency fund fully funded yet when will it be? How much money do you want to invest? When will you need this money?
Investments are less liquid than cash. If an emergency comes up, you need to be able to handle that from your emergency fund. You shouldn’t have to touch your investments. With any investment there is no guarantee it’ll keep or increase in value and you may lose money. With stocks, you can convert the current value to cash in the time it takes the transaction to settle (usually 2-3 days). Real Estate isn’t liquid until you sell it or you take a loan against the property to free up some cash. Investing in private companies is the least liquid. You are completely dependent on the agreement, and you could lose the entire investment. Understand the liquidity you need in the short and mid-term before you start investing.
By setting goals you’ll better understand what investments are best for you. If you don’t have enough money to meet those goals yet, don’t be discouraged. Continue learning more about the investments you’re interested in so when you do have enough money you can buy the right investment(s) for you quickly. Additionally, look for ways to earn more money in your career, through side hustles and spending less money in the first place.
Take Advantage of Retirement Savings Accounts
Once you determine your goals, identify how retirement savings accounts fit into that. If your company offers a 401k and you aren’t already contributing to it, set one up. Many companies offer 401k matches which is free money. Additionally, 401(k) contributions are pre-tax meaning you don’t pay tax on that money earned. Instead, you pay taxes on that money when you withdraw it during retirement. Roth IRA accounts are funded with post-tax dollars. That means you pay tax on the money you contribute now when you originally make the money but don’t pay tax when you withdraw money from your Roth IRA in retirement. There are rules to be familiar with for Roth IRA accounts before you get started.
Avoid Trying to Time The Market
Don’t wait until stocks look cheaper to buy. It’s very hard to time the market. Instead, invest small amounts of money consistently. Over time, it will average out.
The next step is to actually start investing. Remember, don’t be discouraged if you lose money initially. Like anything, it takes practice and dedication to get good at something. Plenty of mistakes will be made along the way but it’s progress, not perfection.