So you want to start investing, but you’re not sure where to actually begin? Now is the perfect time to get started. We can’t just dive into the investing pool just yet. We need to know a few things first so grab a pen and paper.
1. Know Your Situation
When it comes to investing everyone’s situation is different. So we need to get a little personal for a moment and look at three things that will always define your investing strategy.
- We can’t get started unless we know your current financial health. Your net worth? Your monthly income? Monthly expenses? Your total debt and interest rate? Monthly savings and where it’s invested? Rate of return on those investments? We’ll need these in step 2.
- Next we need to know your goals. More importantly your financial goals. How do you see yourself in 3 months, 1 year, 5 years, 10 years or longer? How much do you need to reach them and are you already heading down that path? We’ll need these in step 3.
- Lastly we need to know your risk tolerance (your financial ability to handle losses in your investments). To find this out we need your age, job security, health, net worth, the amount of money you have to cover those unforeseen emergencies, how much time you set aside for your financial goals, and most important your own personality.
Your finances, goals and risk tolerance aren’t set in stone. Everyone’s situation changes so we’ll need to revisit these. A good rule is to do a financial review of yourself every 3 – 6 months and make any necessary changes.
2. Get Your Finances in Order
We can’t get to that fun investing stuff unless we know exactly where all your money goes each month. If you have any high interest debt i.e. credit card debt we’ll need to pay that down first. Now that you have your debt down to a manageable monthly expense, we can start investing. Start with $50 a month, if you can handle more great but don’t overdue it, you still want to be able to take your self out on the town. You should start by building up an amount equal to 3 – 6 months of your expenses, and put this amount into a safe money market account. This will be an emergency fund only, you won’t be borrowing from this for fun things like vacations, flat screens, or a new car. You’ll have to save separately for them. Everything you save beyond this amount can be used in higher risk/ return investments (stocks, bonds, mutual funds, ETFs).
3. Develop a Plan
From your goals, we’ll be able to set up a short term and long term plan for where your money goes each month. It might include: buying a car or house, college education, or retirement. Break your goals down into short term (under a year) and long term (over a year) goals, they will tell you where your money is going. It will also tell you where that money will come from. As was stated earlier you’ll need to review this plan every 3 – 6 months. As your goals change, so will your plan.
4. Put Your Plan into Action
Now you have a short term plan and a long term plan for your month savings. We’ll start with the short term plan since it’s the easiest. Any money you’re putting into your short term plan can go right into your savings account. Don’t try to put this money into anything riskier, it may cost you.
Your long term plan is where things can finally get interesting. It will allow you to put your money into some of those riskier investments. A large portion of of these investments will be in some form of stocks and bonds. The percentage breakdown between these two will be based on your risk tolerance. If you’re 21 years old, just starting your career you’ll probably have a much higher portion in stocks to grow your portfolio. If your closing in on retirement you might start to consider having a higher portion in bonds to maintain your portfolio’s value. All of this will depend on your own personality.
5. Do Your Homework
After all of this, you have money being set aside each month, some goes into the short term plan and the rest needs to get invested. Can we just go out and buy any stock, bond, mutual fund? Nope. There thousands of different stocks available to buy on a daily basis, the same goes for bonds and mutual funds as well. In order to find the right investment we’ll have to do some homework. You’ll need to know the risks of each investment, and how it fits into your portfolio and long term plan.
If you plan on investing in stocks, know the company your investing in. If you’re not sure what the company does and how they make their money, avoid it. Don’t invest in anything you don’t understand. Gather as much information as you can on a company when making your decision. Once you have a few stocks in your portfolio keep researching them. A good rule of thumb is to spend an hour per week researching each stock. If you don’t have the time to do all this research mutual funds or ETFs might be a better choice.
6. Invest With Your Head, Not Your Heart
Discipline and patience are what is needed when investing. You have a plan, stick with it. As you learn more you’ll become more confident, develop your own investment style. Don’t change your investments based on short term market changes. you don’t even need to watch the day to day prices, especially at the beginning. Don’t ever just jump into an investment you’re not absolutely certain of. Invest based on what you’ve learned, you will make mistakes, you will take losses. Everyone does, even the best money managers in the world.
7. Get Help if Needed
Not everyone is cut out for the do-it-yourself investing style. If you’ve gotten this far and are still not sure if this is the best way to go there are a lot of companies that will go through these steps with you. If you have someone else handle your investments remember it’s your money, keep up a quarterly review to make sure your money is being invested wisely.