Beginning to invest money can be a daunting task. Between the news headlines about uncertain markets and reports of advisers stealing money from duped clients, hiding the money under your mattress may seem compelling. Leaving money in places it doesn’t earn interest is rarely a good option. If you start with a few basic principles and learn more about how investments work, your time will be rewarded with a better understanding of the financial markets and with accounts that perform successfully to meet your goals.
Write down your goals. The National Endowment for Financial Education recommends beginning your investment plan with a detailed list, including the time frame and amount needed to reach each goal. This will help you narrow the huge number of investment options into a smaller pool of choices that have historically helped others meet goals similar to yours.
Keep emergency funds. If the market drops and your car breaks down at the same time, you won’t want to tap into depressed investment assets to repair a muffler. The Securities and Exchange Commission recommends beginning a savings account to cover six months of expenses. This will give your new investment portfolio a buffer as you begin picking investments to meet your longer-term goals.
Decide on the tax structure of your investments. If you’re going to save for retirement, ask your human resource people at work about a 401k or similar plan. This will allow you to save money on taxes while you invest. If you aren’t eligible for a workplace plan, research traditional and Roth IRA plans. Some of these plans allow you to contribute as little as $50 per month to an eligible mutual fund if you sign up for automatic monthly investments.
Find appropriate investments for your goals. Many beginner investors start with mutual funds. Mutual funds will allow you to pool money with many different investors to buy diversified investments. The Investment Company Institute offers a free online guide to mutual funds that can help you understand how to choose a good fund for your portfolio.
Open and fund your accounts. If you enjoy working alone, an online brokerage firm may be your best option because fees are considerably lower on investment trades than a full-service brokerage house. Full-service brokers may cost more, but you’ll have an investment professional who has passed tests required to help people find suitable investments for their goals. Because not all brokers are created equal, ask friends for referrals and check the BrokerCheck tool on the Financial Industry Regulatory Authority’s website to make sure your potential broker has a clean track record.