How to Invest Money: A Beginner’s Guide

Determining the best way to invest money for beginners may seem overwhelming because there is so much information and options available. The good news is that you can always start small and grow your portfolio over time. With the right plan, you can stay ahead of inflation and grow your wealth even without having millions to spare for initial investments.

In this article, you will learn about how to invest money, define your goals, choose an investment account, and pick an investment strategy.

Set Your Investment Goals and Determine Time Horizon

Any “investments for beginners” guide should start with setting the right goals. To make it easier, you can use the SMART principle:

•  Specific

  Your investment goal should be specific. For example, if you have a child who will enter a university in 2034, you have 10 years to save up money for their education.

• Measurable

  You have to see exactly where you are and how close you are to success.

• Achievable

  Investment can be a long journey, and there is no shame in starting small so your goals are achievable.

• Relevant

  Your financial goals should be relevant to your life and align with your other goals and values.

• Time-bound

  Having time-bound goals allows you to be more disciplined with your finances, and makes more clear how much you need to save per month or week.

When learning how to start investing, you should consider the time horizon. This is a period during which you plan to hold an investment before you need your money back. A shorter time horizon (up to 5 years) requires a less risky portfolio.

Choose the Right Investment Strategy

An article on how to invest for beginners wouldn’t be complete without talking about investment strategies. The two main options available to you are active and passive investing.

Active investing

When you choose this strategy, you maintain and manage your portfolio on your own, researching your stocks and performing investment analysis. Active investing doesn’t have to involve frequent selling of stock, but it requires some experience.

Pros:

• Higher chance of getting significant returns;
• High level of flexibility.

Cons:

• Requires specific knowledge;
• Higher risks.

Passive investing

Passive investing usually refers to delegating part of your investment management to another person in mutual funds or similar forms of agreement. You may even adopt a fully passive stance and hire a financial advisor. This investment plan involves less selling and buying, as it is a strategy for the long run.

Pros:

• Tax efficiency;
• More predictability and stability;
• Low fees.

Cons:

• Smaller returns;
• Reliance on other people in decision-making;
• Less flexibility.

Passive investing is a better option for beginners, as it is less risky and allows you to get first-hand experience before adopting a more proactive approach.

What Are the Main Types of Investments?

From individual stocks to real estate, there are investment opportunities suitable for different goals and budgets:

• Stocks

  Stocks offer a good way to diversify a portfolio. By becoming a shareholder in a company, you get a portion of its ownership. Depending on the share type, you may even get voting rights and dividend payments.

• Commodities

  Commodities are tangible resources that you can purchase (from agricultural goods to gold). They are traditionally considered volatile assets.

• Bonds

  Bonds are debt instruments issued by corporations or the government to raise money. With a bond, you give a loan to an issuer and receive interest payments over the established period.

• Funds

  These include index funds, mutual funds, and exchange-traded funds. When investing in funds, you can purchase an entire basket of bonds, stocks, and other assets for a diversified portfolio.

• Real estate

  You can purchase real estate directly or buy shares in real estate trusts. The latter option is similar to mutual funds, with investors buying properties collectively.

Practical Steps to Start Investing

Now that you have an idea about goals, investment strategies, and asset types, let’s focus on the crucial actions you have to take to begin your journey. Here’s how to invest your money in a few steps:

Choose an Investment Account

The first step in investing money for beginners is to consider your options and choose an investment account that corresponds to your needs. For example, if you want to save for retirement, you should go with IRA or 401(k) accounts, which belong to the tax-advantage category. However, this account type has limitations on when you can access your money.

Another option is taxable accounts. Referred to as brokerage accounts, they don’t require you to pay specific fees, and you can withdraw your money whenever you want. When you withdraw your funds, you are also not charged penalties or additional taxes, which is a serious advantage.

Determine How Much to Contribute

The next step in the process of how to invest money for beginners is deciding on the contribution amount. This, once again, largely depends on your goals and current financial situation.

If you plan to invest for retirement, a recommendation is to try to contribute at least 10–15% of your annual income towards it. If this is not possible at the moment, you can start with any amount and reach the desired percentage over time.

If you plan big purchases, you should use the time horizon concept, i.e. determine the sum you need and see how much time you have to calculate the necessary monthly contribution amount.

Research Good Investments for Beginners

After you know your goals and have an investment account, you should research your investment options. You can consider stocks, bonds, mutual funds, or exchange-traded funds.

Bonds tend to be stable, making them more suitable for novice investors than stocks. Mutual funds and ETFs are essentially bundles of individual investments, so they work well for portfolio diversification.

Monitor and Make Adjustments

Investing requires your continuous attention, as you will likely have to make adjustments along the way. It is a good idea to review your portfolio once every quarter, sometimes more frequently. You have to assess how the portfolio is performing in terms of expected return and whether it is in line with your goals.

You should also adjust your investments according to significant life events—birth of a child, marriage, etc. For instance, having joint investments with your new spouse can be advantageous when planning your first family purchases.