How To Start Investing Today – An Investing Guide For Beginners

Before you can start investing you need to get a few things sorted out. This is where most people close out the window because they think it is going to be hard or they can’t do it. I don’t want you to become one of those people so bear with me and give this article a shot. This is important and more than worth it.

We all know that you need to start investing in order to build your wealth. This wealth, or nest egg as some people call it, takes time to build up and is a combination of making contributions and having a ton of patience. Don’t worry, I cringe at the thought of being patient as well. The good news is that the more patient you are, the better off you will be. So in a way, patience pays.

In this article, I’m going to take you through the three things you need to do before you can start investing. They are:

Figure out where the money is coming from.
Understand what type of account you need.
Open an investing account.

Everyone says they want to invest and save but few actually work up the nerve to do it. You aren’t like the majority though. You’re prepared to make big moves toward financial freedom and this article is going to be your tour guide.

Are you ready to take a step in the right direction? Let’s get started.

1) Figure Out Where The Money Is Coming From

You can’t start investing if you have no money, simple as that. This is step one but it can often be skipped. Mostly because it’s not the exciting part. Instead, people are concerned with what stocks they should buy and how fast their money will compound. They want the quick and easy fix and that just isn’t how investing works. Can you afford to retire in 10 years? No probably not (I wish it was that easy). Anyone who tells you it is easy or will happen overnight is selling you junk. If it is too good to be true, then it probably is.

You need to find the money so you can start investing. Where is this going to come from? Well, the simplest and most practical answer is the money that you are already making. Yes, this means you are going to have to cut spending somewhere else. This often scares people away. Those are the people who aren’t serious about investing for the future.

Before you go any further, you need to ask yourself; are you serious about investing for the long-run?

If you are, then let’s go through exactly how to do it.

The way I recommend everyone to do this is through automation. I go through this step by step in my article: Automate Your Bank Accounts To Make Money – A Helpful Guide. In this guide, it shows you exactly how I send money automatically to different investing accounts. Here is a screenshot from one of them.

It's time you start investing. Investing takes time and patience but fortunately for you, it takes a couple of hours to set up and can save you thousands.

As you can see, every week there is money automatically transferred to this account. The amount fluctuates because I breakdown my paycheck by percentage and not a set dollar amount. The reason being that it allows me to be consistent and always keep some money coming in without breaking the bank.

My employer is actually the one who does this for me. Luckily for me, and maybe you as well, I can add multiple accounts to my direct deposit. I get to designate multiple accounts to split my paycheck between and my employer does all the work. This makes setting aside money for investing simple.

No matter how you do it, you need to find money every month to invest. It doesn’t matter if it is $20 or $250. Every cent counts.

2) Understand What Type Of Account You Need

To be honest, there are entirely way too many account options out there for you to open. I think this ridiculous amount is one of the main reason people never start investing. They finally figure out how they are going to come up with the money to invest, then they see their options and they instantly become terrified. Too many options is confusing.

As I type this, I can think of over 20 different account types and 80% of them are worthless to most people. To me, that’s a problem. Instead of informing people of the basic account types that they need to have, they tell them about something like a backdoor IRA. Yes, that is a real option but again, don’t even worry about it.

Below is a list of 7 different account types that you should focus on. These ARE NOT ranked in order of importance. That is a question you will need to ask yourself based on your own personal financial situation. For example, some may value a 529 savings plan more than me because they have children. I don’t need this account but it would be a disservice to you if I didn’t mention it and inform you of your options.

In addition, I would highly suggest building a strategy where multiple accounts work together towards your goals. If you are just trying to start investing, then find one on this list, open it, and fund it for 6 months to a year. After that, you can add in complexity. The point I’m trying to drive home is that I would rather have you start investing something than get overwhelmed by your options and do nothing.

Now that we have that cleared up, let’s go through the seven different account types I think you should focus on.

Traditional IRA

Most people are familiar with some form of an IRA and that is usually from work. Did you know you can open up an IRA on your computer right now? You can (and maybe should) if it fits your financial needs.

Traditional IRA’s allow you to do exactly as a company would. You contribute into the account throughout the year and it is invested in whatever way you choose. Traditional IRA’s do not have an income limit as you’ll later learn, but do have a contribution limit.

That limit is $6,000 for a single person. Don’t fret, these types of IRA’s do have some serious advantages such as your contributions are tax-deductible and all earnings are federal income tax-deferred.

What that means is that you won’t pay any tax on the capital gains your account makes until you withdraw the funds at a later date. That date should be after you are 59.5 years old as to avoid the 10% early withdrawal penalty.

Roth IRA

Of everything on this list, a Roth IRA is probably my favorite and the one I suggest to people the most. Roth IRA’s are great for young people, especially if you aren’t making a ton of money. Roth’s are different from traditional IRAs because the money you put in has already been taxed.

Because of this, when you withdraw your money when you are 59.5 years old it will be tax-free. Why 59.5 years old? I honestly have no idea but that’s the rule.

Because they are so tax-advantaged, the most you can invest in a Roth IRA per year is $6,000 for a single person. Be aware that this amount usually increases every year.

Another rule Roth’s have is that they have income caps. If you are single, you need to make an adjusted gross income below $137,000 and the married limit is $203,000. Obviously, these limits are quite high but still something to be aware of.

Brokerage Account

When I tell people they need to start investing, the first thing that pops into their head is a big computer screen filled with a bunch of stock tickers and lights flashing everywhere. Not many people want to do that type of stock trading and they shouldn’t.

If you do have extra cash after maxing out accounts like a traditional and Roth IRA, then why not take some risk on a brokerage account. I’m not suggesting you go all-in on a penny stock or a cryptocurrency but rather take some educated guesses.

Personally, I have a brokerage account that adds up to be about 20% of all my investments. I like brokerage accounts because they have no limits, and you can invest in almost anything. This, of course, means you are exposing yourself to more risk and one of the big reasons I suggest people never open one. But if you are maxing out everything else with money leftover, then the risk is worth the reward.

I’m invested in names like Amazon, Roku, Square, and Twitter. These are mostly household names with products that I believe in. I could go with riskier less blue-chip names but I’m trying to lower my risk.

529 Savings Plan

If you have young kids, I would suggest to start investing in a 529 savings plan. This type of investment account allows you to invest and grow tax-free. This means when you withdraw from the account and use it for educational purposes, then you don’t have to pay taxes on the capital gains.

The term ‘education’ is used loosely as well which is to the advantage of you, the consumer. Room and board, textbooks, and obviously tuition are covered under the term ‘education’. Another advantage is the minimum contribution is usually relatively low. For example, Kansas has a minimum contribution of only $25.

529 saving plans can differ state to state on things like the minimum contribution to the tax benefit. To check your state and learn more check out this article on Nerdwallet.

Health Savings Account

There has been quite a bit of talk about the health care system over the last couple of years and I’ll be the first to admit it is messed up. I can’t provide a solution for that but what I can inform you about is an investment opportunity to help with health-related costs. A health savings account (HSA) allows you to invest pre-tax dollars into an account that can be used for health-related costs in the future.

These costs include deductibles, coinsurance, and other expenses. The big benefit here is you can contribute every year, pre-tax, and if you don’t use the money it will grow year over year. Unfortunately, there is a maximum you can contribute per year.

For 2019, that max contribution is $3,500 for an individual and $7,000 for family coverage. It’s important to note that in order to qualify for an HSA you must have a high deductible plan. The definition of a high deductible is $1,350 for single coverage and $2,700 for a family.

Online Savings Account

Some may be confused to see online savings account on this list but they are a form of investing. It’s no secret that a majority of people don’t have $1,000 in emergency cash sitting around and an online savings account can help you fix that.

The best part about online savings accounts? They usually offer a higher interest rate than a regular savings or checking account. While patience and continuously investing are the main building blocks of building a nest egg, the interest rate is the magic that makes it all worth it.

My favorite online savings account is Wealthfront. They offer a 2.07% interest rate which is over 8x more than what my local bank offers (.25%). That difference may only be a few percentage points but we are talking a difference of tens of thousands of dollars.

Personally, I use my Wealthfront account to store my emergency fund. Hopefully, I won’t need that money for some time and I don’t want it sitting in an account that earns me no interest.

3) Open An Investing Account

Understanding where the money is coming from and what type of accounts you need is the hard part. Opening an investing account is easy and if you can use a computer, then you can do it in under 20 minutes.

The first thing you are going to want to do is to go to Vanguard. Vanguard is one of many online investment brokers but I suggest them because they are the cheapest. I could go into a whole sales pitch on why they are a great company but I’ll save it. Also, I should mention I don’t get any kickback for suggesting them, I just really like them.

Anyway, go to Vanguard’s website and follow the picture below.

Under investing you can see you have a couple of options. Remember how I had you figure out which type of account was right for you in step 2? This is where you are going to choose that account and click on it.

From there, each page will give you some detail on what each account means. Basically, it will restate what I told you above. If everything seems right, then follow the next picture below.

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The next couple of steps will be very similar to creating a Facebook account. Just enter your personal information and you are done. From there Vanguard will ask you to link a bank account or transfer funds. If you are comfortable and ready to do so, then do it. You’ve come this far, no sense in waiting any longer.

Congratulations! You’ve successfully created an account and can start investing.

I get that I haven’t gone over what you should invest in and how much you may need to invest over time but that’s a conversation for another day. A majority of people never even get past these three steps so I felt like it was important to start with the basics. Like I said earlier, all they are concerned with is what stocks or mutual funds to buy and forget that they actually need to have an account to buy those things with. Following this process will help you to be a successful (and hopefully profitable) investor.

The Bottom Line

It will take time to get everything in this article set up and running. Nothing I write about is a quick fix or magic pill and the topic of the things you need to do before you can start investing is no different. I would suggest saving this article to your favorites and doing one step at a time.

Find out how much money you can set aside per month.

Figure out what type of account you need to open.

Open the account and automate your investments.

All of this can be done in a day, a week, or even a month. What matters is that you start investing as soon as you can.

As always, if you ever have any questions then reach out through the Contact Us tab. I can walk you through any part of the process and I’ll do it all for free.

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