how to start investing

If you have never invested anything before – nothing – what should be your very first investment?

I am not a financial advisor, so take this with a grain of salt – you should consult with someone who knows your unique situation and can provide advice specifically for you. That having been said, here’s a fast and furious guide to investing.

  • If you have an emergency fund of at least one month’s salary (and that’s just an approximate amount, choose an amount that feels right to you) and put it in a high-yield savings account (ING, HSBC, etc.)
  • Once you have an emergency fund, check to see if your company has a matching program for any retirement programs (401k, 403bs, etc.). If so, contribute at least that much to your company’s program. If you are in a low tax bracket now and expect to be in a higher one in the future, put money in a Roth IRA. Unlike your 401(k), you can get the principal out before age 59 1/2, which is nice if you plan on retiring young.
  • If you max out your retirement accounts, start building up your emergency fund until you have at least several months’ salary saved up. Personally, I have approximately 6 months – it’s a nice feeling to know that you’re set for that long if you have an emergency.
  • Finally, if you’ve saved the maximum in your tax-advantaged accounts, open up a brokerage account with Scottrade or TD Ameritrade or Zecco or Sharebuilder – don’t agonize much over which one, because you’re not going to be doing day trading. Right? Buy index funds or ETFs and then forget about them for the next 20 years (at least). Once you have a balance of $100,000 in various index funds and ETFs, you can think about individual stocks. Before that point, don’t bother. Why $100,000? At most brokerages, that’s the level where you start getting preferential treatment for fees, research, etc. To be honest, if you’ve managed to get to this point, you don’t need any more advice, do you?

There you go! Nothing to it. To summarize:

  1. Fund an emergency account to a minimal level.
  2. Contribute fully to your retirement plans.
  3. Build up your emergency account until you have several months’ salary saved.
  4. Buy index funds until you have $100,000 or more in savings, then consider other investment routes.

That’s it. Don’t make it complicated. There are a lot of other steps to investing, but when you get right down to it you can keep it very simple until you have a lot more money than you did in the beginning. Too many people try and overanalyze the process, but when you get right down to it, the tough part is coming up with the money to save, not HOW to save it.

smiley

15 comments

  • Too many people try and overanalyze the process

    I’d just like to point out that over analyzing can be a lot of fun sometimes!

    Mike

  • I think the real trick is actually forgetting about your investments. You’ve got to invest the money and avoid checking the ticker every day. You will drive yourself crazy. I think the biggest problem that new investors have is to watch their investments every hour. This type of thing leads to panic selling and making bad decisions. Ignore the prices on a day to day basis and ignore the media that tries to time the market and explain when the market is going up or down.

  • Oh, trust me, I am King of the Overanalyzers, and you are right Mrs. Micah – it does lead to inaction. I agree with you, Mike, I love to settle down with a nice Excel spreadsheet and come up with 38 different scenarios for everything I do, but I do it far too much. It’s a helpful skill if you’re writing a blog, though 🙂

    Matt, I couldn’t agree more. Investing, especially at first, is definitely not any easier if you sit there palpitating every time the market goes up 1% or down 1%. Ignorance is sometimes bliss…

  • Over-analysis can be fun, but it can also lead to inaction, which is the bad part.

  • I am one of those people who cannot help but check my investments almost every day. It’s obsessive. It does drive me crazy. I should make a habit to check it once a month, then move to once every six months, etc….

  • Steve

    Great post – glad to see you advocating keeping things simple. I agree that until you get into hefty savings and investments over engineering strategy is pointless. Cutting out a few expensive dinners and socking away the cash somewhere will have more impact than splitting hairs over different accounts.

  • Don’t forget to invest in some financial education (books, blogs etc.). By the time you get to step 4 you will need some financial savvy to make smart choices.

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  • JimB: couldn’t agree more. At first the key is to cut costs and save. If you’re debating investing in Citibank versus Bank of America at that point, you’re wasting your effort.

    Mark: You just wrote step 3.5. You’re right, getting educated before getting fancy with more sophisticated investing is critical.

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  • I am one of those people as well, check my investments often, even though i have a long term strategy. It gives me piece of mind to know what is happening in the markets, even if they are bad, and then I always know when there are good buying opportunities.

  • I am one of those people as well, check my investments often, even though i have a long term strategy. It gives me piece of mind to know what is happening in the markets, even if they are bad, and then I always know when there are good buying opportunities.

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