How to start investing

When is the best time to start investing your money? Right from your first paycheck? When you have a spouse and are looking to start a nest egg? Sometime in the more distant future?

Chances are you’re waiting for the “right” moment to start investing, but waiting has a high cost. Why? Because the later you start, the less you can take advantage of the power of compounding.

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When is the ideal time to start investing?

The short answer is: invest today, not tomorrow. When to start investing isn’t a question of your income or debt. It doesn’t matter if you’re living paycheck to paycheck or earning six figures; anyone can invest a portion of their income, so it makes sense to invest as soon as possible instead of waiting for the perfect moment. The power of compounding means that even a tiny investment can increase over time.

What’s compounding? When you invest, your money earns interest, and reinvesting that interest will earn further interest on your initial sum and the accumulated interest. Essentially, compounding is the process of earning interest on your interest, which allows your wealth to generate over time. By investing just a fraction of your savings, that amount will have a longer period to grow, ultimately leading to higher returns. As an example, think of two friends, Joe and Bob:

  • Joe starts saving at age 19 and saves $300 per month until he’s 27, a total of $28,800. Then he stops saving and leaves his investment to compound.
  • Bob starts saving at age 27 and invests $300 per month, but he keeps saving until he’s 65, for a total of $140,000.

Who ends up with the most money? Thanks to compounding, it’s Joe. He invested less, but his investment had more time to grow. He ends up with about $1.8 million, while Bob ends up with $1.5 million. Compounding is why you must learn how to start investing as soon as possible.

What are the key factors to consider before investing?

If you want to learn how to invest your money beyond a basic retirement account, like stocks or mutual funds, there are a few things to consider.

  • Cash flow, debt and budget. Are you realistic about your current financial situation? Anyone can invest a percentage of their paycheck in a 401K or IRA. But if you’re wondering how to invest money to make money quickly or thinking about a higher-risk area, make sure you first pay down debt and have a good idea of your cash flow and budget.
  • Financial literacy. You don’t need an MBA to learn how to start investing, but you need to know specific financial terms and understand how things like the stock market work.
  • Risk tolerance. When to start investing and your investment amount depends on your risk tolerance. Those with a high-risk tolerance are willing to invest more, while those with low-risk tolerance often start smaller. If you’re considering investing a lot of money, especially in a high-risk area, talk to an expert who can provide guidance.
  • Goal setting. Keep track of your investments to stay updated on their ongoing success. As with any other area of your life, always set goals. Specific, measurable goals will keep you on track and provide benchmarks that can help you refine your investing strategy.
How to start investing

You might not see it this way, but you’re already a financial trader. If you work for a living, you’re trading your time for money, but that’s probably the worst trade you can make. Why? Because there’s always more money, but you can never get more time. How do you stop this cycle? How can you keep time on your side while still making a profit? The answer is to learn how to invest money to make money.

1. Pay yourself first

The best way to create a “money machine” – i.e., money that will provide an income for life – is by putting aside a small portion of your monthly paycheck to pay yourself first. Track how much you earn and spend in a month, and pick a percentage of your income to set aside, ideally no less than 10%, but as high as you can go. Save as much as you can because that number will increase as your income grows. This amount is off the top and doesn’t factor into other spending. Other expenses, such as housing costs, utility bills, and restaurant meals, come next.

2. Automate your savings

Automating your savings is the best way to set your money machine in motion. You’ve probably heard this before, but it’s true. When learning how to start investing, the secret is to make saving as easy as possible. If you already have a retirement account through your job, ask HR to contribute your chosen percentage automatically. If you already have automatic deductions, update them to your desired amount. Self-employed, own your own business, or work as a contractor? Start a retirement account with a bank or financial institution and then set up an automatic transfer from your checking account.

3. Choose your investments

When you put a set percentage of your earnings into savings, no matter what happens, you will slowly start building your financial future. Even if you account for every penny, you can start saving immediately and investing. The trick is to put your money somewhere it will work for you.

4. Diversify

Diversification serves as a buffer and is fundamental to your broader financial freedom strategy. Some investments generate larger returns, so it’s wise to spread your money among your three asset allocation buckets and different types of investments. Each type of investment features unique benefits and risks — learning how to invest your money in a balanced portfolio reduces the risk for your total investment in the event of one investment’s poor performance.

As you learn how to start investing, you’ll soon realize that the question isn’t when to start (the answer is always right now!) but how much to contribute and where to invest it. Start early, use these strategies as a guide, and your investments will pay off for a lifetime.

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