How to Start Investing

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Investing may seem like it's only for wealthy people, but anyone with a little extra cash can do it. To start investing, it's important to create a strategy and stick to it over the long term. Long-haul investment strategies can help secure your financial future (think retirement) and can assist you in building the wealth you desire in life.

If you want to start investing your money, check out this guide to find out when and how to begin.

When to Start Investing

It's best to start investing when you are confident you can easily manage your monthly budget, including expenses such as your mortgage or rent and other necessities; you have little to no credit card debt; and you've built up an emergency fund. Investing will tie up your money for a significant period of time, so it's critical that you have other funds to take care of your monthly expenses and emergency costs that could come up.

Once you're ready to start, do your research, create a plan and plunk down your first investment, however small. The more time your investment has to grow (in most cases), the more wealth you can build over the long term. Starting early is often key to growing investments because as those investments yield a return, you'll be able to reinvest that money and watch it grow over time.

Imagine this scenario: You start off with an initial investment of $1,000 and contribute $25 each month for the next 30 years. In this scenario, your total out-of-pocket contribution would be $10,000 over the 30 years. If your investment grows at an average of 10% annually, you'll end up with $66,798 at the end of the 30 years; that's more than six times what you originally invested.

If you were to do the same thing but for only 10 years, you would have contributed $4,000 out of pocket, and your total investment would only be worth $7,375. The dramatic difference in these totals shows why it's important to begin investing as soon as it makes sense.

What to Invest in First

There are many ways to invest your money, but as a beginner it's probably smart to start off with smaller and less risky investments. Depending on how much disposable income you have, you may have to adjust your investment strategy to align with how much you're able to put aside each month.

Making the right investments requires doing a lot of research to understand what you're putting your money into and how risky it is. This research can be critical for successful investing, so don't feel intimidated by looking up company or specific mutual fund for more information. There are also ways to get around doing your own research if you just want to get started—more on that later.

Here are some of the most common investments and a little bit about how each one works:

  • Individual stocks: When you buy stocks, you're essentially buying a part of a company. Stock prices increase and decrease according to a company's value, and your investment grows (or doesn't) in direct relation to the company's performance. Imagine you buy 10 shares in a company at $5 apiece. If the company's share price increases to $8, the total value of your investment will increase from $50 to $80. That $30 dollar difference is called your return.
  • Bonds: When you buy a bond, you're giving a corporation or government entity a small loan in exchange for an IOU. You can sell the IOU (the bond) at a later date and earn the accumulated interest, plus principal, paid by the bond issuer. Bonds are generally less volatile investments than stocks and can be a safe place to start for someone looking for an investment with little risk.
  • Mutual funds: These investment vehicles pool together money from different investors and use that cash to buy stocks, bonds and other securities. This portfolio of investments is either actively managed by a fund manager or linked to one of the stock indices, such as the S&P 500. When you buy a mutual fund, you'll own a share of the fund and may gain a level of diversification and security you might not otherwise be able to achieve on your own or by owning just one company's stock.

If you invest your money in stocks, bonds and mutual funds and not in a physical commodity, such as metals or a rental home, your money will end up in one or more of the investments listed above. How you choose to allocate it and what you choose to invest in is up to you.

How to Begin Investing

To get your feet wet, consider contributing to your employer-offered 401(k) plan, if you have one. Retirement accounts—like a 401(k) or an IRA— are managed investments that help you spread your money across different types of securities, such as stocks, bonds, mutual funds and more. These accounts typically have a fund advisor who can help teach you what types of investments are available and assist you in choosing which one may be right for you. They'll also help teach you about how investing works and can be a good stepping stone to taking on other investments down the line.

If you're already contributing to your 401(k) and are ready to do some investing on your own, you should consider whether you want to seek the assistance of a financial advisor or a "robo-advisor." Financial advisors are people you work with to develop an investment strategy based on your financial profile. These advisors charge a fee for their services and sometimes have a minimum account size they'll take on.

How Investments Affect Your Credit

Investing typically has no effect on your credit scores, as investment accounts are not listed in your credit report and, in most cases, credit checks are not needed to purchase investments. Investments also don't involve borrowing, and as a result, no record of repayment is created.

One of the few exceptions to this is if you want to open a margin trading account, which may require that you authorize a credit check. Margin accounts allow you to borrow money from your brokerage to make trades with cash you may not have liquid at the time. The brokerage uses your existing investment portfolio as collateral for your loan. When you apply for a margin account, the brokerage will probably check your credit, which will result in a hard inquiry being listed in your credit reports.

Overall, investing extra money you have may be able to help you build wealth over time. While it takes time and attention, the payoff is worth it for many investors. Remember that all investing involves some level of risk, so make sure you have all your personal finances in order before allocating too much of your money toward building your investment portfolio.