THe Complete 9 step beginner guide to investing
Follow these steps on your journey to become a multi millionaire!
So you’re looking to set out on your journey of investing in the stock market. Bilbao Baggins style, you should start preparing well ahead of time and map out where you want to go and how you want to get there. Unfortunately there is no ring of power to assist you. Okay, I’ll stop with the LOTR references.
But you are probably overloaded with the sea of news and guidance out there, and don’t know where to start.
I was in your exact shoes, back in university I had no idea what to do or how to get started.
Everybody starts out here, no one is born an investing guru. Except perhaps Warren Buffet.
You may be in college now, or are someone who is fed up with their job and wants to achieve financial freedom. Whatever the reason you are in the right place, investing is the best way to achieve financial freedom and is the key reason why the rich continue to get richer.
So after seeing and being asked this question multiple times, I thought it would be useful to frame up an easy step by step guide answering how to get started with investing?
I hope you like my Powerpoint skills below (that’s nearly a decade of Strategy Consulting experience put to good use :))
So let’s get to it. I know it is intimidating to begin this journey, but it will pay dividends (literally) down the road.
Your future self will thank you for it!
Step 1. Just start
Many young people or beginners are put off from investing because of news horror stories of people losing most of their money on Meme stocks like Gamestop or AMC, or from complicated short trades including Puts and Calls.
I’m hear to tell you, this is not investing and you don’t need to know anything about high risk short term trading to invest.
By starting this investing journey, you will begin to put your money to work.
Your hard earned money will be your best employee, when put to work it will never sleep or take vacation. It will work 24 hours a day, 7 days a week.
The important thing is just starting, make a decision now to put your thoughts into action. Don’t leave your money just sitting in a bank account losing 3-4% per year with inflation. Get it working for you.
The good thing is you are reading this guide – once you get through all 9 steps, make sure to take action on this first most important step, which is just starting.
Write it down, set it as a goal and stick it on your fridge so you look at it every day! Starting will help you ensure you don’t have to grind it out for 40 years until retirement worrying about your finances chaining you to a desk job.
Grab a coffee, grab a pen and physically write down specific, measurable financial goals you want to achieve this year.
To help you get there I have included a free downloadable printable pdf below, just enter your email and it will be sent to your inbox.
Print it off! and follow the SMART instructions to craft your financial goals now.
This little bit of effort will pay dividends in the long run.
If you are looking for proof, check out my net worth journey so far.
I have followed all of these steps to get to where I am today. You don’t need to buy a course or hire a personal finance manager, just get started yourself!
*As always, I am not an expert or financial advisor, so nothing on this website should be considered financial advice. These are just my opinions, everyone is different. Always do your own research and have your own independent thought process.
Download FREE printable SMART financial goals template now
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Step 2. Assess your personal finances
Next, determine how much you spend per month.
I like to separate them out into two broad buckets.
1) Basic Living Expenses: This covers every recurring expense that you need to survive. Meaning groceries, your rent / mortgage, insurance to loan payments. Essentially all of your basic living expenses that you don’t have a choice with.
2) Discretionary Expenses: This covers the spending you do have a choice over, everything from costs associated with eating out, vacations, coffee in your local Starbucks, Uber Eats, taxi’s, clothes, nights out. I know you’re reading this going, so essentially everything that is fun in your life. And you’re right 🙂
Once you have set out your typical monthly spending (Tip: by the way just use your banking statements and pick a typical month to determine this). Write down your typical costs for each bucket.
Then ask yourself what you can cut down on from bucket number two (discretionary). Can you cook at home more? Can you buy a bike and cut out the travel expenses?
Set a budget for each. This is going to be your monthly expense budget.
Next add on your sources of monthly income. For most people that will just be your monthly salary take home pay.
Tip: Make sure to use the after tax number as this is the amount which actually ends up in your bank account.
Compare your monthly income to the expenses for bucket 1 and 2. This is what you are left with as disposable income which you can now save and invest every month.
That’s all there is to it… not that complicated right? This is a key step on your financial freedom and investing journey – but yet too few people take stock.
You are now ready to move to step 3.
Step 3. Save, Save, Save
From step 2, you have a clear view of how much you can save every month. The number one thing you should do is start setting that disposable income aside.
Tip: Set up an account where you have an automatic transfer from your current checking account every month.
At the same time, see how you can lower your cost of living. I have listed some examples below that have worked for me.
- Cut out the Starbucks coffees, make a home brew
- Cycle or better walk to work, ditch the car
- Shop on facebook marketplace or thrift stores for furniture
- Stick to unbranded products when shopping
- Pre cook your meals for the week
- Shop around for better prices on your electricity, insurance, internet, phone bill
- Cut out the pricey drinks on night out
- Cancel your multiple tv subscriptions (the Internet has so many free options – e.g. Youtube)
- Remove your account overdraft
- Sell your unused and unwanted stuff (facebook marketplace is your friend)
- Share car trips with friend
- Vacation in your home country, go camping instead of all inclusive resort
- Cancel your gym membership, the pandemic has shown we don’t need one to stay fit and health
- Replace your light bulbs with LED energy saving ones, the cost adds up
The key is to keep your cost of living low, while also increasing your income level if possible.
Disregard the commonly held belief to save 10-30% of your income. Look to get your savings rate up to at least 50%. In my case I aim to save 80% of my income every month.
No matter how much or how little you can save. There is no minimum amount to start investing anymore, new apps out there such as Robinhood let you invest very small amounts of money into stocks (known as buying fractional shares).
So don’t let small amounts hold you back, I started off with a negative net worth in my 20’s and I am now on track to be worth $1.5million by age 35.
I know this is tough, you may have blips in the road or unexpected expenses pop up. But keep at it, you will get there if you are consistent.
You don’t need to have a detailed budget every month, set a target number to contribute every month and aim for that. The more you automate the process the better.
Also before you take the plunge into investing, Tip: I would recommend keeping a 3-6 month emergency fund which would cover your expenses for that period of time in a high yield savings account with an online bank.
Step 4. Research
This is more of a general step, and the fact you’ve got this far means you’re serious about beginning your journey and researching before you start.
This is such an important step, the more you can learn about personal finance and investing the better. I actually find Youtube to be an amazing source of knowledge.
One particular call out is Ben Felix. There are lots of others too, such as Graham Stephan, Dave Ramsey and Cash College. Let me know of your favourite personal finance Youtubers in the comments section – always on the lookout for more.
Also if you can, start to read online reputable articles from the likes of the Financial Times, the Wall Street Journal, or Bloomberg. These have plenty of free trial options, I have learned so much from reading the business/markets sections – particularly the Financial Times.
On the flip side stay away from ill-informed news sites with attention grabbing headlines like ‘The Stock Market Doomsday is coming’. Never panic sell, this is one of the beginning investor mistakes I commonly see. The more you know, the less these sorts of headlines will affect you.
But don’t let not knowing everything stop you from starting (see step 1). As the old adage goes the best way to learn is from doing.
Step 5. Pick the right broker
You’re now at a stage where you are saving a target amount every month. So in order to now invest those savings you need to pick a broker.
There are a few different types of brokers out there. But keep it simple and stick with a discount broker where you invest yourself rather than have someone actively manage your money for you.
Here is an example list – but do your own research (a quick google search or youtube review) depending on where you live.
*I am not affiliated with any of these companies in any way or receive any sort of commission. These are just some of my favourites. I have also included some reviews below from stockbrokers.com, which you may find as a useful reference.
- Fidelity Investments
- TD Ameritrade
- Ally Invest
- Charles Schwab
- Revolut (for any European and Australian Investors)
Make sure to check what sort of commission these providers charge for each investment. Examples include a holding fee, trading fee etc. Robinhood for instance is a free trading app. You can invest in a multitude of investment vehicles such as stock, index funds, crypto etc.
This means there are no commissions, and also no required amount to invest. You can actually start investing with as little as one dollar. Although they don’t facilitate investment in traditional investments such as bonds or mutual funds.
Traditional banks such as Fidelity and TD offer this type of functionality but will charge higher commission/fees for it.
To get set up on these platforms is pretty straight forward. Just download the relevant app and follow the instructions to set up a new investment brokerage account.
Tip: It’s important to know that these brokers earn a commission for each transaction you make. That means they have an incentive to tell you to sell/buy even if it may not be the best decision for your money.
Step 6. Max out retirement accounts first
Before investing in your brokerage account, first inquire with your current employer if they have a retirement plan (e.g. 401k for my American readers, or an RRSP or Pension plan for my Canadian and European readers).
If they do offer one and some sort of matching make sure to take advantage of it. Sign up! It’s essentially free money if they offer matching as they will contribute and match the amount you are contributing up to a certain level.
It’s also pre-tax contributions so you are automatically saving on tax. Although there are restrictions on withdrawing from retirement accounts early.
Most countries also offer tax incentive retirement accounts such as a Roth IRA (individual retirement account), or TFSA (tax free savings account). Make sure to open these up in your brokerage accounts and contribute the max amount every year.
If these names mean nothing to do, it’s okay. Again to do a quick Google search or Youtube video to explain. Or else contact me and I would be happy to provide further details.
At a high level the money you deposit in these accounts is still taxed, but any gains you make on stocks, etf’s, bonds etc. held in these accounts are tax free and are not subject to capital gains.
There are annual limits on how much you can contribute so check that out first.
Opening up these retirement accounts will turbo boost your investment returns! I know tax sounds so boring, but trust me it pays to know about these accounts.
Step 7. Choose the right asset allocation for you
Make sure you invest in investment vehicles (by the way that’s just a fancy term for stocks/bonds/index funds etc.) that you are comfortable with and meet your risk appetite.
Allocation is essentially how much of your income you contribute to each of these investment vehicles (another term used is assets).
As a general rule the younger you are the longer your time horizon will be – in other words you should look to invest and not withdraw any money for the next 20, 30 years and beyond.
Therefore your risk will be higher than for someone close to retirement age or for someone who is looking to withdraw most of their investments to buy their dream home.
The higher your risk tolerance the more you should invest in stocks (i.e. equities). Stocks tend to be more volatile in the short term versus the likes of bonds. But over the long term they typically generate much higher returns.
As you build your net worth, dividends will become a source of passive income too, for you which you can use to either reinvest (which I recommend) or spend on whatever you like.
Below are the major investment vehicles (or assets) i am actually talking about listed below. This is not an exhaustive list but covers the basics, that any beginner should be aware of.
What are they? So when you purchase a stock, you are actually buying a tiny piece of that company (you can buy a stock using your brokerage account mentioned above).
Stocks are companies which are publicly traded on a stock market index such as the S&P 500 – which represents 500 of America’s biggest companies.
They trade under what’s called a ticker symbol which is just a shorthand name which is used to buy and sell shares. For example Coca-Cola’s ticker symbol is KO, Tesla’s ticker symbol is TSLA. Every public stock will have a ticker symbol, and to buy some of that stock you just search for the ticker symbol in your brokerage account and click buy shares. Show me the money!! (for all the Jerry Maguire fans out there)
With stocks you actually own something. Some stocks also pay dividends which is essentially a portion of the earnings that company made for that particularly annual quarter. Because you own shares you will receive a dividend corresponding to the number of shares you own.
Similar to owning anything else like real estate, the more it increases in price the higher your investment. While most of us assume real estate will always go up in value, a lot of individual stocks may go up and down over time and in some cases go to zero!
I don’t ever advise buying individual stocks, as they can be very risky. Anything can happen to an individual company, think Enron in the 90’s or PG&E after the Erin Brockovich movie. I always instead recommend Index Funds and ETF’s, especially for beginners.
Read on to find out more.
– Index Funds and ETFs (Exchange Traded Fund)
Index funds and ETFs are essentially a giant basket of hundreds and thousands of individual companies. So when you buy into an index fund or ETF, you are essentially instantly buying a tiny piece of every company in that basket. It is the best way to instantly diversify your risk across a whole basket of stocks.
The reason I grouped them together is because the only difference between an ETF and index funds is that ETFs can be traded throughout the day similar to stocks, whereas index funds can only be purchased and sold at a certain price set at the end of that trading day.
There are so many different types of index funds out there. For example you may have an index fund which tracks the biggest energy companies in the world or the biggest banks in the world or all the biggest stocks in a particular region.
If you want to find out more, read my post on what are index funds and the top 3 index funds I invest in to retire at 35.
The best way to think about bonds is similar to the way a bank gives out a loan to an ordinary person for say a mortgage. A bond is essentially the reverse where you (the investor) are lending money to a company or an actual government. Meaning you are now in the role of the bank lending out a loan.
In return for you lending this money, the company or government will pay you back a certain amount of interest for a certain amount of time, along with the full amount you originally lent to them at the end of that timeframe.
At a high level that’s all there is to it.
There are more complicated derivatives and forms that bonds take but this is the general explanation,
Bonds are seen as much less volatile and also less risky, which is why they generally generate (alliteration at its finest) much lower returns versus stocks. The typical return on bonds is anywhere from 2-5%, whereas the average annual return on stocks is around 10-11%.
As you can imagine there are lots of companies and governments offering bonds to willing buyers. So make sure to only invest in reputable bonds such as the US (e.g. US treasury bills) or Germany government bonds or blue chip companies like Microsoft, Amazon etc. Avoid ‘junk bonds’ at all costs!
– Mutual Funds
This investment vehicle is essentially a basket of different investments that a company picks on your behalf. They choose what assets to invest in for you – they may pick a mix of stocks, bonds, commodities like gold, real estate – the list is really endless.
A lot of the big banks offer mutual funds along with investment companies. They have a pre-made basket of investments to offer you.
But nothing in this world is free, and mutual funds are no exception. They come with a price. Companies offering mutual funds charge a lot more commission to actively manage your investments.
Personally I prefer index funds over mutual funds because of the much lower fees and commission and you have greater control over what you are investing in. But hey, they are an option.
There are so many other assets or investment vehicles out there, not to mention Real Estate Investment Trusts (REIT’s), commodities like gold, grain, beef or even cryptocurrencies like bitcoin or ethereum.
But for a beginner I would focus on the four I mentioned, they are the easiest to understand and invest in. While most importantly generating you a return for your money.
Tip: Important to note is that you still need to research and determine which suits your specific needs the best.
For example, I am only (I like to describe my age as with the preface ‘only’ makes me feel younger) 30 years old with no mortgage or ambition to buy a home anytime soon. So, I am heavily invested in stocks – in fact over 90% of my portfolio is in a mix of individual stocks and index funds.
As with all investments though there is no guarantee you will make money in the future. Past performance is not a predictor of future success.
But as stocks have grown on average 11% since 1926 there is no reason that trend shouldn’t continue!
Below is a cool infographic that sums up the differences between stocks and bonds nicely, (source: thebalance.com).
Step 8. Stay consistent and monitor performance
You need to consistently dollar cost average into your chosen assets every month.
Dollar-cost averaging is essentially investing the same amount of money at regular intervals (e.g. every month). This strategy means you are spreading out your investment purchases, you can avoid committing all your money to buying an investment at one time.
You may reduce the impact of timing risk, the probability of buying an investment just before its value declines.
Also after investing consistently every month, a habit will form. This is essential in the long term and helps in not losing faith when your investments are moving sideways or even declining from month to month.
Follow the tried and tested approach of investing in low cost broad based index funds and you will be a millionaire by retirement or even a lot earlier. The power of compounding!
Tip: Also be sure to regularly track your investments. This is important because you may eventually have to change what you’ve invested in. Especially if you are invested in individual stocks, which I don’t recommend for a beginner.
If you do own individual stocks, it’s important to keep up to date on quarterly earnings releases for the companies you are invested in.
Earnings are the number one driver of the stock price. Tip: Be sure not to panic sell – and alternatively invest in index funds so you don’t even have to worry about monitoring performance as you are instantly diversified.
There are lots of cool tools out there to track your performance – your chosen brokerage account should also have this feature. Alternatively there are other cool apps out there like Mint or Personal Capital.
Step 9. Rinse and repeat
Woohoo – you made it to the final step. Give yourself a pat on the back, you deserve it. In fact my fingers are getting little six packs typing this much.
Learning how to actually invest is just the start, you will find dipping your toe into this mass pool of information will only draw you in further.
Investing is a journey you will hopefully continue over your whole lifetime. It is the secret to how the rich get richer, and how you can make your money work for you. It will be the hardest working employee you ever have.
Always continue to seek out knowledge and form your own opinion, not the views of headline articles on tabloid websites.
You will sharpen your toolset as you learn more, and notice your wealth will accelerate along with it.
You know have covered the basics of how to get started, and what are the key steps to take. Remember to follow step 1 and just start!
Let me know in the comments what other questions you have when it comes to how to invest for beginners?
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I am, and will continue to practice what I preach!
Leave a comment or contact me if you would like to get in touch and update me on your progress towards your goals.
Catch you soon,