By Myles Leva
Last Updated: June 14, 2022
We’ve written a lot on investing here.
We’ve gone over apps, understanding trading types, and how to learn to invest as a beginner. But we haven’t quite covered what you should do before you invest.
In this article, we will go over:
You should consider three key factors before you invest.
These factors will determine what investment strategy makes sense for you. Of course, after considering these factors, you may need to read far more to be able to put the investment strategy you choose into practice.
First of all, if you don’t know anything yet, you’ll need to learn about investments before you get started.
Even if you want to simply invest in an index fund, some basic knowledge will make it easier to rest assured you at least know what your money is being used for.
Now, let’s go over how to invest when you start without said knowledge.
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You will first need to set aside the money you want to invest.
You have complete freedom in this respect, but it’s best to be practical and set an amount that fits into your budget.
For this step, consider starting to save money from your regular budget. Following budgets like the 50/30/20 rule, or any of its variants, makes it easier to set aside money over time.
If you already have adequate savings (including emergency savings), you can use whatever portion of your savings you are comfortable with. But it’s important to not be too keen to just start investing; it’s more important to make sure you’re starting on solid financial ground.
As a general rule, after building emergency savings, you can aim for 5% to 15% of your income to be put into investment accounts.
Investment accounts come in many forms.
Many people simply use a retirement account like a 401(k) or IRA, or both. These accounts are great for index fund investing, as your retirement savings can grow inside them tax-free until you retire.
Or, you can opt for a Roth IRA to fund the account with post-tax dollars and then forgo paying taxes in retirement.
If you don’t know anything about investing, it’s best to stick to the above accounts and invest in index funds that produce stable, steady returns. However, if your goal is not retirement, you can use other account types.
Taxable brokerage accounts don’t offer the above tax advantages, but they enable you to move your money at any time.
If you want to direct your own investments (such as when you want to pick your own stocks), you will need a self-directed investment account. Of course, if you choose this route, you will first want to thoroughly educate yourself on how investments work and how to successfully invest.
There are several asset classes that the typical 401(k) or IRA will include. You have the choice of what to invest in when you open these retirement accounts.
The right investment strategy for you depends on your goals. For example, if you’re looking at investing for retirement over the next several decades, investing in stocks is the regular choice.
But because picking each stock you invest in individually would be so time-consuming, most people opt to invest in funds.
We’ve also gone over several short-term investment strategies here. These are more hands-on and will require more time to learn to invest effectively than with long-term strategies.
To round things off, here are some things to remember when you learn to invest for the first time:
March 23, 2023