How to Invest Money as a Beginner
Advertiser Disclosure: Our first priority is to provide valuable information to help our readers gain insight into financial topics. Although we receive compensation from some of the brands listed on our site, we only highlight companies we believe can benefit our readers and their financial situations.
If you’re like most people, you need to work to make money. But there is a way to make money work for you. That’s basically the investing definition, where you put money aside now so you can reap the profits and benefits later on. Investing is a cornerstone of any financial plan but can be intimidating when you’re first getting started or don’t have a ton of money to throw around. However, in this high-inflation environment, it’s a must for anyone who wants to grow their money and build wealth for the future. In this guide, we’ll cover how to invest, different types of investments, and yes, even investing for beginners with little money.
Why You Need to Invest
Have you ever picked up a scoop of ice cream and thought “Wow, the price has gone up since I was a kid!” That’s the power of inflation and rising costs. What something cost decades ago is not what it costs today (sadly).
If you keep your money in a simple checking account or savings account, it won’t grow much. You may earn a little bit of interest, but nothing you can retire on. Investing your money through different types of investments can help you get a solid return, sometimes between 7% and 10% over time. To retire and stop working, you’ll need to invest your money.
The Pros and Cons of Investing
If you want to learn how to invest, it’s key to understand the pros and cons before getting started.
Pros:
- Outpace inflation: Through investing you can ensure that your money has a fighting chance against the perils of inflation.
- Long-term growth: Investing helps you build wealth because of compound interest. For example, if you were to invest just $500 at age 25, assuming a 7% return, in 40 years at age 65 that small sum would be $7,487.23, according to this Investor.gov compound interest calculator. Imagine if you could add even just a small bit per month over time.
- Dividends: Some types of investments like index funds or stocks may offer dividends, giving you either income or more funds to reinvest.
- Tax benefits: Certain investment vehicles, such as a 401(k), allow you to defer taxes on your contributions and earnings. Instead of paying now, you pay upon withdrawal. Using a Traditional IRA may allow you to deduct a portion of your contributions. That’s not the case with a Roth IRA, however, your earnings under a Roth are tax-free.
Cons:
- No guarantees: In investing, there are no guarantees (and if a company is promising that, it may be a scam). There is historical data that shows an upward trend over the long run, but there is no 100% safe bet.
- Inherent risk: Investors have no control over the economy or the fluctuations of the stock market. To get the rewards of investing, you have to be comfortable with the risks as well. Values can drop and may take a while to recover, such as in the case of the 1929 stock market crash.
- Tax consequences: You may owe taxes if you end up selling some of your investments and have a gain, so be prepared and talk to a tax and/or investment professional.
Investing for Beginners with Little Money
You might think you need a ton of money to start investing. Is investing for beginners with little money possible? The good news is that you can learn how to invest and get started in many ways. Here are some ways to invest as a beginner even if you don’t have a lot of money.
- Your workplace retirement account: You may not realize it, but if you contribute to your workplace 401(k), you’re investing. Talk to your employer about contributing, even if it’s a small amount, and ask if there’s a company match.
- Robo-advisors: There are Robo-advisors that can help automate investing for you and do much of the heavy lifting. For example, you can consider Betterment, Wealthfront, and others. Review potential fees, any minimums, and customer service options.
- DIY: You can open your investment accounts with a brokerage such as Vanguard or Fidelity and place your own orders. This requires a bit more research and legwork, but if you want total control this is the way. Open an account, deposit funds, and then buy the types of investments you want. Just make sure to do the last part so your money isn’t just sitting in the cash holding account and is actually invested!
Once you choose your preferred investing method, you can decide to make automatic contributions or add money on your own schedule. The important part is consistency when investing as a beginner with little money.
Know Your Risk Tolerance
Are you the type of person who loves going on roller coasters? Or are you the type of person who looks up, shakes your head no, and says “Nope, not for me.” In this situation and investing, it’s key to know how much risk you’re willing to face.
This is often referred to as risk tolerance, or how much risk you can tolerate as part of your investing plan. Knowing your risk tolerance can help you come up with an investment strategy that can help build wealth and work within the risk levels you feel comfortable with.
Talk to a Financial Advisor
Figuring out how to invest can be more like an art than a science. Your individual situation, risk tolerance, and budget are unique to you and you’ll need to figure out a system that works for you. Of course, you don’t have to do this alone either. You can talk to a financial advisor who can walk you through the ins and outs of investing and make sure your bases are covered.
Learn How the Pros Invest
Resolve Unpaid Taxes
Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Return
- Averaged Stock Pick Return over 350% (vs. 120% for the S&P)1
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering its top stock-picking service for $79 for new members (Limited Time)2
Get started with invested with the platform trusted by the pros
Sign Up To Gain Insight On Other Financial Topics
