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When you think of an investor, maybe you picture a slick business person in an expensive suit who works in a corner office — and if you don’t fit in this box, you might think investing is out of your reach.
But almost anyone can start investing, even with as little as $5.
Here’s how to start investing as a beginner in just four steps:
- Figure out your goal
- Plan for your retirement first
- Open an investment account
- Find a strategy that works for your goals
1. Figure out your goal
You don’t need a lot of money to start investing. However, keep in mind that you should only invest money you don’t need to cover rent, student loans, insurance, and other essential expenses.
To start, consider your financial goals. For example, maybe you want to save for a new home, plan for retirement, or tuck money away for your child’s college education.
As you think about your financial future and its timelines, here are some guidelines to keep in mind:
Short-term goals: 0 to 5 years
In general, experts recommend that you keep money for short-term goals in a savings account you can easily access, such as a high-yield savings account.
Investments can be volatile, so you don’t want to risk cash you’ll need soon. While a savings account might not earn you as much in interest, you won’t lose any of your money.
Tip: To establish a short-term goal, figure out the overall cost of your goal as well as how many months you want to spend saving for it. Divide the total cost by the amount of months to see how much you’ll need to save every month to reach your goal.
For example, say you want to buy a $200,000 home in two years (or 24 months) and need to save $40,000 for a 20% down payment in order to qualify for a mortgage. Dividing $40,000 by 24 shows that you’ll need to save $1,666.67 each month to reach your goal.
Mid-term goals: 6 to 10 years
If you won’t need the money for six to 10 years, consider investing in a mix of stocks and bonds to mitigate some of the risk.
Keep in mind that all investments come with at least some risk, so there’s no guarantee of future returns. However, over the past 60 years, average annual returns for the S&P 500 — a major stock index — were nearly 8%.
For example: Say you have an eight-year-old child. You estimate that his college education will cost $150,000 by the time he reaches 18.
If you invested $850 per month in a college savings account and earned an 8% average annual return, your money could be worth over $153,000 by the time he enters college. Your contributions would total $102,000, and your investments would have earned over $51,000 in returns.
Long-term goals: 10 years or longer
For long-term goals, such as savings or retirement or building future wealth, experts say you should invest aggressively by putting most of your money in stocks. Because your portfolio will be aggressive, you’ll see market fluctuations, but you’ll likely also experience growth over the long term.
Tip: Saving for retirement is a common goal when it comes to investing. Investment giant Fidelity recommends the following guidelines to figure out how much to save for retirement:
- One times your income by age 30
- Three times your income by age 40
- Six times your income by age 50
- Eight times your income by age 60
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2. Plan for your retirement first
It’s typically a good idea to plan for your retirement before considering other types of investments. In general, you should aim to save at least 15% of your income for retirement.
If you can’t afford to invest that much right now, that’s OK — just save what you can and invest a little more each year if possible.
If you have access to an employer-sponsored retirement plan — such as a 401(k) or 403(b) — and your employer offers matching contributions, try to contribute enough to qualify for the full match. Otherwise, you could be missing out on a valuable part of your compensation package.
Tip: If you don’t have access to an employer-sponsored retirement plan or want to supplement your retirement fund, an Individual Retirement Account (IRA) might be a good option. This is mainly because IRAs offer tax benefits if you meet certain requirements.
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3. Open an investment account
After you’ve planned for your retirement savings, consider what other kinds of investments might work for you. If you’re ready to open an investment account, you’ll first need to pick the type of account you want depending on your goals.
Here are a couple of common options:
- 529 plan: This type of plan is used to invest for your child’s educational expenses.
- Taxable investment account: Unlike an IRA or 401(k) that offers tax advantages, taxable investment accounts don’t have any tax benefits. However, they also don’t come with restrictions for when you can take withdrawals, which could make them a good option if you’re investing for mid- or long-term goals.
Next, find a brokerage firm you want to work with. Here are some popular firms for new investors. Note that these aren’t Credible partners.
| Broker | Account minimum | Account types | Investment options | Fees |
|---|---|---|---|---|
| E*Trade | $0 |
|
| $0 commissions on U.S. stocks and ETFs* |
| Fidelity | $0 |
|
| $0 trade fees on stocks, ETFs, and options* |
| TD Ameritrade | $0 |
|
| $0 commissions on stocks, ETFs, and options* |
| *Note: Fees might apply depending on investment type and index | ||||
Robo advisors
If you’re brand new to the world of investing or you’d prefer a more passive approach, you could also consider opening an account with a robo-advisor, such as Betterment or Ellevest (neither are Credible partners).
Robo-advisors typically offer taxable investment accounts, retirement accounts, and education savings accounts — but unlike traditional brokerage firms where you pick your own investments, robo-advisors do the work for you.
How does it work? When you open an account with a robo-advisor, you’ll answer questions about your financial goals, desired timeline, and risk tolerance as well as how much you plan to invest each month or year. The robo-advisor will use your answers to create an investment portfolio designed to meet your needs.
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4. Find a strategy that works for your goals
The right investment strategy for you will ultimately depend on your goals and how fast you’d like to reach them. Here are a couple of potential approaches to consider:
Dollar-cost averaging
Timing the market is difficult, even for experts. One strategy to potentially mitigate risk is dollar-cost averaging. With this approach, you don’t pay attention to market fluctuations.
Instead, you make regular contributions at regular intervals — such as investing $50 each week into your 401(k), for example.
What to know: Dollar-cost averaging takes out emotion from investing. By sticking to a consistent schedule, you can ride out market changes and lower your risk.
However, keep in mind that you might miss out on higher returns if you invested all of your money at once when the market was low.
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Index funds
While learning how to invest in stocks might be popular, investing in individual stocks could be risky. If you invest your money in a single company, there’s a chance the company could perform poorly, and you could lose your investment.
To reduce your risk, you might decide to invest in index funds instead. Index funds are mutual funds or exchange-traded funds (ETFs) that track major stock market indices such as the S&P 500 or the Dow Jones Industrial Average.
Rather than investing in a single company, investing in an index fund lets you invest in hundreds of companies at once. If a company performs poorly, the other companies within the index fund can offset your losses.
What to know: Index funds are typically rebalanced for you, which might make them a good option for more hands-off investors looking for low-cost options.
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Frequently asked questions about investing as a beginner
What are the 4 most common types of investments?
While there are many types of investment options, there a few common kinds that many average investors will use. These include:
- Stocks, or equities, give you a share of ownership in a specific company. For example, you can buy a share of big companies like Tesla and Amazon.
- Bonds are typically offered by the government. When you purchase bonds, you’re essentially lending money to the issuer and will get a specified rate of interest in return. Bonds are less risky than individual stocks and could provide a predictable stream of income.
- ETFs allow you to invest in dozens or hundreds of companies at once. You can also choose to invest in specific industries or types of companies to diversify your portfolio.
- Mutual funds combine investments from multiple people to purchase stocks, bonds, and other securities. Like ETFs, mutual funds let you invest in multiple companies at once and instantly diversify your portfolio.
How can I invest with little money?
You don’t need thousands or even hundreds of dollars to start investing. There are many micro-investing apps that let you start investing with very little money.
Here are a couple to consider. Note that these aren’t Credible partners.
- Acorns is a robo-advisor and micro-investing app. After paying a $1 monthly fee, you can start investing in ETFs picked for you. Acorns also offers a round-up feature that will round up your purchases to the nearest dollar and deposit the extra change into your investment account. Over time, your spare change could add up to significant investments.
- Stash is another investment app that you can start using with just $5. Unlike Acorns, which only offers ETFs, Stash lets you buy stocks and purchase fractional shares, which means you can invest in high-value stocks even if you don’t have a lot of cash. Stash offers three investment plans ranging from $1 to $9 per month.
How do I learn what stocks to buy?
You should always do your research before investing your hard-earned money. There are several tools available to help you as you consider your options — for example, you could use Morningstar to learn about a security’s fees and past performance.
While a strong past performance isn’t a sure-fire way to guess what future returns will look like, the information can help you learn about a stock’s strength and decide whether investing is a good idea.
Tip: If you’re overwhelmed or aren’t sure which investments are best for you, consider using a robo-advisor or consulting with an investment professional for advice.
Also keep in mind that while Credible is a good source for financial information that’s easy to understand and relevant to your life, we’re not investment advisors — so be sure to speak with an investment specialist to see what’s right for your individual situation before you make any big moves.
How much will $500 be worth in 20 years?
This will depend on how you choose to invest $500 over 20 years. For example, say you open an investment account with $500 but don’t deposit anything else into it.
Assuming an average annual return of 8%, here’s how much the money would grow over 20 years:
| Time | Account value | Account growth |
|---|---|---|
| 5 years | $734.66 | $234.66 |
| 10 years | $1,079.46 | $579.46 |
| 15 years | $1,586.08 | $1,086.08 |
| 20 years | $2,330.48 | $1,830.48 |
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