The hardest part of a journey is the very first step, and investing is no different. The investing world may seem so far removed from your day-to-day life that getting started appears impossible, but you can certainly do it. Follow these steps to kick-start your investing journey!
1. Create an emergency fund
It might not seem as glamorous as putting money into the stock market, but you need an emergency fund before you start your investing career. Keep three to six months of living expenses in a dedicated account in order to cover unexpected costs, so that you don't end up like the half of Americans who are unable to pay off a $400 surprise expense. Even if your job is secure, you need to build up a cushion to protect yourself in the event of the unimaginable -- don't add insult to injury by dipping into your investments or borrowing money in order to cover rent or food expenses.
If you have to sell off your investments in the event of an emergency, you may never enjoy the benefits of compound interest. Over long periods of time, the market has returned around 9% to 10% annually. This may not be much at first, but if left alone, any amount can grow dramatically through the mathematical magic of compounding. If you have to sell your investments to pay off unexpected expenses, you will miss out on the biggest part of putting your money to work for you.
2. Pay off any high-interest debt
If your interest payments are higher than what you'd get by putting that money to work elsewhere, you're better off paying down that debt than investing that money. Think of paying down debt as an investment with a guaranteed return equal to the interest rate -- but instead of your investment growing, you simply avoid paying that amount per year. This makes paying down higher-interest debt a slam-dunk investment.
Conversely, you may not need to speed up how you repay your lower-interest rate loans, such as a mortgage. Let's say a mortgage has a 4.1% interest rate, and you can invest for market-performing returns in an S&P 500 index fund. That invested amount nets roughly five percentage points more annually than the 4.1% return of paying down the mortgage. Depending on your risk tolerance, this might not be right for you -- the market does have down years, while paying down debt always yields a positive return. Choose whichever path helps you sleep better at night.
3. Open and fund a brokerage account
After you've established an emergency fund and paid down your costliest debt, you will need to create a brokerage account so you can invest in the stock market. Well-known online brokers such as E*Trade, Robinhood, and TD Ameritrade let you set up an account and start owning stocks in minutes.
However, before you rush out to open a brokerage account, consider what you are looking for. Not all brokers offer the same services, or have the same pricing structure. Avoid brokers that take a percentage of the money you invest, or charge high commission fees that will eat into your returns.
If you have a limited amount to invest, look for a broker that allows you to buy fractional shares. Your choice may also depend on whether you want to open a regular brokerage account, or an individual retirement account (IRA). Not all brokerages allow you to set up an IRA, so make sure to compare all your options.
Investing takes a long time, and it's not exactly a nonstop thrill ride, but it is incredibly rewarding. Once you've covered your bases, feel free to jump right in! Find great starter stocks to build your portfolio around, and hold them for the long term. You'll be amazed at just how quickly your investment portfolio grows.