Investing Made Easy: A Quick Action Plan for Beginners
Do you want to make your money work for you instead of the other way around?
This is where investing comes in. Too often, new investors think that investing is complicated. But it doesn’t have to be! Below is our “investing made easy” guide that walks you through five simple steps to help you invest and generate wealth!
- Investing is important to help you build wealth over time.
- Determine your financial goals before investing. Then calculate how much you need to invest to reach these goals.
- Create an investment portfolio that matches your age and risk tolerance. You can choose a pre-made portfolio or allocate assets on your own.
- To build a portfolio, select a trading platform through the brokerage of your choice. Also, make sure you invest in a 401K if your employer offers one.
- Buy the portfolio. This means that you buy specific portfolio assets such as ETFs or stocks within the trading platform.
- Make your investment contributions automatic, so you don’t forget to invest.
Why is investing important?
Investing is the art of buying and selling assets (e.g., stocks and bonds) to help you earn more money. Investing is important for your Present and Future Self as you can build wealth now and in the future.
Smart investing helps you:
- Earn money in the short-term through dividends (aka portions of a company’s profits that are paid to its shareholders).
- Build wealth over the long-term through regular contributions and compound interest (aka interest earning interest).
- Beat inflation as your invested money can earn more than the inflation rate.
- Retire with enough to live off of when you no longer work.
Perhaps most important is that investing can help you reach your financial goals. As your money earns money, you can use returns for buying a home, retiring early, your kids’ college education, and more.
Investing should be a long-term game. Day trading or trying to time the market by buying and selling often is stressful and risky. Buy and hold your investments for years to build wealth.
Note: Before investing, make sure you’re financially stable. Pay off high-interest debt first. Also, create an emergency fund of at least 3-6 months of living expenses. Once your safety net is in place, start investing.
Step 1: Calculate how much you need to invest to reach your financial goals.
First, determine what you want to accomplish by investing. Consider these goals your North Star for determining how much to invest per month.
Decide why you want to invest in the first place. What do you hope to achieve? Here are a few mid-to-long-term financial goals to consider (hint: make your goals very specific):
- Earn $10K in dividends to help with a $50K house down payment by 2026.
- Achieve a $55K net worth in five years by age 30.
- Retire in 15 years by age 40 with $1.5 million.
These are just examples. Financial goals aren’t one-size-fits-all. They depend on what you want your life to look like in the future. Achieving these goals depends on how much you make and how much you spend.
If you still need ideas, Fidelity breaks down savings goals by age.
Once you have your financial goals in place, we recommend using an investment calculator to determine how much you need to invest per month to reach your goals. Here’s a free calculator from calculator.net.
Let’s say you want to retire in 15 years with $1.5 million. You already have $15,000 to invest. You contribute $4,500 to your investment account every month. Interest is compounded annually.
At a 7% return rate, you’d have almost $1.5 by the end of 15 years. Use the calculator to determine how much you need to invest per month for every financial goal.
Step 2: Create an investment portfolio.
When you think of investing, you might think of just investing in individual stocks. But your investment portfolio – a collection of financial investments – can be made up of multiple investment types:
- Mutual funds
- ETFs (a mix of stocks and bonds placed into a single fund)
You can invest in these assets yourself, such as through an online brokerage, and invest through your employer’s 401K (hint: if your company offers 401K matching, contribute enough each month to meet the match!).
Consider investing in a mix of assets to diversify your investments and lower your risk. But how do you determine how much to invest in each asset or what percentage to create your portfolio?
This is the most difficult task as an investor because these decisions are based on many factors — factors that are personal to you, such as your risk tolerance, if you’re an active or passive investor, etc. But it’s also the most important decision you’ll make to achieve a strong portfolio performance!
Check out the two common types of portfolios:
- Income portfolio. This portfolio is primarily made up of 70% to 100% of bonds.
- Balanced portfolio. This portfolio is mostly balanced with stocks and bonds. For example, 60% of the portfolio might be made up of stocks and 40% is made up of bonds.
- Growth portfolio. This portfolio is made up of 70% to 100% of stocks.
You can create a portfolio yourself (i.e., pick assets and decide how much to invest in each) or you can choose a pre-made portfolio, such as through sites like Portfolio Charts and Lazy Portfolio ETF. Or, here are three easy asset allocation portfolios to choose from.
Your risk tolerance (aka the level of risk you’re willing to take) should also impact your portfolio choice and how much you invest in certain assets. When you’re younger, you can take more risks, so a growth portfolio might be the best option.
For example, stocks have outperformed bonds over the long term but they are also riskier. You want to have more money in stocks when you’re younger since you can afford more risk. One easy way to calculate your asset allocation is to subtract your age from 110. If you are 25 now, 85% of your money should be in stocks.
Note: If you’re still not sure how to allocate your assets on your own (aka what percentage should be in bonds, stocks, etc.), you can use an investment advisor. However, investment advisors normally charge high fees which can significantly cut into any money made. If you take the time to learn about investing on your own (which you’re doing now!), you can save on those fees.
Step 3: Start investing with a trading platform.
Outside of a 401K, which is set up through your employer, get started investing with a trading platform. But first, you’ll need an online financial brokerage account – it will give you access to software where you can invest.
Popular brokerages include
You can also choose your own brokerage that’s not on this list. Hint: If you’re not ready to invest real money, select a brokerage that offers demo or simulation accounts. You can then practice investing without actually using money.
Fund your account after you’ve created it. The brokerage’s website will guide you through a list of steps to connect your bank account. Some brokerages have a minimum funding requirement. For example, M1 Finance requires a minimum initial investment of $100 to get started.
Through the brokerage, you’ll have access to trading software. There are web-based, app-based, and desktop app software. The options depend on the brokerage.
Here’s an example of what the trading software looks like with M1 Finance:
Whatever brokerage you choose, familiarize yourself primarily with the buttons that allow you to buy and sell. Also, watch YouTube tutorials for your specific brokerage that teach you how to use each platform.
Step 4: Buy investments for your portfolio.
Make sure the money you’ve deposited into your investment account doesn’t just sit there! Once you’ve decided on a portfolio, it’s time to buy it (i.e., invest in your chosen assets, such as stocks or bonds) within your brokerage’s trading platform.
Let’s say you’ve decided on the Three-Fund Portfolio. This low-cost, simple portfolio is made up of U.S. stocks, international stocks, and bonds. The best asset allocation depends on your age and risk tolerance but the 80/20 allocation (80% invested in stocks and 20% invested in bonds) is typically appropriate if you’re younger:
- 60% U.S. Stocks
- 20% International Stocks
- 20% U.S. Bonds
You don’t have to research and buy individual stocks and bonds to create this portfolio (although that is an option!). Instead, you can invest in ETFs which expose you to multiple investments.
To buy U.S. stocks, you could choose to invest 60% in Vanguard’s total U.S. stock market ETF which is VTI. To buy international stocks, you could invest in a total international stock market fund like Vanguard’s VXUS.
To buy bonds, you could invest in long-term treasury bonds through Vanguard Long-Term Treasury Index Fund ETF or VGLT.
All of these ETFs can be purchased through a trading platform like M1 Finance. Add this 3-Fund “pie” to your portfolio and save it to your account.
You now have a portfolio. The buying process is very similar no matter what portfolio you choose or the trading software you use!
Step 5: Make your investment contributions automatic.
Automatically invest money into your portfolio every month – your portfolio amount will steadily grow. You don’t forget to invest and you take advantage of time and compound interest.
Automate your investments in two ways:
1. Set up automatic contributions to your 401K.
Set up automatic deductions, so money from your paycheck goes directly into your employer’s 401K. You should be able to talk to your payroll or HR department to set this up. We suggest three contribution options:
- Max out your contributions. The 401K contribution limit is $20,500 in 2022.
- Contribute the minimum to meet your employer’s match.
- At the very least, contribute 10% of your salary every month into a 401K.
Maybe you contribute 15% of your $50K salary per year. That means $625 would automatically come out of your paycheck each month or $7,500 per year. Now let’s say your employer matches up to 50% of your contributions. Six percent is the maximum employer match.
Your current 401K balance is $1,000. Factoring in a 2% annual salary increase and a 5% return, you’d have $ 1,776,868.32 in 40 years. Even without an employer match, you’d have over $1.2 million.
2. Set up automatic contributions to your online brokerage account.
Maybe you want to earn even more by investing. Or perhaps your employer doesn’t offer a 401K. Either way, automatically invest a set amount in stocks or other investments each month through your online account.
For example, with M1 Finance’s recurring deposits, you can choose to automatically contribute to your portfolio every month. Maybe you want to invest $500 every monthly paycheck. You set up a funding schedule where $500 gets invested from your bank account on the 15th of every month. With M1’s Auto-Invest, the money from every deposit is automatically allocated to ensure your portfolio stays on track.
These automatic investments also help you achieve dollar-cost averaging.
Note: Go back to your financial goals to determine how much to automatically invest per month. Scale up contributions over time to help you meet your goals.
Investing made easy
Learn even more about investing for beginners with the Complete Investing Course (Stocks, ETFs, Index/Mutual Funds) on Udemy. This course breaks down complex topics like stocks and building a portfolio into easy-to-understand concepts. Check out the course about Completing Investing here.