Career & Finance Fridays

“What makes you wise is not what you learn, but what you practice. What makes you wealthy is not what you earn, but what you invest. So, invest in what to practice, and practice what to invest.” ― Michael Peshkam

Rent, utility bills, debt payments and groceries might seem like all you can afford when you're just starting out, much less during inflationary times when your paycheck buys less bread, gas or home than it used to. But once you've wrangled budgeting for those monthly expenses (and set aside at least a little cash in an emergency fund), it's time to start investing. The tricky part is figuring out what to invest in — and how much.

As a newbie to the world of investing, you'll have a lot of questions, not the least of which is: How much money do I need, how do I get started and what are the best investment strategies for beginners? Our guide will answer those questions and more.

Here are five steps to start investing this year:

1. Start investing as early as possible

Investing when you’re young is one of the best ways to see solid returns on your money. That's thanks to compound earnings, which means your investment returns start earning their own return. Compounding allows your account balance to snowball over time.

At the same time, people often wonder if it's possible to get started with a little money. In short: Yes.

Investing with smaller dollar amounts is possible now more than ever, thanks to low or no investment minimums, zero commissions and fractional shares. There are plenty of investments available for relatively small amounts, such as index funds, exchange-traded funds and mutual funds.

If you’re stressed about whether your contribution is enough, focus instead on what amount feels manageable given your financial situation and goals. “It doesn't matter if it's $5,000 a month or $50 a month, have a regular contribution to your investments,” says Brent Weiss, a certified financial planner in St. Petersburg, Florida and the co-founder of financial planning firm Facet.

How that works, in practice: Let's say you invest $200 every month for 10 years and earn a 6% average annual return. At the end of the 10-year period, you'll have $33,300. Of that amount, $24,200 is money you've contributed — those $200 monthly contributions — and $9,100 is interest you've earned on your investment.

There will be ups and downs in the stock market, of course, but investing young means you have decades to ride them out — and decades for your money to grow. Start now, even if you have to start small.

If you're still unconvinced by the power of investing, use our inflation calculator to see how inflation can cut into your savings if you don't invest.

2. Decide how much to invest

How much you should invest depends on your financial situation, investment goal and when you need to reach it.

One common investment goal is retirement. As a general rule of thumb, you want to aim to invest a total of 10% to 15% of your income each year for retirement. That probably sounds unrealistic now, but you can start small and work your way up to it over time. (Calculate a more specific retirement goal with our retirement calculator.)

If you have a retirement account at work, like a 401(k), and it offers matching dollars, your first investing milestone is easy: Contribute at least enough to that account to earn the full match. That's free money, and you don't want to miss out on it, especially since your employer match counts toward that goal.

For other investing goals, such as purchasing a home, travel or education, consider your time horizon and the amount you need, then work backwards to break that amount down into monthly or weekly investments.

» Learn more: IRA vs. 401K retirement accounts

3. Open an investment account

If you’re one of the many investing for retirement without access to an employer-sponsored retirement account like a 401(k), you can invest for retirement in an individual retirement account (IRA), like a traditional or Roth IRA.

» Looking to start saving for retirement? See our roundup of the best IRAs.

If you're investing for another goal, you likely want to avoid retirement accounts — which are designed to be used for retirement, and have restrictions about when and how you can take your money back out.

Instead, consider a taxable brokerage account you can withdraw from at any time without paying additional taxes or penalties. Brokerage accounts are also a good option for people who have maxed out their IRA retirement contributions and want to continue investing (as the contribution limits are often significantly lower for IRAs than employer-sponsored retirement accounts).

4. Pick an investment strategy

Your investment strategy depends on your saving goals, how much money you need to reach them and your time horizon.

If your savings goal is more than 20 years away (like retirement), almost all of your money can be in stocks. But picking specific stocks can be complicated and time consuming, so for most people, the best way to invest in stocks is through low-cost stock mutual funds, index funds or ETFs.

If you’re saving for a short-term goal and you need the money within five years, the risk associated with stocks means you're better off keeping your money safe, in an online savings account, cash management account or low-risk investment portfolio. We outline the best options for short-term savings here.

If you can't or don't want to decide, you can open an investment account (including an IRA) through a robo-advisor, an investment management service that uses computer algorithms to build and look after your investment portfolio.

Robo-advisors largely build their portfolios out of low-cost ETFs and index funds. Because they offer low costs and low or no minimums, robos let you get started quickly. They charge a small fee for portfolio management, generally around 0.25% of your account balance.

5. Understand your investment options

Once you decide how to invest, you’ll need to choose what to invest in. Every investment carries risk, and it’s important to understand each instrument, how much risk it carries and whether that risk is aligned with your goals. The most popular investments for those just starting out include:

Stocks

• A stock is a share of ownership in a single company. Stocks are also known as equities.

• Stocks are purchased for a share price, which can range from the single digits to a couple thousand dollars, depending on the company. We recommend purchasing stocks through mutual funds, which we'll detail below.

» Learn more: How to invest in stocks

Bonds

• A bond is essentially a loan to a company or government entity, which agrees to pay you back in a certain number of years. In the meantime, you get interest.

• Bonds generally are less risky than stocks because you know exactly when you’ll be paid back and how much you’ll earn. But bonds earn lower long-term returns, so they should make up only a small part of a long-term investment portfolio.

» Learn more: How to buy bonds

Mutual funds

• A mutual fund is a mix of investments packaged together. Mutual funds allow investors to skip the work of picking individual stocks and bonds, and instead purchase a diverse collection in one transaction. The inherent diversification of mutual funds makes them generally less risky than individual stocks.

• Some mutual funds are managed by a professional, but index funds — a type of mutual fund — follow the performance of a specific stock market index, like the S&P 500. By eliminating the professional management, index funds are able to charge lower fees than actively managed mutual funds.

• Most 401(k)s offer a curated selection of mutual or index funds with no minimum investment, but outside of those plans, these funds may require a minimum of $1,000 or more.

» Learn more: How to invest in mutual funds

Exchange-traded funds

• Like a mutual fund, an ETF holds many individual investments bundled together. The difference is that ETFs trade throughout the day like a stock, and are purchased for a share price.

• An ETF's share price is often lower than the minimum investment requirement of a mutual fund, which makes ETFs a good option for new investors or small budgets. Index funds can also be ETFs.

» Learn more: How to buy ETFs

Money & Finances

What is your favorite type of investment and why?