Having a steady monthly income is the first step toward building a successful financial future. But it’s not the only tool you have at your disposal.
As you grow professionally, and even get raises along the way, investing is a powerful complement for what lies ahead. It lets your money work for you, even while you sleep.
Anyone can become an investor, regardless of experience or budget. Investing for beginners is about taking small, consistent steps toward building wealth over time. It’s meant to work alongside your income, not replace it.
Put another way, your paycheck should cover your day-to-day expenses and other immediate needs, while your investments are there to fund future goals like retirement, education, or major purchases.
In this guide, we’ll demystify investing basics, explore different investment types, and share practical tips to help you start investing with confidence.
Why Should I Invest?
Simply put, investing means buying things that will grow in value or earn you money over time. It puts your money to work for you over the long term, building wealth while you focus on your daily responsibilities.
Probably the most common misconception is that investing is just for the wealthy or financially savvy. It’s not: Investing is accessible to everyone and can help anyone reach their financial goals. You can start investing small amounts, and slowly grow your future.
Here are a few reasons to consider investing:
- Beat inflation: Money sitting in your regular savings account loses buying power over time, as the interest paid typically grows much slower than the rate of inflation. Investments generally grow faster than inflation, helping your money increase its value over time.
- Reach long-term goals: Whether you’re saving for retirement, a home down payment, or your child’s education, investing can help you build more wealth, faster.
- Create extra income: Some investments pay you regularly through dividends or interest, which can provide additional financial security. Think of it as a complement to your monthly income.
The best part about investing is that anyone can do it. You can start with as little as $5, putting in small amounts consistently over time. What matters most is building the habit.
Investing Lingo 101
Before diving into specific investment types, you should get to know some basic terms that will help you navigate your investing decisions. These concepts are a must-know for successful beginner investors.
Asset Allocation
Asset allocation means how you split your money among different types of investments like stocks, bonds, and cash.
Think of it as deciding how to spread your financial eggs between several baskets. The right mix depends on your goals, the amount of time you want to stay invested, and how much risk you’re comfortable with.
For example, younger investors may choose stocks for their growth potential, while those nearing retirement might use bonds for income and stability.
Risk Tolerance
Your risk tolerance is how comfortable you are with seeing your investments go up and down in value quickly.
If the thought of a sudden, dramatic drop in your investment account causes you anxiety, you may have a lower risk tolerance than someone who can brush off temporary losses.
It’s important to note that investments with higher possible returns usually come with higher risk. Understanding how much risk you can stomach can help you build an investment mix that won’t keep you up at night during market downturns.
Time Horizon
Your time horizon is how long you plan to keep your money invested before you’ll need to use it. Generally speaking, the longer your time horizon, the more risk you can handle.
For goals like retirement that might be decades away, you have time to ride out market ups and downs and potentially benefit from higher returns. On the other hand, you’ll likely want less risky investments for shorter goals, like saving to buy a home in three years.
Portfolio Diversification
Diversification means spreading your investments across different assets to reduce risk. By owning a variety of investments, you protect yourself from taking too big a financial hit if any single investment performs poorly.
Diversification is kind of like planning for the weather on a trip—you don’t just pack for sunshine. Smart investors diversify their money between different assets, across various industries and parts of the world.
Does this strategy guarantee you’ll always make money? Of course not. But if one investment gets stormy, you’ll likely have others with a sunnier outlook.
Dollar-Cost Averaging
Dollar-cost averaging is investing fixed amounts regularly, regardless of market conditions. For example, you could make a point of investing $100 every month.
This approach can help you develop consistent investing habits and avoid trying to time the market, which can easily become a source of stress and misfortune.
People who invest consistently, even during market downturns, typically see better long-term results than those who stop investing when markets fall.
Compound Interest
Compound interest is often called the “eighth wonder of the world” for good reason. It’s the process of earning interest on your original investment and on the interest you’ve already earned.
The power of compounding accelerates over time, which is why investing early—even with small amounts—can lead to significant growth.
Think of it this way: If you planted a sapling today and let it grow for decades, it would eventually become a towering tree. Similarly, a small investment in your twenties could grow into a substantial nest egg by retirement age, even if you never add another dollar.
Want to see this magic in action? This free compound interest calculator lets you plug in different amounts and time periods to see how your money might grow over time.
Risk vs. Reward: Different Investment Types for Investors of All Stripes
Now that you understand the basics, let’s explore some common investment options, or assets.
Each investment type works differently: Some are more stable but grow slowly, while others might grow faster but with bigger ups and downs. The right mix for you depends on when you’ll need the money and your comfort level with risk.
Stocks
Stocks are shares of ownership in a company. When you buy a stock, you’re buying a small piece of that business, making you a part-owner.
There are different types of stocks to consider:
- Large-cap stocks: Shares of big, established companies, which typically have market values of $10 billion or more. These tend to be more stable but may grow more slowly.
- Mid-cap stocks: Companies valued between $2 billion and $10 billion, offering a balance of growth potential and stability.
- Small-cap stocks: Smaller companies worth less than $2 billion. These may offer higher growth potential but typically come with higher risk.
Historically, stocks have provided the highest long-term returns among major investment types, averaging nearly 10% returns annually for the past almost 100 years. However, they also come with higher ups and downs, meaning their value can change a lot in the short term.
Bonds
When you buy a bond, you’re lending money to a government, city, or company in exchange for regular interest payments. In most cases, you’ll also get your money back when the bond matures.
Bonds typically offer lower returns than stocks but have more stability and income. They’re a key component of most investment strategies, especially as you get closer to needing your money.
Common types of bonds include government bonds (like U.S. Treasury bonds), municipal bonds issued by local governments, and corporate bonds issued by companies.
Mutual Funds and ETFs
Mutual funds and ETFs (exchange-traded funds) both pool money from many investors to buy a mix of stocks, bonds, or other investments.
With mutual funds and ETFs, you get instant diversification with a relatively small investment. Many mutual funds have minimum initial investments ranging from $500 to $3,000, though some have lower minimums or may waive them in certain situations.
Some popular types include:
- Index funds: These track a stock market index like the S&P 500, keeping costs low while providing broad market exposure.
- Actively managed funds: Professional fund managers actively pick investments trying to beat the market. As such, these funds typically have higher fees.
- Target-date funds: Usually found in 401(k) plans, these funds have investment mixes that are automatically adjusted over time based on your goals and when you plan to retire.
ETFs are similar to mutual funds but trade like individual stocks throughout the day. They typically have lower fees and allow you to start by buying a single share or even a fraction of a share.
Alternative Investments
Beyond stocks and bonds, there are several other investment options to consider as you become more comfortable with investing.
Some common alternatives include real estate (either directly or through real estate investment trusts), commodities like gold and silver, and cryptocurrency. Even crowdfunding is an investment option: Through Regulation Crowdfunding (Reg CF), pretty much anyone can invest small amounts of money in companies.
These types typically require more research and understanding, so as a beginner, it may be best to start with more mainstream investments.
4 Tips to Start Investing for Beginners
Now that you have the basics covered, it’s time to talk about how to start investing.
It can be exciting to begin your investing journey, but above all, make sure that you understand what and how you’re doing it. These four tips will help you get started on the right foot.
1. Understand Your Financial Situation
Before you dive into investing, take an honest look at your financial picture. This means figuring out how much money you can comfortably invest—and potentially lose if your investments don’t perform well.
A good approach might be to include investing as a category in your monthly budget, just like rent or groceries. Start by earmarking a small amount; even $15-50 per month is a great beginning.
Keep in mind that your appetite for risk should guide your investment choices. If the thought of your investments dropping 20% in value would keep you up at night, you might want to stick to more conservative investments.
If you can stay calm during market downturns, a more aggressive approach may be the way to go.
2. Set Clear Investment Goals
Begin by defining your investment objectives. Are you saving for retirement, a home down payment, education, or something else? Each goal may need a different investment approach.
Be specific about your goals by identifying:
- The purpose of each goal.
- The amount you’ll need.
- How long until you need the money.
- How important each goal is compared to others.
Remember, the most important step is to start investing, even with small amounts. As little as $15 or $50 a month can grow significantly over time, especially when you start early and stay consistent.
3. Open an Investment Account
You’ll need an investment account to get started. The type of account you choose depends on your goals and tax situation.
Common investment account types include:
- Retirement accounts: 401(k)s through your employer or individual retirement accounts (IRAs) offer tax benefits for retirement savings.
- Brokerage accounts: These offer lots of flexibility and access to many different investment types. There aren’t any limits on how much you can put in, but they don’t provide tax benefits.
- Education accounts: 529 plans provide tax advantages specifically for education savings.
For most beginners, opening an account with a trusted online broker is straightforward. Look for brokers that offer learning resources, are easy to use, and have low fees.
Start by researching different investment account types to help you choose the right one for your needs.
4. Stay Informed
While you don’t need to check the markets every day, it’s a good idea to stay up to date on economic trends and how your investments are doing.
Spend some time developing your financial knowledge. Your broker may offer educational content for investors. You can also get free personal finance information from organizations like the Securities and Exchange Commission.
Consider talking to a professional if you’re uncertain about your investment strategy or as your money situation becomes more complex. A financial advisor can provide personalized guidance based on your situation and goals.
Your Investment Journey Begins Now
Investing is for everyone—not just Wall Street professionals or the wealthy.
By understanding the basics of investing for beginners, exploring different investment types, and following a consistent plan that matches your goals, you can harness the power of investing to put your money to work for you.
Above all, remember that investing is a long game. The most successful investors maintain a long-term view, stay patient during market ups and downs, and stick with their investment plan.
Whether you have $5 or $5,000, the most important step is to get started, even if you’re investing small amounts. Your future self will thank you for the financial seeds you plant today.
At Kudzu, we’ve designed tools to help you build the financial foundation needed for successful investing. Our app helps you become more mindful of your spending and savings habits—necessary skills for freeing up money to invest.
You also get access to our PayPerks library of interactive tutorials, where you can continue learning about investing and other personal finance concepts as you grow more confident in your investment abilities.
Ready to put your money to work? Download the Kudzu app today and take that first step toward growing wealth for tomorrow.
