When we hear the word “investing,” most of us picture men in vests and crisp shirts with their sleeves rolled up, trading millions of dollars on the stock exchange. I’m here to tell you that you don’t need to be a Wall Street trader, a finance geek, or someone with lots of money (or a man, for that matter) to start investing.
Investing remains the best way to grow your wealth. Here is an astonishing fact. By not investing, you could be missing out on $4 an hour, $100 a day, or $3,000 a month in potential income, according to Ellevest! That’s a lot of money to leave on the table.
If you know that investing is a way to go but aren’t sure how to get started, you’ve come to the right place. I’m going to break down this “intimidating” process into a simple step-by-step guide so you know exactly what to do to begin investing in the stock market. Let’s dive in.
Step 1. Do these two things first before you start investing: pay off high-interest debt and create an emergency fund
If you have any high-interest debt, such as credit card debt, you should focus on paying that off first. Most likely, this debt is costing you more than you can earn in the stock market.
Next, work on building up an emergency fund before you begin investing. That way, you’ll have a cushion in case something unexpected happens. Keep that money in a high-yielding savings account.
How much should you stash away? Most people are comfortable with 3-6 months’ worth of living expenses, but it’s very personal. You might be very risk-averse and feel like 12 months’ worth of expenses is a good number to shoot for, or you may feel at ease with having enough to last you one month—your call. The important thing is to HAVE an emergency fund.
Step 2. Determine Your Goals, Time Horizon, and Risk Profile
Women are driven by reaching their financial goals rather than by beating the market. So, you have to define your financial goals clearly. What do you want from your money? It might be saving for retirement, saving for a down payment on a house, being able to pay for your children’s college, or building wealth.
Each of these financial goals has its investment time horizon (how many years you have to achieve that goal) and risk profile (how much volatility can you withstand and how much money can you afford to lose).
Investing for retirement
You can afford moderate to high risk while investing for retirement. It all depends on how early you start and how many years away your retirement is. Your retirement portfolio should be heavily weighted towards the U.S. stock market. A sample portfolio might look like this: 90% stocks, 5% bonds, 5% real estate.
Saving for down-payment on a house
Saving for a down-payment on a home might take around 5-6 years. Therefore, you can afford a moderate level of risk. A market downturn doesn’t mean you can’t buy a house. You might have to wait a bit longer or buy a smaller home. A sample portfolio might look like this: 40% stocks, 60% bonds.
Saving for your kids’ college
Assuming you started saving for college when your kids were young, you have a long-term investment horizon (15+ years); therefore, you can afford to take moderate to a high level of risk. A sample portfolio might look like this: 90% stocks, 5% bonds, 5% real estate.
Building wealth is a long-term goal (20+ years); therefore, you can afford to take more risk since it’s likely that you’ll have time to recover from market downturns. A sample portfolio might look like this: 90% stocks, 5% bonds, 5% real estate.
Step 3. Open a Retirement Account first, and then Individual Investment Account if necessary
Once you’ve built up your emergency fund, the best place to begin investing is in a retirement account. This could be a 401(k)-plan offered through your employer or an Individual Retirement Account (IRA) if there is no employer plan.
Employer-sponsored retirement account
If your company offers a retirement plan, contact the human resources department and ask them how you can enroll. Also, find out if there is an employer match. An employer contributes the same amount of money or a percentage of what you add to the account. It’s free money for your investments so take full advantage of it!
Many employer-sponsored plans will put your money into a Target Date Fund, which is an excellent option for most people. To learn more about Target Date Funds, read our post “This May Be The Only Investment You Need To Own”.
IRS sets the limits on how much you can contribute to your retirement accounts annually. In 2021, employees saving for retirement through 401(k)s and 403(b)s can contribute up to $19,500 to those plans during the year.
Individual Retirement Account
If your company doesn’t offer a retirement account, or you want to invest more than the 401(k)-contribution limit ($19,500), you should open an Individual Retirement Account (IRA). Anyone over the age of 18 with income can open one for themselves.
There are several options for IRAs. This article goes into a lot of details comparing different retirement accounts.
It usually takes less than 15 minutes to open an IRA, and most online brokerages provide this service. My two personal favorites are Fidelity and Vanguard, but if you’re curious to see other options, here is a list of 14 best IRA accounts according to NerdWallet.
Individual Investment Account
There is a limit on how much you can contribute to your IRA every year. For 2021, this limit is $6,000. So, if you’ve maxed out your 401(k) and IRA, the next best thing is to open an individual investment account.
This type of account does not offer any tax benefits, but it lets you invest in any of your financial goals regardless of how much money you’re putting in.
You can have your investment account in the same online brokerage firm that already has your retirement account.
Step 4. Determine Your Investment Approach – Active or Passive
Next, you need to figure out what kind of investor are you – active or passive?
Try this. Which statements resonate the most with you?
Active: I’m a DIY type, and I’m interested in choosing stocks and stock funds for myself. I’m an analytical person and enjoy crunching numbers, reading research reports, and follow the stock market news. I have several hours a week to dedicate to stock market investing.
Passive: I know that investing is great, but I would like to get some help managing the process. I have a busy life, and I don’t have much time to spend on investing. Besides, I’m not a big fan of math, anyway.
There is no right or wrong answer here. You just have to figure out which approach works for you.
Step 5. Open an account with a Robo-advisor or an online brokerage
If you are more of a passive investor, I highly recommend you open an investment account with a Robo-advisor. A Robo-advisor is a brokerage firm that essentially invests your money on your behalf in a diversified portfolio of low-cost index funds (ETFs or exchange-traded funds) that is appropriate for your age, risk tolerance, and investing goals. The Robo-advisor will also rebalance your portfolio automatically and optimize it for tax efficiency.
My favorite Robo-advisor for women is Ellevest. It is the only investment platform designed by women for women, meaning their algorithms take into account women’s earnings curve, the fact that we take more career breaks, and live longer than men.
Unfortunately, on average, women end up with a much smaller nest egg in retirement, and they have to make it last longer (6-8 years on average). We have a lot of catching up to do, so it is crucial to start investing as soon as possible.
Another great option is the Vanguard Digital Advisor. Vanguard’s founder Jack Bogle is the father of index-fund investing. Vanguard has some of the world’s largest exchange-traded funds.
If you are like me and would like to take a more active investment approach, I suggest you open an investment account with one of the above-mentioned online brokers.
I personally like Fidelity because their dashboard is user-friendly, and the investment app is easy to use.
You can create a low-cost index funds portfolio based on your goals, risk tolerance, and time horizon. If you’re curious to learn more about index fund investing, we’ve got an excellent article for you to check out – “The Beginner’s Guide to Index Investing.”
You can also invest in individual stocks. But I warn you – only do that if you have the time and desire to research and evaluate stocks on an ongoing basis thoroughly.
Step 6. Decide how much you’re going to invest
There is a common misconception that you have to have a lot of money to start investing. It could not be farther from the truth. These days you can begin investing with a couple of hundred dollars.
Look at how much money you are earning every month and analyze all of your expenses. You can use our Conscious Spending Plan template to help you see your spending patterns and ways to change them.
Then decide what percentage of your take-home pay you can afford to invest and stick with it. The key here is to invest consistently over time, which brings me to my next point.
Step 7. Automate your investments
Automating your investments is the single most crucial step you could take to set yourself up for financial success. We all have busy lives. There is not enough time or willpower to continually work on your finances and make sure your money is going where it’s supposed to.
First, set up automatic contributions to your 401(k). Ensure your paycheck (after the deduction to 401(k)) is directly deposited into your checking account. Give your HR a copy of a blank check, and they will set up an automated direct deposit in no time.
Then, log into your investment accounts (IRAs and non-retirement accounts) and connect them to your checking account. From there, set up automatic money transfers from your checking account into your investment accounts. I would also highly recommend setting up automated investments right after the money hits your account. That way, you will avoid timing the market and will invest consistently.
If you have your savings and checking accounts at different banks, make sure you connect the two. Sometimes people open high-yielding savings accounts at another bank. Set up automated monthly transfers from your checking to your savings account.
Another cool way to automatically save money each time you buy something is to use a roundup feature offered by the Ellevest Debit card. It’s a smart and easy way to build up your emergency fund.
Step 8. Use dollar-cost averaging
Dollar-cost averaging is a fancy way of saying to invest gradually, rather than all at once.
For example, rather than investing $10,000 in a single index fund in one day, you can make ten periodic contributions of $1,000 each into the fund.
By doing this, you remove the risk of trying to time the market and buying at the top. Instead, you’re buying into the fund at all different times and continuously.
Dollar-cost averaging works beautifully with automatic payroll contributions.
Step 9. Do a Practice Run – Emotional Test Drive
Investing is emotional. If you feel nervous about putting your money on the line and literally don’t know which buttons to press and when, I recommend doing a practice run. It’s like doing a test drive, only an emotional test drive.
Pick an exchange-traded fund or a stock you like and want to own and practice buying a small number of its shares for a tiny amount of money – an amount you would not miss.
It should not matter if it were on sale, not on sale, insanely overpriced, whatever. It should be about the experience.
Treat this money as it has been paid to buy the educational experience of purchasing shares, just like a tennis lesson. It’s a chance for you to practice buying shares with an awareness of your emotions rather than on the numbers. It is all about practicing.
Step 10. Stay the course and increase your contributions gradually over time
In the face of current economic turmoil and high market volatility, you may find yourself making impulsive decisions or becoming paralyzed and unable to stick to your investment strategy or rebalance your portfolio as needed. Instead, stay the course: maintain discipline and long-term perspective.
First, if you’re a DIY investor, be disciplined about rebalancing your portfolio to maintain your asset allocation (mix of stocks, bonds, real estate, cash, etc.).
Second, always stay invested, never be entirely out of the market.
Third, merely contributing more money toward your investment goal is a surprisingly powerful tool. You cannot control the markets, but it’s within your control how much you contribute to your portfolio.
The bigger picture
Thanks for reading this far. Take these ten steps, and you’ll be on your way to becoming an investor. Just remember that investing is a journey, not a destination. You will need to be learning and experimenting on an ongoing basis.
If you’re ready to dig deeper and learn about five fundamental principles for successful long-term investing, we’ve got a perfect guide for you: The Ultimate Guide to Investing.