Simple Step by Step Guide to Investing for Beginners

Investing may sound like a complicated topic, but today I am going to break it down in this simple guide to investing for beginners!

If you are wondering where Cassie is, don’t worry she is working hard on other new content for the blog! So I will be your guest writer today!

My name is Vilas and when I’m not helping Cassie behind the scenes, I’m busy working as a Chemist. That’s right, I don’t work as some fancy financial banking wizard! So that just goes to show that if I can do it, you can too!

Those wall street guys can make investing seem scary with all the financial jargon, but a lot of what they say is for more advanced traders. Those are things that you and I probably might never even have to care about.

Here is your step by step guide to investing for beginners!

Today, we are going to focus on the basics of investing and everything you need to know to get started! By the end of this post you’ll learn what investing is, why you should start investing, how to invest, what to buy, the risks involved and more.

By going one step at a time this should be all you need to begin your path to financial freedom! We’re going to start by answering the question “what is investing?”

What is Investing?

At its core, investing is putting your money into something with the goal that it will one day be worth more than what you started with. Investing can take many forms, from buying a store, to buying property (even buying a home can be an investment) to buying stocks.

Some methods of investing are more complicated than others. However, today we’re going to focus solely on stocks, as they’re the easiest way to start investing. Stocks represent ownership of a company. So when you buy stocks, you are simply buying a piece of that company. We’ll walk through an easy example of buying a company’s stock next!

Simple Example of Investing

To give you an idea of what investing looks like on a small scale, here’s a simple example.

Let’s say Lily owns her own business, which is a lemonade stand. She is making good money from it, so she wants to open a second lemonade stand. However, she doesn’t have enough money to open another at the moment. So, she decides to open up her business for her friends to invest in.

Lily’s friends know she’s quite the entrepreneur and each give her $10 to own 5% of her lemonade stand. As her business grows, her lemonade stand becomes more valuable. Now, more friends want to own part of her lemonade stand. They offer $30 for that same 5%.

Wanting to make a profit, the friends who originally invested in Lily’s business for $10, sell their 5% ownership for $30 to the new friends and keep the $20 difference.

Now, Lily can use the original investment to open a second lemonade stand to become more profitable and continue to grow. Lily’s friends who initially invested made a profit as well, and the current friends who own a percentage hope she keeps doing well so they can make a profit too.

Essentially, this is all that happens with the stock market, just on a much larger scale! Companies (Lily) issue stocks that you and I (Lily’s friends) can buy with the goal being that we all make money!

Why Start Investing?

Now why would you want to start investing in the first place? Well, to make money of course! The ultimate goal would be to have enough money coming in from our investments that we no longer have to work our jobs, and can do whatever we want in life. Achieving financial freedom like that is something that can be done more easily than you think, as long as you stay consistent!

Without getting too much into the math today, let’s see how we can achieve that. Historically the S&P 500 (the largest companies of the stock market) has given returns of approximately 10% every year. That means, if you had one million dollars invested, you would receive 100k in one year! Even if you had 500,000 invested, you would get 50k a year! Which is plenty considering you may have other money coming in from a 401k, IRA, etc.

How to Retire with 1 Million Dollars

These numbers may seem astronomical today, but that’s only if you consider saving that much in a regular savings account. Instead, if we invested our money in stocks during that time and let our money compound year after year, we only have to put in roughly $200k over 40 years time and that will be worth 1 million dollars! That’s only $5,000 a year we have to invest! And the earlier you start the easier it becomes to grow a large nest egg!

The key to saving that much by retirement now becomes only an issue of staying committed. Putting aside enough money every year is what we need to focus on. And don’t worry, there is no one size fits all approach. So even if you can only save $1,000 in a year, that will still help you enormously towards being financially free versus not investing at all! And remember, the earlier you start, the longer your money can compound and grow for you!

In order to truly show how profitable investing in stocks can be, we may have to dive into some more in-depth math. That’s something we’ll discuss at a later date, but hopefully these simple examples explain the point!

Before You Start Investing

Before you actually start investing, there are a few steps you’ll want to take first: paying off any high interest debt and building an emergency fund.

Pay off Credit Cards

Before you think about purchasing stocks, you should pay off any credit card debt first. If you carry any of this type of debt, it can seem scary and never ending, but even if you never planned on investing, this is something that needs to be addressed.

The best thing you can do to escape this hole is to make a budget that you can stick to. Then start diligently saving money to pay this down. Lucky for us, Cassie has already talked about plenty of ways on how to do just that! Have a look at some of her tips and tricks here.

Download your free budgeting template here!

The main reason paying off credit card debt is so important is because on average, credit cards have interest rates of 16%. Some cards can even range from 18% through the high 20’s!

If we are trying to grow our money at 10% a year with stocks, we will literally be losing more than we gain as the rate our credit debt climbs will outpace our stock gains. It would be impossible for us to get ahead with that huge weight constantly dragging us down.

Other High Interest Loan Debt

While credit card debt is notoriously bad, we also need to pay off other high interest debt too. Remember we are not looking at the total amount of a loan you have left, but just the interest rate.

For example, if you have a $500,000 loan for a home at an interest rate of 4% this would not be considered a high interest loan. So, you wouldn’t need to have the loan completely paid off before you start investing.

On the other hand, if you have a $5,000 loan with a 14% interest rate, it’d be best to pay off your loan first before investing.

Build an Emergency Fund

After all our high interest loans are paid off, we need to start building our emergency fund. This step is a crucial building block that will set you up with a solid foundation for your investing goals. You’ll have to decide for yourself what feels right, but a good rule of thumb is to have 3-6 months of expenses saved up for emergencies.

We all hope for the best, but life always throws curveballs at us. You never know if you might have an unexpected car repair, end up in the hospital or even lose your job briefly. These setbacks are never welcomed, but we should always try to be ready for them.

So if you find yourself needing cash right now to pay for an unplanned expense, it’s absolutely critical that we have cash in our fund to pay for it. That way we don’t have to sell any investments hastily for that cash and run the chance of taking a loss! And the possibility that we might sell at a loss comes from the fact that stocks in the short term can fluctuate, and if we can help it, we never want to sell them when they are down. I’ll explain more on this later.

Peace of Mind

Another thing that I’d argue is more important is what this does for your mental health. Peace of mind is something you can’t put a price on. Living life knowing that you have enough money saved for something just in case, is infinitely more valuable than having to live in fear day to day of “oh no what if something happens and I can’t afford it.” This goes beyond just investing; that peace of mind and the mental benefits of not being as stressed about money and setbacks cannot be stated enough!

If you need help on how to build up that fund, again it goes back to making a budget you can stick to and putting aside a little bit every month. The same tips and tricks from the previous section still apply!

Looking for more financial resources? Click here for additional posts on budgeting, saving money, paying off debt and more!

Time to Start Investing

Now that you’ve paid off your high interest debt, built up an emergency fund and have a rough understanding of investing, you’re ready to go! In order to actually buy companies’ stocks we don’t go directly to the company, but rather we use a brokerage.

I personally use Charles Schwab, and I would recommend that as well. However, if you use any of the well known brokerages like Vanguard, or Fidelity, among a few others, you will be in good hands. These are all established institutions that have lots of resources that can help you learn and guide you along your investing path.

Setting up your account online should be pretty straightforward and only take about 10 minutes. You just have to answer a couple questions so that you can legally start trading and then boom you’re ready!

What to buy

Now don’t be overwhelmed at the sheer volume of all the products offered. When you’re first starting out, I recommend ONLY buying low-cost index funds. These are basically funds that are made up of all the stocks in the market and cost only a fraction of the price.

Low-cost index funds allow you to have exposure to the market without having to buy each individual stock one at a time. That would get extremely time consuming and expensive! (Some stocks can cost thousands of dollars for just one!)

In exchange for using the fund they will charge a small fee, also referred to as an expense ratio. That is for them to manage the fund by adding and removing stocks to mirror the market. I’ll list a few as well as their corresponding ticker symbols below. But by no means do you have to only stick to these. And always remember to do your own research before purchasing any stocks or other investment vehicles.

SPDR S&P 500 ETF Trust (SPY)

Schwab S&P 500 Index Fund (SWPPX)

Vanguard S&P 500 ETF (VOO)

Fidelity ZERO Large Cap Index (FNILX)

Risks of Investing

Now while all this sounds exciting we have to look at the other side of the coin as well. Risk is always present when it comes to investing because making money is never guaranteed. There is always a chance to lose money regardless of if you bought real estate that depreciates, started a business that doesn’t succeed, or embarked on any number of investing techniques.

The key is that you have to weigh the risk against the reward. And the risk stocks hold in the long term is considered much less relative to the reward you receive for the amount of time and money you invest.

Stocks may go up and down on a week to week basis. However, because we are investing for the long term, we can ignore the little shifts and only focus on the large trends over many years. I already mentioned that over the last 90+ years, the S&P 500 gained roughly 10% annually. But did you know that even if you invested during years that it was down, you would’ve come out ahead in the long run! There are many studies done that prove this over decades of research, but the main takeaway is to be consistent and you will profit!

Evaluating Your Risk Tolerance

Risk is also something you will have to evaluate for yourself. Do you want a safer approach? Buy and hold large and established companies. Are you okay to accept more risk in exchange for potentially a higher payout? Maybe look at purchasing some smaller companies that have a lot of room to grow.

Only you can decide what level of risk you will be comfortable accepting and do the research from there.

Conclusion

This may be a lot of information to consume at once, but take it slow! There’s no need to rush into investing before you feel confident in your abilities. Always do research! Whether that’s learning more about a company or about an investing term that you don’t understand, you want to have enough confidence so that when you buy a stock, you feel good about that decision. Then forget you even own it. Let it grow for you in the background without you having to think about it. You’ll be glad you did!

Just a note that there is a lot to investing I didn’t cover. This was just a guide to investing for beginners. But really that’s all you need! Many investors who have been investing for decades don’t even look at some of the complicated derivatives that can be involved with investing! (And might be better off for that honestly!)

But as you start, continue to educate yourself on topics such as 401k’s, Roth and Traditional IRA’s, and Health Savings Accounts (HSA’s) to maximize your returns even further.

Please leave us a comment below with feedback on what financial topics you’d like us to talk about next! In the meantime, we hope this post explains investing for you and good luck on your journey to financial freedom!

Simple Step by Step Guide to Investing for Beginners

Here is your step by step guide to investing for beginners!