Figuring out how to invest money can be a real challenge.
And I’m sure you’ll agree with me when I say there’s certainly no shortage of information on investing available in the digital age.
However, too much information can be overwhelming. Right?
That’s why I have put together this post to give you everything you need to know in one place. I’ve structured the information in a way that is comprehensive, yet not overly complicated.
So, if you’re a beginner who wants to start investing money in order to reach your financial goals, this is for you.
You’ll walk away with a solid grasp of investing. Plus I’ll share what are the best investments right now for you.
Investing Money for Beginners
There are two important questions to ask yourself when getting started investing.
- How much help do you want?
- How much money do you want to invest?
Once you answer these, I’ll show you how to make money by investing and a few safe investments to start with.
Step 1: Determine How Much Help You Want
When you invest, you can choose to receive help in a number of ways. Many people don’t want to take the time to learn how to invest, and so, they entrust their money to a financial advisor or entrust it to the mutual fund manager.
For both of these options, you will be charged fees based on a percentage of your investment in return for the advisor’s or money manager’s service.
For a slightly lesser fee, you can also opt to use a robo-advisor. A robo-advisor will manage your money—yep, you guessed it—robotically using a computer algorithm. This type of investment management has gained popularity because it is less expensive than paying a financial advisor but still allows you to be hands-off.
However, the bot chooses investments based on the Modern Portfolio Theory (MPT), which won’t allow your investments to produce great returns or even beat the market.
Or, you can learn this stuff on your own and Do-It-Yourself. This is the option I recommend.
It can be tempting for beginner investors to want to reach out to a professional because there are a lot of investing myths that purposely discourage people, specifically beginners, from investing.
But I want to encourage you: you CAN absolutely learn to invest on your own.
That’s why you’re here, right? As I mentioned above, I’ll prepare you in this post with a solid foundation to move forward and make smart investing decisions—without the help of a financial advisor, robo or not.
Step 2: Figure Out How Much You Want to Invest
The next step is to figure out how much money you want to invest. The dollar amount you invest is up to you, and it’s different for everyone.
To give you a good gauge of how much you should invest, though, I’ve answered a few common questions about saving vs. investing, what portion of your money you should invest, how often, and if you can get started with little money.
How Much of My Money Should Be Invested?
It doesn’t matter how much or how little money you have, it’s always a good idea to invest as much as you are able to. If you start investing in your 20s, you can invest as little as a few thousand dollars a year and you will be well on your way to preparing for retirement.
A good practice is to set aside a portion of every paycheck to invest, after taking out what you need to live such as housing expenses and food. When you establish this habit early, you will have more money to invest both now and in the future, and you will be ready to invest with the time is right.
How Much Should I Invest Per Month?
While some people preach that making consistent monthly investments is the best way to invest in stocks and “time the market”, this couldn’t be farther from the truth. If you do this, you will be paying way more for a company’s stock than you should, and doing so more often than not.
If you invest in the stock market, the right time to invest is not “anytime” but rather when the companies you want to invest in reach a price that allows you to buy them at an incredible discount. And let me tell you, this isn’t going to happen every month. So, hold onto your cash and wait until the time is right.
Is It Better To Save Money or Invest it?
Now while you want to be patient for the right price, I want to make one thing clear. Saving money is a good practice, but leaving your money in a savings account long-term is only hurting you. Your money is actually losing value thanks to inflation and mediocre interest rates that can’t keep up with it.
When you invest your savings, though, and do so wisely, you can grow your wealth significantly over time.
So, instead of dedicating money to “saving” with every paycheck, dedicate it to “investing”. It is, of course, a good idea to have a small portion of money set aside in an easily accessible account for emergencies.
Once you have an amount in your emergency account that you feel comfortable with, put everything else into investing.
Can You Invest in Stocks with Little Money?
Yes! You absolutely can invest in stocks with little money. In fact, I recommend beginners start small and go from there. When you invest small to start, you will get good practice, learn your true risk tolerance, and get more comfortable with your investment strategy. Plus, even small sums of money can be turned into fortunes over time if you choose the right investments thanks to the power of compound interest.
If you only have $500 to invest and want to know how to use it best, check out these small investment ideas.
What’s the key to making money by investing money?
No matter how much money you have to invest or how much help you get along the way, the key to making money with investing is investing for the long term.
Short-Term Investments vs. Long-Term Investments
Short-term investors make money by trading in and out of stocks over a short period of time rather than buying and holding them for several years. While you certainly can make money doing this, the problem is that no matter how skilled at trading you become, there will always be a big element of luck involved. For beginner investors, especially, short-term trading comes down almost entirely to luck, and you can easily lose as much or more than you profit.
Although some people experience success from short-term trades, this isn’t the type of investing that benefits most people, and this isn’t the type of investing I teach. Investing shouldn’t be used as a get-rich-quick scheme or a gambling game, but rather as a way to consistently grow the wealth you already have over the long-term. With long-term investing, you are able to minimize your risk and negate the sometimes-crushing effects of short-term volatility and price-drops. This involves letting your money compound in the stock market over 10 and 20 years.
I get it. Growing your wealth over a few decades doesn’t sound all that glamorous, but trust me, long-term investing, the Rule #1 way, is how people retire rich.
Step 3: Determine Where to Invest Your Money
After you feel comfortable with the level of help you have decided to take or not to take and the amount of money you want to invest, it’s time to decide where to invest your money—for the long term. When deciding where you should invest your money, you’ve got plenty of options. These options include:
1. The Stock Market
The most common and arguably most beneficial place for an investor to put their money is into the stock market.
When you buy a stock, you will then own a small portion of the company you bought into. When the company profits, they may pay you a portion of those profits in dividends based on how many shares of stock you own.
When the value of the company grows over time, so does the price of the shares you own, meaning that you can sell them at a later date for a profit.
Index investing is another way of investing in the stock market, but instead of buying a stock in an individual company, you purchase stock in a stock market index, which tracks a number of the largest companies in the stock market.
Over the past 90 years, the S&P 500 – which is an index of the 500 biggest companies in the US and a pretty good reflection of the overall stock market – has delivered an average annual return of 9.8%.
This means that if all you did was take your money and purchase stock in the S&P 500 with no time spent researching and choosing individual stocks, you could still expect to make 3-4 times more than if you invested in bonds and upwards of 10 times more what you would earn putting your money in a savings account (more on these type of investments later).
Investing in a 401(k) is another way to invest in the stock market too. It’s simply a vehicle to invest in the stock market provided by your employer for retirement. The real value of a 401(k), though, comes if your employer is willing to match a portion of your contributions.
A “match” is essentially free money that doubles the money you put into your 401(k) account and essentially doubles your investment regardless of what the market does. It is certainly something you should take advantage of if you have the opportunity available.
Your employer typically only matches up to a certain amount. So, once you’ve reached the maximum amount of money that your employer is willing to match for the year, invest the rest of the money you want to on your own so you have more control over where you invest it.
There are other investment options, beyond the stock market, too…
2. Investment Bonds
Investment bonds are one of the lesser understood types of investments. Here’s how they work:
When you purchase a bond, you are essentially loaning money to either a company or the government (for US investors, this is typically the US government, though you can buy foreign bonds as well). The government or company selling you the bond will then pay you interest on the “loan” over the duration of the bond’s life cycle.
Bonds are typically considered ‘less risky’ than stocks, however, their potential for returns is much lower as well.
3. Mutual Funds
Rather than buying a single stock, mutual funds, similar to index funds, enable you to buy a basket of stocks in one purchase. The stocks in a mutual fund, though, unlike an index fund, are typically chosen and managed by a mutual fund manager.
Here’s the kicker:
These mutual fund managers charge a percentage-based fee when you invest in their mutual fund. Most of the time, this fee makes it much more difficult for investors to beat the market when they invest in mutual funds over index funds or individual stocks. Also, most mutual fund investors don’t actually ever beat the stock market.
4. Physical Commodities
Physical commodities are investments that you physically own, such as gold or silver. These physical commodities, in particular, often serve as a safeguard against hard economic times because they will always hold their value.
5. Savings Accounts
You are probably most familiar with savings accounts, but you shouldn’t really think of these as a way to invest your money. Putting your money into a savings account and allowing it to collect interest is, by far, the least risky way but also probably the worst way to invest your money if you want to see a return on your investment. By that definition, putting all your money into a savings account is actually a bad investment.
As is usually the case, low risk means low returns. The risk when putting your money into a savings account is negligible, and typically, there are little to no returns. As I mentioned above, putting your money into a savings account is only hurting you, because you won’t make enough off of interest to even cover the cost of inflation.
Still, savings accounts do play a positive role in investing as they allow you to stockpile a risk-free sum of cash that you can use to purchase other investments or use in emergencies so you don’t touch your other investments.
What Are The Safest Investments for Beginners?
Many of the investment options I listed above are completely safe and fool-proof investments for beginners. For example, you can put your money in US treasury bonds and be almost guaranteed to earn 2-3% annual returns on your investment.
The problem is that 2-3% returns are not nearly enough for most people to reach their investing goals or retirement savings. Now, to me, that’s not safe.
To actually build enough wealth to retire comfortably, you have to seek out higher returns. The good news is, there is a way to invest your money safely AND achieve high returns. It’s called Rule #1 investing.
While there is always some investment risk, you can learn to reduce your investment risk and increase your returns if you follow this investing strategy.
What Investments Give the Best Return?
If the purpose of investing is to grow your wealth over time, you should prioritize the type of investment that gives you the best return, right?
Among the various types of investments, the stock market is the place to invest to get the best returns.
When you learn Rule #1 investing, you can achieve average annual returns upwards of 15%. Rule #1 investing is a stock market investing strategy focused on buying wonderful companies on sale.
A wonderful company is one that will continue to grow as the years go by, surviving whatever challenges the market may throw at them along the way. If you are able to find these companies to invest in, you can certainly get the best returns on your investments.
You don’t just have to invest in singular stocks, though. Putting some of your money into a stock market index fund is also a good practice.
If you are more risk-averse, or only ready to dip your toe into the stock market at this point, that’s OK too, but keep in mind nothing will grow your money quite like investing in the stock market can.
What’s the Best Way to Invest Money?
Clearly, the best way to ensure good, if not great, returns on your money is to learn to invest (on your own!) the Rule #1 way and put your money into wonderful companies in the stock market.
You may be wondering, “but, Phil, what about those other types of investments? Shouldn’t I put some of my money in those too?” and I get why you’re asking this.
There’s a lot of talk in the financial community about “diversification”, which simply means investing your money in a variety of ways in order to provide a safety net should one investment go South.
The thing is, you don’t need to diversify if you know how to invest and understand what you are investing in.
By taking the time to research and learn about the companies you are investing in, you are providing your own safety net, because you won’t invest in any company that doesn’t meet the standards for a wonderful company, as we define it in Rule #1 Investing.
That is key.
Of the investment options available, investing in the stock market is the option that offers the most potential for reward, but, you can’t blindly put your money in stocks chosen at random and expect to achieve great returns.
In order to succeed investing in the stock market, you have to use a system and a strategy.
How To Invest Money in Stocks
The system and strategy I recommend is Rule #1 investing. This is how to invest in stocks the right way.
Rule #1 investing is a process for finding wonderful companies to invest in at a price that makes them attractive.
I’ve thrown around the phrase “wonderful company” quite a bit already, and if you’re familiar with Rule #1 Investing you know what I’m talking about, but here’s a quick refresher:
A wonderful company is one that has trustworthy management, a track record of growth, a leg up on the competition, and that you understand.
Here’s a brief overview here of the four characteristics that every company has to have in order to be considered “wonderful”:
One important factor to consider when analyzing the investment potential of a company is its management.
Companies live and die by the people who are running them, and you need to make sure that any company you invest in is managed by executives who are honest, talented, and determined.
Before you invest in a company, take the time to thoroughly familiarize yourself with its management, and make sure that you trust them to grow the company going forward.
If you are going to invest in a company, it needs to have some sort of personal meaning to you.
There are a couple of reasons why this is important. For one, you are more likely to understand companies that have meaning to you. In other words, you know what the company does, how it works, and how it makes money.
Understanding a company means that you will be better able to analyze the future of the company and make more accurate decisions when investing in it.
Investing in a company that has meaning to you and that you believe in also makes you more likely to research the company and stay on top of what is happening with it – which, in the end, is a big part of being a successful investor.
When a company has a moat, it means that it is difficult for competitors to come in and carve away a portion of that company’s market share, protecting it from being outrun by competition.
A moat could be a proprietary product or software, an impenetrable brand, customer loyalty, or majority control over the market.
Margin of Safety
The Margin of Safety is a measure of how “on sale” a company’s stock price is compared to the true value of the company.
You need to be able to determine the value of a company and from that value determine a “buy price”. The difference between the two is the margin of safety. The goal is to find wonderful companies for 50% off their actual value. This allows you to purchase a company when it is undervalued at a price that all but guarantees a great return on your investment.
By using our margin of safety calculator, you can determine whether a company’s stock price is on sale relative to the true value of the company.
If you want to learn more about the 4Ms of Rule #1 investing, check out my guide to investing in stocks where I explain these principles more in-depth.
Stock Trading Courses for Beginners
Do you have a better grasp on how to invest your money?
A good investor never stops learning. Take the Investing IQ quiz to see where you’re at and if you’re ready for the next step in your investing education.
Learning more about investing will give you the best possible chance at succeeding as an investor and reaching your goals.
If you’d like to learn more about Rule #1 Investing, in particular, and how this strategy can help grow your wealth and shape your future, I invite you to join me at my Free Investing Webinar.
Stock trading courses that are designed for beginner investors, such as this one, are able to teach you important things you need to know about the stock market, how to choose quality companies, when to buy and when to sell, and much more.
They are designed to thoroughly walk you through the process of investing one step at a time, teaching you investment strategies and how to apply them in a much more efficient way than the bombardment of sometimes confusing and contradicting information you will be able to find online.
So, why don’t you join me? In this 45 minute session, I’ll share how I got started investing and teach you the simple steps I learned that have changed everything.
Now… go play.
Editor’s Note: This post was updated for 2021 with additional investing strategies for beginners and more details on additional types of investments.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.