If you’re a new stock investor who wants to learn how to invest, you can follow these steps to get started with your investment plan. I’d like to thank Mike from ABCs of Investing for this informative guest article! If you like this post, please consider subscribing to his feed.
This is a quick guide to help you get started with investing — of course there is no point to putting money into mutual funds if you don’t have the rest of your finances under control so we’ll start with some of the more basic money management techniques and then get down to the fun investment stuff! If you already have your finances in order then skip right to the investment section.
One other thing to note is that a lot of the items I mention are topics to learn about — not all the answers will be in this guide. This is more of a roadmap than an encyclopedia.
How To Invest In The Stock Market
Step 1: Set goals. What are your financial goals?
Financial goals are usually improvements you would like to see in your finances.
There are short term goals such as:
- Be able to pay off bills every month.
- Save up for a small purchase or vacation.
And long term goals:
- Eliminate debt.
- Save enough money to retire.
- Buy a house.
For now, try to come up with fairly general goals without specific numbers, since they will come after you do some more analysis on your budget.
Step 2: Know thyself (or take a look at your finances).
The next step is to look at your current finances. This doesn’t mean a casual glance over to the pile of papers sitting on your kitchen table, it means a real close look at all your financial information.
Things to consider:
- How much income do you have.
- What are all your major assets? How much are they valued at?
- How much cash do you have?
- Do you have any investments?
- What debts do you have? Payments?
Once you figure out these items, you should be able to determine if you’re able to spend less than you make. If you’re spending more than you’re earning, then you need to make some changes — living below your means is a key step because you’ll need to have discretionary income in order to build up your savings and have enough to invest. Without a positive cash flow or savings to work with, you won’t be able to proceed with the remaining steps.
Step 3: Create a strategy.
Use the information from Step 1 and Step 2 (feel free to revise Step 1 at any time) to match your budget and cash flow to your goals. For example if you are saving $50/month towards your retirement and you have very little retirement savings — then the goal of retiring in the near future might not be realistic.
This step also includes taking a good look at your own numbers and determining what the next best steps are. If you have a lot of debt then maybe debt reduction should take priority. If your debt and spending are under control then maybe saving for retirement should be a priority. Only you can decide the exact strategy for you.
Step 4: Come up with specific action items.
The outcome of this step will hopefully be a specific budget, specific debt reduction goals (ie. pay off student loan debt in 3 years — or put an extra $200 into the mortgage every month) and/or actual saving goals (ie. save $300/month in your 401(k) to get the employer match). This is where you get into the nitty gritty of your budget and make decisions on the changes you are going to make.
Step 5: Get started with investing!
This step will only apply if you’ve determined from previous steps that you’ve got the money for investments, or if you already actually own some investments. One thing to keep in mind is that just because you aren’t investing now, doesn’t mean you won’t be investing later on, so learning about investing is always a good thing.
These are the things you should concentrate on as you ponder your investment plan:
Review your investment goals. What are your specific investments for? The concept of investment time horizon is very important — if you have a short term goal for your investments then invest in something guaranteed like a high yield savings account. If you are investing for the long term then owning more stocks is appropriate.
Determine your asset allocation. Asset allocation is also very important — that is basically the proportion of risky assets (ie. stocks) vs guaranteed assets (ie. CDs) in your portfolio. Your choice of asset allocation reflects your desire for safety vs growth (or how much potential return you’d like to achieve).
All these steps are a bit of work but that’s the way it goes. Once you learn the basics and get your finances and investments organized then it is very little work to maintain. Take your time, there is no rush.
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