Investing for Beginners: From Your First $1 to $10k and Beyond

It’s rough to get started, but once you know the best practices and questions to ask you’ll be on track to invest confidently.
Adam

Written by Adam on 2021-04-11. Personal Finance, Blog, Investing. 3 comments. Find out how I make money.

So you’re ready to start investing. What do you do first? Here’s the thing: getting started is the hardest part. After that investing is as easy as moving money into a savings account!

The hardest part of investing isn’t picking hot stocks or staying on top of the news: it’s figuring out what to do next. Like most things in life, once you know what to do, the stress of action starts to fade away.

FanX Pin Haul
FanX Pin Haul

If you’re just getting started investing and want to know the steps, this is the guide for you. In this article, we’ll help clear up the process and give you concrete steps on how to invest from scratch.

Here’s a list of the steps you’ll want to take to get started. Keep reading to figure out how to do each of these.

  1. Figure out what account you’ll use to invest.
  2. Choose a place to invest and open that account.
  3. Decide what to invest in and invest in it!
  4. Set up automatic deposits going forward.

When I started investing, each of these steps was overwhelming. Once I figured out what to do I suddenly had control over my finances and I saw my investments grow higher each year. You can do the same thing.

Side note: this is an interactive post. Some parts of it will require you to input your own financial details to help fill in the gaps and complete the given tasks. There are a bunch of lessons like this in the Minafi Investor Bootcamp.

Step 1: Figure Out What Account to Use

You know how checking and savings account work? You deposit money into them at your bank and you’re able to withdraw cash from an ATM, write checks or transfer money to somewhere else.

Checking and savings accounts are a type of cash account. Since your money is in cash, you can use it at any time.

Investment accounts are very similar to this. The biggest difference between a checking/savings account and an investment account is that an investment account can hold cash as well as stock market investments.

You can move your cash into these investments, and you can move these investments back into cash. Unlike checking and savings, you can’t withdraw money directly from an investment – you need to sell the investment, then withdraw the cash. There are even a number of investment platforms that give you a checking account to access the cash portion of your account (more on that in step 2).

There are a bunch of different investment accounts you can choose from. You’ve probably heard their names before: 401(k), IRA (Individual retirement account), Roth IRA (Roth Individual retirement account), and brokerage accounts (taxable account). To get started invested you only need to choose one account.

Luckily, there’s a best account for everyone’s situation. Try adding your details to the form below to figure out what your first investment account should be.

Based on this you should have a single account type in mind. That account might not be an investment account! It may be creating an emergency fund or paying off your high-interest debt. If that’s the case, focus on that first.

If you have some savings in an emergency fund but could increase it a bit, you could split future deposits between that and your first investment account as well.

Depending on your job, you may not have a 401(k). For a number of years while working I didn’t. If you have a job without a 401(k), I’d recommend investing with a Roth IRA (if you earn less than $125k filing single or $195k filing jointly). Roth IRA’s are an amazing account to learn how to invest with.

My one recommendation for getting started: don’t start with a brokerage account! A brokerage account, also called an “after-tax account”, should be your last resort. Every time you sell something in one of these accounts, you’ll need to pay taxes on it – either at the end of the year or possibly quarterly if you’ve owed taxes in the previous year. If you’re in a place with state taxes, you may be on the hook for taxes there at well.

I’d recommend your first account be your 401(k). If your company doesn’t offer one (and you’re under the income limit), then choose a Roth IRA.

I don’t recommend a traditional IRA if you can help it. Roth IRA’s have some added bonuses that IRA’s don’t: you can withdraw your contributions any time without paying a penalty, there are fewer rules on them once you retire, and withdrawing from them is tax-free – something that can come in handy later in like.

Once you know what account you’ll use (401(k), IRA, Roth IRA, or Brokerage account), it’s time to continue on to the next step.

Once you know what account you’ll use (401(k), IRA, Roth IRA, or Brokerage account), it’s time to check off this task and continue on to the next step.

Step 2: Choose Where to Invest and Open that Account

With a checking or savings account you can walk up to any bank and ask “I’d like to open a checking account”. They’ll know exactly what you mean and be able to open your account in no time.

Investment companies work the same way with investment accounts. In this case, you can head over to their website and look for the “Open a Roth IRA” link (for example) and be able to open one there.

But which investment company should you use?

If step 1 leads you to a 401(k) account, then your options are limited. 401(k) accounts are offered through your employer. That means you’ll need to talk to someone in HR that handles your paycheck. If you’re not sure who to ask, see if your manager can help you find the right person. If you’re still in doubt, ask whoever does onboarding at your company to point you in the right direction.

If you don’t have access to a 401(k) but are currently employed, then you can open an IRA or Roth IRA with any investment company you choose.

Here’s the thing with investment companies: they range from very good to extremely predatory. When I started investing I paid a huge amount of fees just because I didn’t know what to ask for. Here’s what you should ask for:

  • An account exactly matching your account from step 1.
  • No fees for opening it, or any ongoing fees when investing.
  • No account management fees, advisor fees or other fees (unless you choose a robo advisor, which we’ll tackle next).
  • It should allow you to invest in low-fee index funds (which we’ll cover in step 3).

If you’re not sure what platform to use, check out the Minafi Investment Apps & Brokerages Directory. Use the search filters on the right-hand side to filter for the type of account you landed on for step 1.

Self-Managed Account or Roboadvisor?

From there it comes down to preference.

If you’d like to manage your own investments (choose your own funds, rebalance when you get off track, continue learning about investing), I’d recommend Vanguard. With this route, you’ll only need to spend about an hour a year investing once you know the basics.

If you’d like to let someone else make all the investment decisions (choosing funds, rebalancing) and don’t want to learn the ins and outs of investing, I’d recommend either Betterment or Wealthfront. Both are solid robo advisors – investment sites that will automatically invest for you.

If you’re somewhere in the middle, where you’d like to be mostly hands-off, but be able to dig in later, I’d recommend M1 Finance. They’re part robo advisor, part manual. You’re in control of how involved you want to be.

Side note: I don’t get any commission for recommending Vanguard, Betterment, or Wealthfront – I just think they’re the best options out there. I do get a commission when people sign up for M1 Finance, but after trying it out myself I have no concerns recommending it.

All of these places – Vanguard, Wealthfront, Betterment and M1 Finance – offer a bunch of account types. You should be able to find one that works for you.

Decide where to invest (your 401(k), Vanguard, M1 Finance, Betterment, Wealthfront, etc).

Once you’ve made that decision, it’s time to open the account!

Open an account at your investment location.

This step may take some time. The financial industry isn’t known for its speed. Give it some time and bookmark this post if you want to return to it later.

Step 3: Decide What to Invest In

This may sound like the most daunting part, but don’t worry. We only need to find one thing to invest in – just one!

Now, if you choose a robo advisor for step 2, you can skip this step. The sign-up process will ask a bunch of questions to help determine your portfolio. In the end, most robo advisors will select somewhere between 6 and 12 different investments for you.

If you choose M1 Finance, I’d recommend selecting a pie (asset allocation of your money) using the “Expert Pies > (the year you anticipate retiring)” templates.

Choose aggressive if you believe that you would not sell anything if the market dropped by a large amount, or conservative if you would. Since this is a long-term investment, there’s a relatively little risk (historically) if you hold onto it. The biggest risk is that the market drops 50%, you sell everything, then it climbs back up while you miss the recovery. Choose the most aggressive portfolio that lets you sleep at night while not panic selling.

If you didn’t choose either of those, then you’ve decided to invest on your own! In that case, I’d recommend you read through my free investing course that offers a core foundation for how to invest. We cover the basics in this post, but the course goes into more specific situations that might impact your decisions.

When you get started investing, my advice is to keep it simple. I made the mistake of trying to do too much – investing in a bunch of different things. I felt like that made me feel like I had more control over my investments.

That’s a bad idea. You only need to invest in one fund to get started.

You’re not in control of your investments. They can go up or down. Your decisions won’t impact which direction they go. It’s like a train going to another station – either you’re on it or you’re not. The only way to miss the train is not to invest.

Index Funds: An Investors Secret Weapon

Here’s the thing about investing: if you choose a single company, that company can go out of business. In that case, you lose everything. Warren Buffet and any financial advisor who’s not scamming you will recommend you invest most of your money in index funds.

Index funds are a type of investment that invests in a number of companies behind the scenes. You invest in just that one fund, but it invests in hundreds or thousands of companies. You can sit back and enjoy a diversified portfolio without needing to hand-select that many companies.

Like with company stocks, there are a bunch of index funds. The core of most US investor’s portfolios will be a “Large Cap US Stock Market index fund” like $VTSAX. This is equivalent to the blue box below. Each box represents a different type of index fund investment.

There are thousands of index funds out there in each of these categories. It can be overwhelming to sort through them. If you’re unsure if a fund is a good fund for retirement, try searching for it in the Minafi Fund Directory and see it’s score.

Although $VTSAX says large-cap, it’s actually a large-cap + medium cap + small-cap investment. It’s getting some of the advantages of small-cap funds without as much of the downside.

Side note: Large cap means the fund invests in very large companies. Small cap means smaller companies.

For your 1-fund portfolio, there are 3 options I’d recommend. Any of these are an AMAZING way to get started:

  • $VTSAX or $VTI – Vanguards Total US Stock Market Fund. This invests in over 3,200 companies in the US. If the US market grows, as it has done every decade since its inception, your money will grow.
  • $VTWAX or $VT – Vanguards Total World Stock Market Fund. This invests in about 9,000 companies around the world with 60% of its investments in the US and the rest internationally.
  • A target-date fund based on the date you plan to retire. This is a single fund that will invest in everything for you.

Note: The 5-letter funds that end in X are mutual funds you can invest in straight from Vanguard or other places. The others are ETFs that you can buy from any brokerage firm. There’s little difference between these two, but I prefer mutual funds invested at Vanguard for the simplicity of it. If you’re curious about the difference between these two, you can read more about mutual funds vs ETFs.

Your 401(k) might not offer the funds listed above. Most will at least offer a similar large-cap fund. It may be called an S&P 500 fund which is about 80% the same as $VTSAX/$VTI. I have a short course on how to narrow down funds in your 401(k) if nothing else in this article helps for your situation.

In order to make this investment, you’ll need some cash coming into your investment account! For that you’ll need to connect your bank account with your investment account. Connecting your account may take some time. Most investment accounts will make a small deposit into your checking account to verify it exists.

If you’re investing with a 401(k), the process will be smoother, but still may take a paycheck or two to get setup.

Connect your bank account to your investment account – or setup your 401(k) account so you can login.

Once you know what to invest in, it’s time to make your first investment! This can be scary at first. Start small and keep going. If you want to read more, I have a course that digs more into this topic too.

Make your first investment! It can be as small as $1 or as much as you feel comfortable investing.

Step 4: Set up Automatic Deposits Going Forward

You’re almost there! You’ve selected your account type, opened it with your investment firm of choice and made your first investment. What’s next?

hike sign
Investing is a hike – not a sprint.

Investing isn’t a sprint, it’s a hike. The more money you invest, the more you’ll have later. The absolute best thing you can do financially for your future self is to set up automatic deposits.

With a 401(k) this is easy. You fill out some paperwork or set a percentile in your online system and that much money comes out of your account each paycheck.

For other investment accounts, there’s one more step. Sign in to your account and look for a way to make investments on some kind of schedule. I recommend setting it up to withdraw from your bank account a few days after you get paid.

The faster you can think of that money as “invested for retirement” and not “in your pocket” the less chance you’ll spend it.

You can tweak this amount whenever you feel like it. If your emergency fund is running a little low, you can lower your automatic investment a bit and give it time to refill. If you have more money in savings than 3-6 months, then deposit a little more.

By setting this up automatically you won’t even miss it.

Setup an automatic investment going forward. A common approach is to schedule this a few days after your paycheck.

What Next?

This post is a good start, but there are a bunch of things not covered here. A bunch of these are all covered in my free Minimal Investor Course you can read online here on Minafi, or by getting an email each week.

Here are a few next steps and topics covered in the course that you could look into next:

I know this is a lot. It’s easy to get overwhelmed by how much there is to learn or to try to over-optimize your portfolio. If you find yourself feeling that way, take a break. Spend some time not thinking about your finances and come back when you’re ready.

Not everyone needs to manage their own accounts either! If all of this sounds too daunting, you can bypass a bunch of these steps by choosing a robo advisor. That’s great too!

Stay with it year after year and before you know it you’ll have more saved than you can even imagine!

Adam

Hi, I'm Adam! I help millennials invest to reach financial independence sooner than they ever thought possible. Want to see what you could do to reach FI sooner? You're in the right place!

3 Comments

Why not add to the conversation below? Your voice is welcome!
MamaBear

MamaBear

April 18, 2021

These are fantastic graphics! I think you need an entire post focusing on them and your message about annual returns, best case/worst case, why you shouldn’t ever expect to be at the tippy-top or the basement-bottom (because you own more than one asset class).

The “trouble” with cash really stands out – this is absolutely great and the interactive element makes it stick more.

Thanks for your awesome work.

I think you need an entire post focusing on them and your message about annual returns, best case/worst case, why you shouldn’t ever expect to be at the tippy-top or the basement-bottom

That’s a good idea! I might do just that soon! 🙂

Thank you for posting all of this information – I recently became an investor for the first. It is a great feeling, but it is also overwhelming. I know I have to keep track of everything, keep situational awareness, and not let things drift along. What I want to ask is should an investor ever have an expectation for return on investment? I used to believe that 7% annual return generalization until I became more financially literate. But what is a good way to mitigate expectations while hoping for the best when it comes to returns? What can I do proactively to potentially increase them, if even incrfementally?

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