New to Investing: 4 easy steps to get started

Don’t let getting started overwhelm you

Investing can feel overwhelming and this has prevented many from starting. You're probably reading this article because you are interested in learning more about investing but you don’t know where to start. Well, remember the first time you tried to ride a bicycle, your first swimming lesson, your first presentation at work; it probably felt a bit daunting but you managed. It’s the same with investing which can be broken down in manageable steps. So let's look at 4 easy steps to get started. 

Step 1: Figure out how much you should invest

How much money you should invest depends on how much money you have. So first you need to figure out what your financial situation is and it starts with taking a close look at your income and expenses. It’s always a good idea to take a look at your budget. How much money you make and how much money you spend. 

A budget is an estimate of your income and expenses. Your income is usually your salary but can also include other items like property rental income. When it comes to expenses, start with what you absolutely need to spend aka fixed expenses. These expenses are things like rent or mortgage payments, transportation costs, food, utilities, health care, etc. Then look at other expenses such as clothing, eating out or entertainment. These expenses aren’t necessary and are known as variable expenses. Be honest about those and if you can and if you want, consider cutting down on some of your variable expenses so you have more income left over. 

The whole point here is to understand how much money is coming in and how much money is going out. Whatever is left will then determine your ability to save and invest. The key here is, you should not invest money that is needed to cover your expenses, both fixed and variable expenses. You should only invest what is left over after covering your expenses.


Step 2: Think about your goals

Though setting goals is not essential – many investors start without having any goals in mind- it is nonetheless an important step as it helps provide structure, direction and a purpose. Goals can help you stay focused and motivated and act as a roadmap guiding sound financial decisions.

Goals can be anything, for example, paying for a round the world vacation, buying a house, planning for retirement, etc. Goals can be short-term, medium-term or long-term and this will in turn determine the type of investments you should go into. For example, stocks are riskier than bonds and are better suited for long-term goals than short-term goals.

Step 3: Open and fund a brokerage account

A brokerage account is needed to buy and sell securities such as stocks, bonds, mutual funds and ETFs. Those transactions can’t take place in a regular bank account that is used to deposit/withdraw funds and pay bills. It is important to compare brokers before opening an account and pay particular attention to things like the fees the broker charges, the minimum account size, the broker’s reputation and whether the broker is registered.

Once the account is opened, it is then time to fund it, which means to transfer funds from your bank account to your brokerage account. Only then are you ready to make your 1^st investment.

Step 4: Selecting investments

If you are new to investment, mutual funds and ETFs are an easy way to get started. These products which are baskets of securities such as stocks and bonds, provide instant diversification. The advantage of using those products is that you don’t have to think about which security to buy, that choice is made by teams of professionals who are also responsible for monitoring and rebalancing the funds they manage.

You could also choose to buy individual securities. This method is more complex and requires more time than investing in funds. To do it properly, you need to be able to research companies and have an understanding of companies’ fundamentals and financials ratios. You should also ensure that you build a diversified portfolio, investing in multiple instruments across asset classes, sectors, geographies, etc. It is recommended to invest in between 20-30 stocks to avoid over-concentration.

Many brokers nowadays provide screening tools that allow you to filter and search for stocks and funds based on pre-defined criteria such as asset class, region, sector, industry, risk, return, sustainability rating, market cap, etc. Make sure to use such tools to narrow down your search.

A third option is to rely entirely on a professional, working with a financial advisor that will, based on your financial situation, time horizon and risk appetite, help you devise a financial plan and recommends specific investments.

Conclusion   

Even though investing requires some work on your part, it’s not that complicated and is worth the effort as it can help you build wealth overtime and help you achieve your financial goals.