Are you new to investing? Not sure where to start? Investing for beginners can be overwhelming. There are so many moving parts. With that said, we hope the process we’ll show you today will make it easier for you to get started.

What follows are ten steps you can take to become a successful investor. Let’s get started.

1. Work from a Budget

I put your budget first for a reason. It should be obvious. If you don’t know where your money is going, it will be challenging to save and invest consistently. I’m not suggesting you need to be inflexible with your budget—quite the contrary.

However, you need to know where your money is going every month to know to analyze areas where you might reduce expenses and increase the amount available to save and invest.

You’ll need to know how much you have left after paying all the bills, funding your emergency fund, and taking care of things like food, clothing, cars, school supplies, and any other expenses you might incur.

What’s left after taking care of all of these things is your discretionary income. That’s where you’ll get the money to invest. That’s where you can determine how much you can put toward funding your various investment objectives (See #2 below).

Tip: You can boost your discretionary income with money making apps and cash back sites like Swagbucks, Honey, and Rakuten.

2. Know Your Why

Before starting any investing, you must know why you’re investing. How will the money invested eventually be spent? When? Will it be withdrawn in a lump sum? Over a period of time?

If you are investing for retirement, what are the best accounts to use? 401(k)? Traditional  or Roth IRA?

If you’re a beginner, perhaps you’re saving to buy your first home. If that’s the case, you shouldn’t invest that money in the same way you’re investing your retirement dollars.

Maybe you’re saving for your kids’ college education. Once again, that money will be invested differently than money for a house or retirement.

Before you put any money to work in investments, know how and when the money will eventually be used.

3. Build Your Emergency Fund

Before you start investing, make sure you have built up an emergency fund. The money you put into your emergency fund should be a part of your budget until you get it to the desired amount.

Like many things in personal finances, how much one should keep in an emergency fund is subjective. At a minimum, you should have three to six months of your monthly expenses set aside in this fund.

If you’re a more conservative person, you might be more comfortable with a one-year cushion in your fund. I know others who have as much as three years set aside in their fund. Managing your monthly expenses by reducing or eliminating unnecessary expenses means you can have a smaller emergency fund.

The reason is simple: if your fund’s size is based on a multiple of your monthly expenses, the smaller your expenses, the smaller your fund. Another way to look at it—if you lower your monthly expenses, whatever amount you have in your emergency fund will last longer.

Either way, be sure to think about how many months you want to be covered and keep that amount or more in this fund.

One last thing on this. Do not invest your emergency fund money in anything that has a risk of loss. Look for an FDIC-insured interest-bearing savings or money market account.

4. Have a Plan

Once you’ve decided why you’re investing your money, it’s time to develop a plan to invest it.

For example, let’s say one of your goals is to invest for retirement. I brought up some questions above about what type of retirement accounts would be best. Here are some other basic questions to answer:

  • When do I want to retire?
  • How much income do I want in today’s dollars?
  • What will my expenses be?
  • What sources of income will I have (Social Security, pension, inheritance, etc.)?
  • How long will the money need to last, or how long do I expect to live?

Once you have that last number, you can work backward to calculate how much you need to save each year based on a given growth rate. If you have 30 years until retirement, need $1 million, and earn 5% on your investments each year, you’d need to save roughly $15,000 every year. Viewed monthly, you’d set aside $1,250. Use a compound interest calculator to figure out what you need for your plan.

If you have a company retirement plan, the bulk of that investment might go into that account. Remember, most employer plans have a matching contribution. Many companies will match your contributions 100% up to 3%, 5%, or more. That’s free money and reduces the amount you need to contribute to reach your $1 million goals.

Use this same calculation method for each goal you’re trying to achieve.

5. Follow Your Plan

I know it seems unnecessary to say this, but many people seem to get distracted, discouraged, or convinced that there is a better way.

If you’ve done the work to calculate how much money you need to fund your goals, how much you need to save, and the kind of return that will get you there, that’s really all that matters. Don’t worry about what others are doing. That’s not to say you shouldn’t listen to others. However, just because someone is doing well for themselves doesn’t mean how they’re doing it is good for you.

Stay focused on the plan you’ve created for yourself. If your circumstances change (job loss, income reduction, health issue, etc.), see how that affects your plan. If need be, make adjustments along the way.

Be sure to calculate how these changes affect your goals and adjust accordingly. Doing this will help keep you on track.

6. Invest Wisely

There are many differing opinions on how to invest your money. There will always be someone who tells you they’re getting a much better return on their investments than you are. Don’t be swayed. No one wants to appear to be stupid. Some need to toot their own horn to make themselves feel better.

It doesn’t matter what someone else is earning on their money at the end of the day. It has nothing to do with what you’re trying to do with your money.

You’ll also hear a lot of noise from the financial and mainstream media. Ignore it for the same reason.

Figure out how much you need to earn to have the amount of money you need when you plan to use it. Apply a conservative return percentage to calculate the annual investment needed. Keep in mind that investment returns are not fixed or linear. They will fluctuate, sometimes pretty dramatically.

Here’s an article that will introduce you to some of the investment options available in 2020 and beyond to help you choose.

7. Be Flexible

We covered this briefly in the section on following your plan. Being flexible means being open to adjusting your plans. Any change in life circumstances should be the reason for any changes you make.

Being flexible doesn’t mean popping in and out of investment funds to chase returns. Chasing returns or timing the market doesn’t work over the long term. Once in a while, people get lucky. But I know of no one, individual, professional, or otherwise, who has had long-term success trading or timing the market.

If your returns lag what you calculated, you can adjust by doing one of two things:

  1. Increase the amount of money you’re contributing to your investments.
  2. Move more of your money into riskier investments with higher expected returns.

There are some caveats to discuss with option #2. No one should take more investment risk than they are willing, able, and need to. Any increase in risk should be incremental. For example, if you have 50% of your money in stocks, adding another 5%­–10% more in stocks may offer the additional return needed without substantially increasing your risk.

That brings us to the next important step in the process.

8. Invest for the Long Term

When we say have a plan, follow a plan, and invest wisely, we are talking about doing that for the long term. Investment success comes over time. 

If you’ve made your plan, determined how much you need to save and invest, and determined how much you need to earn to get there, you’ve done the bulk of the work. Markets reward investors over the long term.

Develop your portfolio based on all of these things, be sure it’s diversified across many asset classes, and stay with it until you reach your goals. It really is that simple.

I said simple, not easy. There will be many distractions along the way that may make you think you need to change your plans or portfolio. Be very careful!

If you’ve done your homework and know what you need to get where you want to go, stick with the plan and tune out all the noise.

9. Monitor Your Investments

Monitoring your investments does not mean changing them all the time. Nor does it mean looking at them every day, week, or month and fretting over what the market is doing. Markets over the short term are very volatile.

Any changes you make should be incremental. Let’s say you want 50% in stocks and 50% in bonds. If you look at your portfolio at the end of the year and see you now have 60% in stocks and 40% in bonds, consider making some adjustments.

Called rebalancing, this means you would sell 10% of your stocks and invest that money into your bonds to keep your allocation at 50/50 stocks/bonds. After all, that’s how you determined you needed to invest your money to accomplish your goals.

Rebalancing keeps you on track. You needn’t rebalance more than once, maybe twice, a year. Market fluctuations often help rebalance the portfolio back to where you need it to be. In other words, the market swings both up and down pretty regularly. When people sell stocks, they often buy bonds. These fluctuations can bring your portfolio back into the balance you want.

10. Have Patience

Patience is one of the hardest principles to keep when investing. That is especially true in volatile times. We’ve had days in 2020 when the market dropped 9% in one day, only to bounce back over the next day or two to erase that one-day drop.

It can be unnerving and make you want to get out of the market. Resist the temptation. Investors who sold out of the market in the financial crises of 2000–2002 and 2008 damaged themselves badly. If they had stayed invested and, better yet, invested more in the market, they likely would have been way ahead.

Rebalance. These market drops are a great way to take advantage of lower prices in either stocks or bonds. If you are not comfortable with these kinds of price swings, you probably shouldn’t be invested in the markets.

The markets reward long-term investors and, more often than not, punish short-term investors. Hang in there. Be patient. Don’t listen to the advice of well-meaning friends, family, neighbors, or coworkers. Turn off the news.

Final Thoughts

I don’t know about you, but I tend to overcomplicate many things. It’s not a good idea when it comes to investing. Please keep it simple. Follow a process, whether it’s these ten steps or something else. Stick with it. Be patient, and do your best to ignore the noise.

People who appear smarter than you often aren’t. Don’t sell yourself short. The plan you set is yours, not anyone else’s. Remember that when other well-meaning people tell you how well they’re doing and how much better you should be doing.

Play the long game. Don’t follow the crowd. They are often wrong. Turn off the noise. That’s a recipe for both investment success and success in life.

Michael Dinich is a personal finance expert, podcaster, YouTuber, and journalist. Michael is the founder of Your Money Geek, a rapidly growing personal finance and pop culture website. Michael has appeared as a guest on numerous personal finance podcasts and blogs. He is passionate about helping others, side hustles, and all things geeky.  

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