How to begin investing: The steps to take and terms to know

You’ve got big financial goals: a new home, sending your kids to college and, eventually, retirement. There are a lot of ways to reach those goals, and investing your money is one method to help you get there.

But before you start buying up stocks, take a deep breath and make sure you’re ready (and before you make any investing decisions, consult a financial advisor). Investing can be risky, so first you need a personal financial plan in place. 

Even if you’re planning to start investing with only a little money, it takes financial preparation, education and clear goals to get started.

Investing your money wisely can help you preserve and grow your money over time. Historically, investing has been a great way to stay ahead of inflation—the gradual rise in prices that slowly reduces what your money can buy. For context, inflation has averaged about 3% to 4% a year historically, while the S&P 500 (a measure of how the overall stock market is performing) has returned about 10% per year over time, according to Bankrate.

Knowing how to get started with investing can help you build wealth while taking advantage of potential tax benefits. You can invest for retirement through an individual retirement account (IRA), a tax-advantaged account that comes in two varieties: a traditional IRA and a Roth IRA. With a traditional IRA, you may get a tax break now, but you’ll generally pay taxes when you take the money out in retirement. With a Roth IRA, you pay taxes on the money you put in now, but you can generally take it out tax-free in retirement. 

Typically, the earlier you start investing, the more potential there is to grow your money. For example, if you put away $100 a month and never invested it or earned interest on it, you’d have $12,000 after 10 years. But if you invested that same $100 a month and earned an 8% annual return, you’d end up with $18,000—or 50% more. 

Over decades, the difference can add up to tens or even hundreds of thousands of dollars. Be aware that markets have their ups and downs, and there’s no guarantee of that kind of growth. Always consult a financial professional before making investment decisions.

Many people want to know how to start investing with only a little money. Before you start investing, it may be helpful to make sure you’ve already paid off your high-interest debt, are saving for retirement and have an emergency fund to cover unexpected expenses that you wouldn’t be able to pay for with your regular income. If you’re looking for extra money to put toward an investment account, you might want to find a part-time job or other easy ways to save money to boost your savings.

Looking for a place to put your emergency fund before you start investing? Consider a high interest rate savings account like a 360 Performance Savings account from Capital One. After all, you deserve a strong rate that reflects your commitment to saving for the things that matter most.

Before you start investing, it may be helpful to understand some basic concepts and terms that can help you develop your long-term investment strategy and reach your financial goals. Because you should always consult a financial advisor before you begin investing, understanding these terms can help those conversations be more productive.

As you learn how to begin investing, you’ll notice that a guiding principle is to minimize risk. To do that, you may want to spread your money across different types of investments. Including a mix of stocks and bonds can also diversify across other asset classes so that your portfolio isn’t subject to the risk of any one asset class. 

You may want to spread your investments across different industry sectors, such as technology, healthcare and finance.

With multiple different types of investments, a single investment is less likely to sink your savings if it performs poorly. It’s less likely to experience big swings in value, which can help keep you on track toward your goals.

Investing can be an emotional rollercoaster. Those emotions can harm your investment strategy and lead to irrational buying or selling. Like automating your savings, automating your investments can take emotions out of the equation. It can also help you stick more closely to your financial plan.

With your financial plan in mind, you can automate your investment contributions by establishing regular transfers into your investment account from your paycheck or a bank account.

Investing automatically on a consistent schedule can help protect you from the ups and downs of the market.

Index funds are mutual funds or exchange traded funds, also known as ETFs, that track a particular index, such as the S&P 500. You can buy shares of index fund ETFs just like a stock, but they move up and down based on the performance of many different assets. For that reason, index funds offer investors a simple way to spread investments out.

For example, in addition to an index fund that tracks the performance of the S&P 500 (which is made up of 500 of the largest companies in the United States), you could also buy an ETF that tracks the price of gold or one that tracks the performance of European tech companies, for example. Many actively managed mutual funds and ETFs charge fees to manage their assets. Index funds are typically less expensive because they are passively managed. Just keep in mind that while index funds have certain benefits, they still carry risks. Always consult a financial advisor before making investment decisions.

A concrete plan can be helpful to keep you on track and increase your chances of reaching your financial goals. Before you can answer the question “When should I start investing?” you should consider these three things first:

Are you looking to grow wealth? Or is your focus on preserving what you already have? When starting to invest, are your goals specific, achievable and measurable? Tracking your progress will help you know when you’ve reached your goal.

Investing for retirement is typically a long-term goal, perhaps decades in the future. But investing for your kids’ college might be a mid-term goal of 10 or 15 years. Growing your money to afford a home renovation might be a short-term goal of one to three years. A time horizon can be important if you need your investments to match your goals and your risk tolerance.

Investing in your future can be overwhelming, but a financial advisor can help. Financial advisors can help you determine which investments are the best fit for your time horizon and goals. They may also be able to help you with tax strategy and other aspects of your financial journey.

A strong financial foundation will typically include:

• Growing your income
• Paying down debt
• Saving for retirement
• Building an emergency fund

Investing can be part of your broader financial strategy as your needs change throughout life. But before you start investing, consider whether you have a solid financial foundation in place.

For many people, that means building an emergency fund to cover unexpected expenses like medical bills or home repairs. If you don’t have one yet, consider making emergency savings a priority.

Before you start investing, take time to build a strong financial foundation and learn the basics. Setting clear goals and creating a long-term plan can help you feel more confident along the way.

Get started with these tips:

• Build your financial foundation: Pay down high-interest debt, have an emergency fund and save for retirement before you begin investing.
• Set clear goals: Choose investments that align with your financial goals, timeline and comfort with risk.
• Keep learning: Understanding concepts such as diversification and automatic investing can help you make informed decisions. A financial advisor can also offer guidance as your needs change over time.

Consider opening a 360 Checking, 360 Performance Savings or 360 CD with Capital One.