For most, achieving financial security is typically the result of working hard, saving and investing. Saving is a simple concept: You save whatever money you can in the best financial product you can find.
Learning how to invest is more complicated than saving, but investing can offer greater rewards. Use these steps to get started in the investment game — don’t be afraid to start investing today.
Steps for Successful Investing
Investing, or committing money or capital to an endeavor and expecting to receive income or asset growth — was once the exclusive privilege of the wealthy. The digital age has leveled the playing field and now anyone can learn to invest.
Follow these eight steps to start investing your money:
1. Take Your Personal Financial Inventory
Think of your financial plan as a road map that shows your starting point, your destination and the routes you’ll take to get where you want to go — doing this is an investing 101 requirement. Before you can start on your investment journey, you need to know where you are right now. Start by figuring out your net worth.
2. Set Financial Goals
Make a list of the things you’ll need to accumulate in the short, medium and long term. For example, you might want to purchase a new car within the next five years, which is a medium-term goal. Or, you might have 15 years to save for your child’s college education and want to start now, which is a long-term goal.
The final destination on your investment roadmap is your financial goals. Writing them down will help you create sound investment strategies.
Related: How to Invest on a Budget
3. Determine Your Risk Tolerance
All investments involve some level of risk, and high-reward investments always involve higher levels of risk. Which investment product is most appropriate for you depends on how much risk you feel comfortable taking. Even some low-risk investments might not be right for your portfolio if you have a really low tolerance for risk.
Even if you like make riskier investments, taking on an elevated level of risk might not be in your best interest depending on your current situation. For example, a young person with 30 years to go before retirement has more time to overcome a significant investment loss than someone who wants to retire next year.
4. Research Investment Types
Decide whether you’re more comfortable as a loaner or an owner. Investments typically fall into one of two categories: debt or equity. Debt investments, like corporate or municipal bonds, represent a loan to the issuer and repay the investor of the face value of the bond plus interest. Equity investments, like stocks, represent ownership in an underlying company and the investor participates in the organization’s financial fortunes, good or bad.
Debt investments, like corporate or municipal bonds, represent a loan to the issuer and eventually repay the investor the bond’s face value plus interest. Equity investments, like stocks, represent ownership in an underlying company, and the investor participates in the organization’s financial fortunes — good or bad.
5. Select an Investment Professional
Find an investment professional who can give you solid advice. If you don’t know the first thing about how to invest in stocks or if you want to know how to invest in bonds, look for an investment broker who will explain the stock market for beginners or share some investment advice.
If want to learn how to invest in real estate you might consider asking a real estate agent or attorney for advice. Your accountant or CPA can help you navigate the sea of red tape associated with taxes on investments. If you choose to make your own investment decisions, you’ll need an intermediary, like an online brokerage account or licensed real estate agent, to handle many transactions.
6. Understand Your Investment
Ask plenty of questions before you invest in anything — any legitimate investment professional will welcome them. Ask for an investment prospectus and read it carefully.
You don’t need to become an investing pro or understand microbiology before you invest a pharmaceutical company’s stock, but you should understand the finance basics, like how the investment makes money, what its historical return is, what risks it involves and whether it’s in line with your financial goals.
7. Diversify Your Portfolio
You can reduce your risk by diversifying your investment portfolio across a range of industries and securities types. If one investment loses money, the other investments in your portfolio help offset it.
8. Review and Rebalance Your Portfolio
Review your investment portfolio at least once a year to ensure you’re on track with your financial goals. If you’ve gone through any major life changes that could affect your financial situation — such as getting married or having a child — you might want to rebalance your portfolio.
Keep Reading: Why Investing Should Be Part of Your Financial Plan
No matter what types of investments you choose, it’s important you familiarize yourself with important investing terms and concepts so you can make the right investing decisions for your finances.