how to invest for the first time

Where to start and how much money you really need to invest.

👀 7minute read

initial investing

📷: Pinterest

PSA: There is sooo much to learn. This is not something you can bang out in a day’s work.

BUT: We bet you know more than you think. If not, we got you.

We are going to teach you why it matters and show you where to start.

Because financial education isn’t just to help your bank account – it’s also to help you understand what all the fuss is about.

And investing is definitely a path worth traveling down.

What is investing? And what can I invest in?

Investing = Buying something that is expected to grow.

When you invest, you are using cash (or other assets) to purchase something – and in exchange, you are hoping to be compensated for that risk.

You can invest in… Anything, really. This applies to more than just the stock market. You can invest in a new car, real estate, your education, someone else’s business venture, jewelry, and so many other things.

Generally speaking, when we talk about investing, we are talking about the stock market and retirement investments. Why? Well, because we like to work with what we know best. And in our experience, what works best, too.

That doesn’t mean other forms of investing are not as attractive. But what we know – through research and lived experience – is that when you invest in the stock market, you can expect to earn, on average, 7% growth each year.

And 7% is a very interesting proposition. One you should definitely pay attention to. Also, one that should be entered into cautiously, smartly, and with eyes wide open. Which is what we’re here for.

What is a good place to start?

Goals. Always start with your goals. What are you trying to accomplish?

Do you want to save money for retirement? Are you hoping to make extra cash for down payment on your future home? You’re curious and trying it for fun?

Be clear on why you’re investing and what you want for your money goals.

Investing in your 401k / retirement account?

If you are in your 20s or 30s, you will want to invest all of the money stored in your retirement account. Why? Because the funds are locked up until you retire anyways, so you should absolutely grow it during this period. Also, buying and selling investments is tax-free when your money is inside a 401k retirement account.

Investing in the stock market for #goals or fun?

In this case, you want to figure out an amount to start with, and the level of risk you are willing to take. And if you are investing outside of a retirement account, don’t forget: buying and selling investments triggers taxes. Oh, ya, taxes…

We cover how much this dollar amount should be later. Keep scrolling.

Is “stock picking” investing?

Yes and no.

Stock picking happens when you choose individual stocks to invest in, based on research or market buzz, in the hopes that it’ll grow a lot (and make you a lot of money). It’s *one* form of investing, not the only one.

We see stock picking as a super-risky (and sometimes fun) way to invest in the stock market. Once you start, it can be highly-addictive. It’s extra-satisfying when your stock picks soar, but super-scary and gut wrenching when your stock picks tank.

What is the danger in that? If we’ve learned anything from Gamestop, it is that as quickly as you can make money, you can lose it. And if the money you are investing is set aside for retirement or emergencies, that is a losing proposition.

70% of women don’t want to invest in the stock market. And we get why. You see news like this, and it puts you off. Well, your intuition and gut on this subject is spot-on: it is a super-risky investment and meant for your “fun money” spending. AKA Money you do not need. Money you won’t be upset to part with.

Good news: Stock picking is NOT required to successfully grow your money or net worth.

We love seeing women excited about their stock picks and we will never persuade you against this form of investing. But stock picking is not for everyone. It’s important to know what you’re getting yourself into.

So, when we mention “investing” we are NOT talking about stock picking.

We are talking about *diversified*, *long-term* investing.

We are talking about investing in a wide variety of investments that make up your portfolio, in order to limit risk and increase the probability of growth.

Stock picking and diversified investing: two very different things.

We’re here for both (but mostly diversified investing).

Ok, then what? How do I start investing?

📷 Credit: Giphy

There are several different ways to invest in the stock market.

First, figure out your investment options.

With a retirement account, your company or 401k provider might only offer a few types of investment options.

For example:

% stocks or % bonds (ie. 80% stocks, 20% bonds)
Asset classes (ie. Healthcare, Technology, Emerging Markets)
Target funds (ie. Target Fund 2060 Retirement)

If you have an IRA that you manage yourself, you likely have infinite options compared to the 401k.

IRA, 401k, WTF? Read this if you’re still confused about all that jazz.

Then, think about your risk level.

Are you risk-friendly or risk-adverse?

We cover this when comparing stock picking and diversified investing.

Here’s a general guide, from low to high risk options:

Low Risk – Diversified ETF portfolio of stocks and bonds

Medium Risk – Diversified ETF portfolio of stocks

High Risk – Stock picking (aka Amazon, Netflix, Apple)

Very High Risk – Cryptocurrency

Second, set your money goals

Like we mentioned earlier:

IF you are investing from your retirement account, and are young, 100% of the money in that account should be invested.

AKA, no money sitting in cash or money market funds in that account. And no money in a “cash alternative”. This can be misleading. You think the account is invested, but it isn’t. You won’t benefit from the growth unless it is. Pay close attention.

IF you are not investing from a retirement account, and you choose to start a personal investing account on the side, pick a specific dollar amount to invest.

(Btw, Penny calculates this for you, taking into consideration the full picture of your earnings, debts, and money goals)

How much should you really invest?

If you are curious HOW to break down the math – this is how we do it:

Confirm you have six times your must-pay expenses in emergency savings (and don’t invest that money, she is your safety net)
Confirm you are putting at least $3k a year in your retirement account
1. Later, try to up that to $6k a year (that’s the max for IRAs)
2. If you are already doing that, consider up-ing even more to $19.5k a year (which is the max for 401ks)
Pay off any debt that is charging you over 4% interest. Why? When you invest, the average returns are 7%. If you are paying 4% interest on debt, and investing at the same time, the magic cancels out.
Already done those things? First of all: AMAZING! Hats off to you, girl! Start with $1k in your personal investing account.
Ready for more than that? Awesome. Think about your life events coming up in the next few years: house? car? wedding?...why? Investing works best with a lonngggg time horizon. We are talking decades. So, keep the money for your big life events happening soon in a high yield savings account. And anything beyond that can be invested for the long haul, because you aren’t going to need to use it to live your life *right now*.

Closing thoughts

Investing is like learning how to ride a bike. The more you practice, the better you’ll get at it. And once you get the hang of it, you’ll find yourself wondering why it took you so long to start in the first place.

Ready to invest? We’ll show you how.

Practice your money moves with us! We built a step-by-step financial plan that walks you through the nitty-gritty, and shows you exactly where you need to start (and how much) based on your personalized money goals.

Starting investing with Penny Finance