Eight Simple Steps to Start Investing


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Maybe you’ve been working on your personal finances for a while.  You’ve got a budget. You’ve paid off all of your debt (or never had any in the first place).  You’ve gotten your emergency fund together and have about $10,000 in cash sitting there.  At this point you’ve got a line in your budget called “Investing” and you’re starting to siphon money out of your income to a bank account that you’ve created to store up your investing funds until you have enough to get into the markets. But now you’re worried about what you should do, where you should invest, and even how you go through the actions needed to buy stocks and bonds.

Luckily, investing is a lot easier today than it was before about the year 2005.  Where in the past you would need to have a fairly large amount of money before brokers would even work with you, the mutual fund industry has answered the need for the common man (and woman) to invest and discovered that there are a lot of people out there needing such services.  At places like Vanguard you can set up an account and start investing with as little as $3,000 ($1,000 if you’re starting a retirement account like a traditional or Roth IRA).  You might be able to invest with even less at places like Charles Schwab and/or if you set up autodraft from your checking account.  With these accounts, you have access to a wide array of mutual funds, and even individual stocks and ETFs, all with a few clicks of a mouse.

Still, there are a lot of options and it is probably fairly intimidating for the new investor.  That is why I’m providing the Simple Steps needed to get started in investing.

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Step 1:  Pay off all credit cards.

Before you even think about investing, get rid of your credit card debt.  During a really good period in the stock market, you’ll get a return of 15% per year.  Long-term returns average around 10% (which is 7% after inflation).  You just can’t compete with a 19 or 25% interest rate on a credit card balance.  Just think of yourself getting a 25% return on the money you use to pay off credit cards.  Then, cut up your cards and get debit cards instead so that you won’t go into credit card debt again.

Step 2:  Start with a retirement account.

Someday you will want to retire, which means that you need to have retirement savings to last you for about thirty years, plus something like $500,000 to $750,000 to pay for healthcare expenses beyond what Medicare covers.  If you have a 401k or 403b at work, start there, putting in at least as much as your company will match.  Putting in less means that you are leaving free money on-the-table.  If your company matches the first 5%, you can effectively increase your salary by 5% by just putting 5% of your pay into your 401k.  If you don’t have a 401k plan at work, sign up for the pension plan if one exists.  Regardless if there is a plan at work, go to Vanguard or Schwab and start a Roth IRA.

Fund your retirement plans with 15% of your salary.  Start by putting whatever the company matches into your work plan (or whatever is required by your pension plan), then fund your IRA up to the yearly maximum.  If there is anything left over, put it into your work retirement plan.  Still have money left over?  Start a standard, taxable account at Schwab or Vanguard and fund that account.

Step 3:  Determine your retirement fund asset allocations.

Assets are things like stocks and bonds.  They are things that pay you money, adding to your income.  Standard asset types for investing include stocks, bonds, and real estate.  To determine you asset allocation:

  1.  If you’re less than age 40, start with 100% stocks.
  2. If you’re over age 40, start with your age minus 20% in bonds, 110% minus your age in stocks, and 10% in real estate.   For example, if you’re 45, you would start with 25% bonds, 65% stocks, and 10% in real estate.
  3. If you’ve worried about losing money and are very nervous, increase your bond allocation by 10% and reduce your stock allocation by 10%.  This will smooth things out somewhat.  For example, someone who was 45 would increase their bond allocation to 35%, reduce their stock allocation to 55%, and still have 10% in real estate.  Someone who was 20 would reduce their stock allocation to 90% and add 10% bonds.


Want all the details on using Investing to grow financially Independent?  Try The SmallIvy Book of Investing.  

Step 4:  Select your retirement account stock funds.

Go through the funds you have available and try to find index funds.  If you can, select a total stock market index fund.  If that is not available, try to find a large-cap (like an S&P500 fund) and a small-cap (like a Russell 2000 fund) fund.  If index funds are not available (for example, in a 401k plan without the best choices), find the lowest cost stock funds available (try to find funds that charge less than 1% of assets invested) and select one that invests in all sectors of the market or one that invests in growth and one that invests in value.  Also find a fund that invests in international stocks, hopefully something like a total international stock fund.  Read the fund descriptions to find what the fund invests in and manager’s style, as well as total fees.  

Step 5:  Find your retirement account Bond and Real Estate Funds

Go through the same process in selecting your bond and real estate funds.  Try to find a total bond index fund and an REIT index fund.  If you don’t have an REIT fund available, just add 10% to your bond allocation.

Step 6: Buy your retirement account funds.

You should be able to buy your funds using the website for your 401k or IRA.  Many sites will allow you to specify specific percentages of the account to put into each fund.  If that is the case, go ahead and set those percentages based upon the asset allocations you determined in Step 3.  If not, you’ll need to pull out a calculator or spreadsheet, do the math, then enter the dollar amounts.  Note that you will want to set your investment percentages in two different places, one for how to allocate the money you have in the account already, and the other for how to invest new funds.  Set both of these the same and matching the allocations you determined.

Divide the money within an asset category (stocks, bonds, real estate) equally to each of the funds in that category.  The exception is international stocks, which should be 20% of your stock allocation (so if you are investing 80% stocks, you would put 16 % of your account (80% x 20% = 16%) into international stocks and then 64% into US stocks and 10% into bonds and 10% into real estate.

Step 7:  Setup taxable brokerage accounts with Vanguard or Schwab if you have more money to invest.

Hopefully, after you are through putting money away for retirement, you’ll still have more money to invest.  Unlike your retirement funds, which you won’t be able to touch until retirement, money you invest in taxable accounts can generate additional income to enhance your life and hopefully make you financially independent before retirement.  Put 100% of your taxable investing accounts into stocks and only sell when you want to generate cash for something since you’ll be taxed each time that you do. As long as you don’t sell the shares, you won’t be taxed on the increases in value of your account due to increases in price of the funds in the account.  You will be taxed on the dividends and capital gains that the stocks in your funds are generating, but these should be small amounts if you buy index funds investing in the whole stock market.

If you want to, you can set these accounts up to spin off cash when the stocks in the funds pay dividends or there are capital gains.  You’ll then just magically see money appearing in your money market account with the fund company, with a larger amount n December (fund companies tend to move money around and realize capital gains at the end of the year.  This money will be taxable, but then can be used as you wish.  This is a great way to get extra cash without needing to sell shares.

Step 8: Wait until January 15th, then rebalance.

You should rebalance your accounts – set them back to your desired asset allocations – about once a year.  You should also adjust your allocations for changes in your age at this time (as you get older, you should be shifting more into bonds).  Luckily, most mutual fund companies also have tools to let you rebalance.  Just set the percentages you want into the tool and press the button.  Do this again every January 15th (or a date somewhere near then).

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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