Investing Money for Beginners

Investing seems like a big commitment that requires a lot of money and knowledge, right? Wrong. Investment is more accessible now than ever with investment apps like Acorns, Ally and more. But how do you get started?

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First, you need to know what each account is and how it works. Each investment type has a different financial entry point, risk level and associated fees. Once you’re familiar with each, you have to assess your risk tolerance and capacity. That seems like a lot, but that’s why we created this beginner’s investment guide to help you get started.

What Are the Best Investments for Beginners?

Investment is the key to growing your money and helping keep you secure in retirement. Keep reading to learn you can start investing today.

1. High-Yield Savings Accounts

High-yield savings accounts are one of the best beginner investments because they’re low-risk, accessible options. You can often open HYSAs at the same banking institution that hosts your checking account.

With this type of account, you get the perks of earning interest on your deposit at a higher annual percentage yield than a traditional savings account plus the safety of FDIC protection up to $250,000.

How Much Money Do You Need to Get Started?

Some HYSAs require a minimum deposit amount to open the account, but there are many options with minimum amounts as low as $0. So, if you have a few bucks, you can start growing your money.

Pros

• Little to no minimum deposit amount

• Insured by FDIC up to $250,000

• Typically a higher APY than a traditional savings account

Cons

• Some banks intentionally unclear about how to qualify for high APY

• Can cap the balance amount that qualifies for APY

• Some banks require minimum transactions per month.

2. Money Market Accounts

If you like the idea of a HYSA but want your money to work a little bit harder for you, try a Money Market Account. Money Market Accounts are accounts hosted by a banking institution that pays an APY on your balance.

These accounts benefit from higher interest rates than high-yield savings accounts, while still receiving FDIC or NCUA insurance up to $250,000. Some MMAs even offer tiered interest rates, meaning your interest rate increases as your account balance increases.

How Much Money Do You Need to Get Started?

Money Market Account deposit and minimum balance requirements vary wildly, ranging from $0 to $2,500 and more.

Pros

• You have access to your money, though it is sometimes limited.

• You can open some MMAs with a few dollars.

• Can have higher APYs than HYSAs

Cons

• Can have high maintenance fees

• Most have higher deposit minimums

• Come with transaction limits

3. Certificates of Deposit

Certificates of deposit are accounts that require you to invest a set amount of money to accrue interest for a specific amount of time, such as months or years. Interest rates for CDs are generally higher than other types of savings accounts but can be variable.

CDs, like the other investment options we’ve discussed so far, are lower-risk investment options. They’re insured by the FDIC. Your money may grow, but how much depends on your interest rate and whether it’s variable or fixed. This type of investment also carries an incentive to leave the money alone. If you withdraw any of your CDs before they fully mature, you can incur fees.

Some factors make CDs a more risky option than an HYSA or traditional savings account, though. CDs with a variable rate typically follow a market index — for example, the S&P 500. If the interest rate falls too low on a variable CD, your bank or broker also can “call” it or “terminate” the CD after a certain amount of time. Investors don’t have this ability. There is also additional risk of fraud when you purchase from a broker.

How Much Money Do You Need to Get Started?

Unlike some of the other investment options we’ve discussed so far, you do need a fairly large sum of cash to meet the minimum deposit requirement. Deposits tend to start around $500 and go up from there.

Pros

• Higher interest rates than other savings accounts.

• Insured by the FDIC

• You get your principal investment back plus interest.

Cons

• Variable CDs can be terminated by the bank or broker.

• Chance of fraud when working with a broker

• Withdrawals before the account matures incur fees

4. 401(k)

401(k) accounts are a highly accessible retirement planning option for people working W-2 jobs. These plans are employer-sponsored and involve you contributing an untaxed amount from your paycheck to an investment of your choosing. Your contributions don’t stay untaxed forever, though. Expect to pay taxes when the money is distributed.

A major benefit to 401(k) plans is that employers sometimes match a percentage of your contribution, which could double a portion of your total monthly contribution. Also, if you participate in a 401(k) plan you could qualify for the retirement saver’s tax credit, lowering your tax burden.

How Much Money Do You Need to Get Started?

Typically, 401(k) plans have a set automatic deferral rate if you opt into the plan. You can contribute a larger percentage if you desire.

Pros

• Some employers match contributions.

• Contributions are untaxed.

• Can qualify you for tax credits.

Cons

• Amount taxed on distribution higher than would be on monthly contributions.

• Lower paycheck each month.

• Annual contribution limit.

5. Individual Retirement Arrangements

If 401(k)s are not an option for you, IRAs are a great option. IRAs are investment plans you make tax-deferred contributions to, helping you plan a financially secure retirement.

There are two types of IRAs: Traditional IRAs and Roth IRAs. At a very high level, the main difference between the two retirement plans is when your contributions get taxed. With Traditional IRAs, your contributions are tax-deductible. With Roth IRAs, once you qualify for distributions they are tax-free.

Both types of IRAs have annual contribution maximums and incur a 10% fee if withdrawn before age 59 ½.

How Much Money Do You Need to Get Started?

Minimum contribution amounts vary from banking institution to banking institution, but some options require as little as $50.

Pros

• Tax-advantaged

• Two options to choose from

• FDIC-insured

Cons

• Withdrawal fees before 59 ½

• Have contribution limits

6. Mutual Funds

Mutual Funds are the level where investing gets a bit more risky. Mutual funds are open-end companies, which means investors like you can buy and redeem shares daily based on the net asset value, or NAV, of each share.

Everything the fund owns — securities, assets, etc. — is referred to as its portfolio, and all of it is managed by a Securities Exchange Commission-registered adviser. People invest in mutual funds for a lot of different reasons, the primary being that it’s an easy way to diversify your portfolio quickly. Some of the more popular ones you might have heard of include Charles Schwab, Vanguard and Fidelity.

You can buy shares from different places — either directly from the fund or through a broker. Mutual funds come with several fees, usually to offset the costs of running the fund. Pay attention to how the fees affect your return. There are mutual fund analyzers that can help you determine which purchase makes the most sense. If you redeem shares, you can expect payment within seven days.

How Much Money Do You Need to Get Started?

The cost needed depends on the fund and the cost of shares that day. There are enough options that you should be able to find something that fits your budget. Funds like Charles Schwab have Fund Finders where you can find that information.

Pros

• Freedom to buy and sell every day.

• Simple way to diversify your investment portfolio.

• You decide how many shares you want.

Cons

• Fund values fluctuate. You could lose some or all of your investment.

• Deciding where to invest can be confusing.

• Fees can be high.

7. Exchange-Traded Funds

Exchange-traded funds are companies that pool investor money in a fund that makes investments. Each company is registered with the SEC and invests in stocks, bonds and other assets. ETFs are investment products you can buy from an exchange during the trading day, similar to mutual funds.

Where Mutual Funds and ETFs differ is that instead of investors having the ability to purchase shares directly, they purchase shares from someone authorized to purchase directly — called an “authorized participant.” You can redeem shares daily just like mutualfunds.

An ETF you may be familiar with includes Vanguard Russell 1000 Growth ETF.

How Much Money Do You Need to Get Started?

Similar to Mutual funds, the cost depends on the Nav and any fees associated with the ETF you choose. Visit the ETF of your choice’s website for more information.

Pros

• Can redeem shares daily

• Can access real-time pricing information

• Minimum investment can be low

Cons

• You still have to pay fees even if you lose money.

• No influence over what is in a specific fund’s portfolio

• Can lose some or all of your investment

8. Bonds

Investing in bonds is basically loaning companies money that they promise to pay back plus interest. There are three types of bonds you can invest in: U.S. Treasury bonds, U.S. savings bonds, and corporate bonds . Companies use the money to purchase items, invest in innovation, and more .

Unlike stocks, bonds do not entitle you to any equity in the company you invest in. If a company goes bankrupt, you’re more likely to receive some amount of compensation than if you were a shareholder. That’s only a step up the totem pole, though, and a company going bankrupt can mean losses for anyone with money tied up in the company.

Before investing in a bond, be sure to check the date of maturity. Maturities can range anywhere from 1 year to over 10. Savings bonds generally have a 20 to 30-year maturity.

How Much Money Do You Need to Get Started?

Every bond is different, but you need at least $100 to invest in bonds.

Pros

• Even if the company goes bankrupt, you may still receive compensation.

• A set-and-forget strategy

Cons

• Bankruptcy proceedings tie up your money.

• No equity, so if the company does well, you don’t benefit.

• Some companies don’t pay interest and principal dates on time.

9. Stocks

When companies are trying to grow, sometimes they’ll sell stocks as part of their growth strategy. When you buy these stocks, it’s like buying a slice of a company — making you part owner. That strategy is called an Initial Public Offering, or IPO. There are many different kinds of stocks – common, preferred, growth, income, value and blue-chip — and a company’s stock designation can help you determine what kind of return you may receive.

You can buy stocks from different places. Some companies sell their stocks directly, while others require you to go through a broker. There are also stock funds, which are a type of mutual fund.

How Much Money Do You Need to Get Started?

Stocks have a low financial barrier to entry, with costs as low as $40.

Pros

• Could get paid by the company

• May receive capital gains from stock value growth

• Inexpensive to get started

Cons

• Could lose some or all of your investment.

• During bankruptcy, you’re the last to be paid (if you get paid)

• Stock value can fluctuate based on public perception

10. Real Estate

If you’ve had your sights set on real estate investing but don’t have the capital to buy land or property, you have options. The first is real estate funds. They act just like other mutual funds and ETFs. The other investment you can make is into a Real Estate Investment Trust, or REIT.

REITs are companies that own and invest in commercial real estate assets like malls, hotels, storage facilities, apartment buildings and more . The SEC oversees most REITS, and some are publicly available on the stock exchange while others aren’t. To buy REITs not available on the public exchange, you’ll need a broker.

Risk varies between publicly and privately traded REITs. Private-traded REITs are susceptible to lowered share value, conflicts of interest and a lack of cost transparency.

How Much Money Do You Need to Get Started?

REIT prices fluctuate, but you likely need at least $1,500 to start investing.

Pros

• Publicly traded REITs can be redeemed daily.

• Accessible way to get into real estate investment

• Could potentially provide more dividends

Cons

• Non-traded REITs can’t be sold as easily as publicly traded REITs.

• Have to pay fees on all REITs, but private REITs are more expensive.

• Some distributions are paid from offering proceeds and borrowings, lowering share value.

Tips on Investing for Beginners

Take a look at these tips below if you’re investing for the first time.

Seek Professional Guidance

Some investment types are easily accessible and low-risk enough to try them on your own, but not all of them. A diversified portfolio requires a mix of high and low-risk investments. Before you can build the portfolio of your dreams, you have to know what your risk tolerance is and a financial expert can help you.

Assess Your Risk Thoroughly

There are two factors to consider when you think of risk tolerance according to Charles Schwab Corporation – your risk tolerance and your risk capacity.

Your risk tolerance determines:

• How much risk you’re personally willing to take on.

• How well you can handle the idea you may lose money.

• Your ability and fortitude to adapt amid market fluctuations.

• How well you handle unpredictability

Your risk capacity looks at how much risk you are capable of taking on when you take everything else in your life into consideration. Do you have dependents? Do you have a lot of debt? Do you own a business?

Assessing your risk is a mix of evaluating your mental and financial capacity, and shouldn’t be skipped.

Choose An Appropriate Investment Strategy

Everyone’s investment strategy is different because everyone’s capacity and tolerance for risk are different. Once you understand how investing fits between all your life obligations, you can work with a financial advisor to determine what your investment mix should look like.

You may have a portfolio with more high-risk or more low-risk investments. All that matters is that you’re not investing more than you’re willing to lose.

Start With Small Investments

Investing for the first time can be a little scary. It’s okay to admit it. If you’d rather test the waters before you fully dive into the investment world, financial apps like Acorns have small investment options you can do quickly and easily from your computer or mobile device.

Round-Up Investing

Many financial apps offer something Acorns pioneered called round-up investing. Round-up investing rounds every purchase you make up to the nearest dollar, and invests that change. Acorns starts investing your money once you accumulate $5.

If you spend an even dollar amount, you can choose the amount you invest up to $1. Many other investment apps offer round-up investing now, too, so you can start today if you already have an account.

Micro Investing

Micro Investing is another investment app feature where you invest by purchasing fractions of shares. With this feature, you can start investing with just a few dollars. One of the main barriers to entry for investing is people thinking they don’t have enough money. Micro investing takes what you have and starts your wealth-building journey.

Monitor and Adjust Your Investments As Needed

Making your first deposit is just the first step in investing. Once your money’s in someone’s hands, you need to monitor what’s happening and adjust if you notice things aren’t going the way you thought.

According to BlackRock, there are three situations where you should consider adjusting your approach:

• Your goals changed. Maybe you’re in a place where you can take on more risk or need to take on less. These are all reasons to consider adjustments.

• Surprise risk. Something unplanned came up and now your portfolio is more or less risky than you intended. Time to pivot.

• Your advisor’s perspective changed. Working with a financial advisor gives you access to knowledge and insight you may not normally have. If your advisor suddenly feels more negative (or positive!) about something in your portfolio, pay attention.

FAQ

• Can you start investing with no money?

  • You can start an account with no money, but you can't actually invest in anything with $0. A special circumstance would be if you got a new job and had the opportunity to opt into a 401(k) plan.

• Can you invest if you’re broke?

  • If you're broke, you can absolutely invest. Round-up investing and micro investing are great options for people who are limited on funds.

• How do I start investing if I don't know anything?

  • You can either download an investment app that chooses investments for you based on a quiz about your priorities or contact a financial advisor to help you get started. If you have a banking account somewhere, oftentimes those services are included. Some organizations provide free financial advice.

• What is the best first-time investment?

  • The best first-time investment is a high-yield savings account. It's insured by the FDIC, low risk, and you always have access to your money with some withdrawal restrictions.

• How do I invest in real estate as a beginner?

  • You can easily get into real estate investing as a beginner by investing in Real Estate Funds or Real Estate Investment Trusts.

• Why is it important to save and invest?

  • If you want your money to grow significantly, you must invest. Investment is a great way to secure your future past retirement.

Andrew Lisa, Daria Uhlig, Stephanie Faris, Gabrielle Olya, John Csiszar and Caitlyn Moorhead contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: Investing Money for Beginners