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Investing for Beginners

Investing for beginners outlines the basic steps that lead to financial independence. After all, it is up to you to have enough money to buy a home, save for retirement, and pay for your children's college. Saving and investing starts at an early age and the skills you learn stay with you for the rest of your life.

Whether you are saving for a new car or investing in the stock market, the most important skill to learn is self discipline. The best way for a beginner to start investing is to get your finances in order. Once you have a handle on your expenses you can begin to invest. The more you can save, the more you can invest and achieve your financial goals.

If you already feel you are in control of your finances and are saving 10% or more of your income then go to Step 6: Take Full Advantage of Your Company's Retirement Savings Plans.

Investing for beginners starts with learning to manage your money and live within your means. They are the foundation to a good investment program. Step 9: Set up a diversified investment program that guides you to create wealth describes how to begin your saving and investment journey.

Step 1: Create a Budget.

Investing for beginners starts with a spending budget. A budget is a tool that can reveal spending problems and help fine-tune your cash flow. The mere process of gathering information to begin or maintain a budget can help you control your spending and free up cash to save, invest, or pay off debt. All budgets are not created equal, however; some are overly complicated, and others require constant monitoring. A budget that is simple enough to appeal to non-accountants and yet able to provide the benefits listed above is best. Once you track your expenses against your budget you will get a better feel on the amount of detail necessary to help you manage your expenditures. This first step in the saving and investment process gets you started in learning to invest.

Step 2: Track your monthly expenditures.

Knowing how much and where you spend your hard earned money helps you track you spending habits.  Observe and learn from your spending compared to you budget.  Adjust your spending accordingly, paying off your debt and saving for special needs, like college, retirement, etc.  There are a number of inexpensive products that help you track your expenses compare them to you budget, including Quicken and Simple Planning.

Step 3:  Pay off the credit cards.

Surprised that paying off credit card debt is the third step in the investing for beginners process?  Well, all the interest and late fees you are paying for this expensive debt is money you could be placing into your savings program and investments. has a calculator to help estimate how long it will take you to pay off your credit card debt.  And discusses the importance of maintaining a good credit history.

Step 4:  Save up for a rainy day.

One of the most important saving and investment skills is to recognize that emergencies do happen.  Do you have enough money set aside to cover 3 to 6 months of living expenses?  If not, you should make sure you have enough money saved for any emergency situation. has a simple debt reduction planner and a savings calculator that may be helpful to plan your savings goals.

These funds need to be readily available should you need them.  Many advisors suggest they be kept in a bank or money-market mutual fund.  Another way that creates a little more return is to create a "ladder of CD's".  A CD is a Certificate of Deposit, which is a savings instrument.  Assume your emergency cash reserve is $24,000.  Adjust your emergency cash reserve according to your needs and income levels. At your bank set up six certificates of deposit (CD) as follows:

  1. $4,000 in a 1 month CD
  2. $4,000 in a 2 month CD
  3. $4,000 in a 3 month CD
  4. $4,000 in a 4 month CD
  5. $4,000 in a 5 month CD
  6. $4,000 in a 6 month CD

As each CD matures, roll it over into a 6 month CD.  After 6 months you will have 6 separate 6 month CDs maturing every month.  Continue to roll them over after each one matures.  Of interest, creating a "ladder" like this is one way to invest in bonds to create regular income and minimize risk. You are learning to invest by employing well thought techniques to enhance your returns.

"With a fully funded reserve, you can start putting extra money into … longer-term savings and investments." (Jane Bryant Quinn, Making the Most of Your Money, Simon & Schuster, New York, 1997, p. 172)

Step 5:  Set up a disciplined savings program that pays you just like you pay your other bills.

The fundamental building block to personal prosperity is living below your means.  In other words, SAVING! That's it! That's the secret to becoming wealthy. Granted, there's the question of what to do with the money once you have it saved; but if you can't adjust your living expenses so that you create and maintain a regular saving plan, there's no need discussing the rest.

Living below your means applies to all income levels. Planning for your future is a basic investing step. Part of that planning is setting aside at least 10 to 20% of your total income to save for important expenditures like, a down payment for a home, college for your children and of course to create wealth. This takes time (years) so you must be patient; but, given enough time, it's a sure thing to make you wealthy. A great way is to have money transferred to investment (or savings) accounts on a regular monthly basis. Using this technique, you won't have to remember to contribute to your savings plan every month. The more you save the faster you will be able to achieve your investing goals.

Step 6:  Take full advantage of your Company's retirement savings plans.

Many companies offer 401k plans.  According to, a 401k plan is "A defined contribution plan that permits employees to have a portion of their salary deducted from their paycheck and contributed to an account." Federal (and sometimes state) taxes on the employee contributions and investment earnings are deferred until the participant receives a distribution from the plan (typically at retirement). Employers may also make contributions to a participant’s account.

Typically, your contributions are pre-tax, meaning that you do not have to pay taxes on the amount you contribute to your 401k until you withdraw the money, hopefully after you retire. Many companies match part or all of your contribution. That is free money. Take advantage of it. If you are not contributing to your 401k, start now. The longer you wait, the less wealth you will be able to accumulate. Make the power of compound interest work for you.

Step 7:  Take advantage of all the tax-advantaged savings programs including IRAs, 529 College savings plans, etc.

There are a number of tax advantaged savings plans including IRAs, and college savings plans. An Individual Retirement Arrangement (IRA), commonly called an Individual Retirement Account, is a personal retirement savings plan available to anyone who receives taxable compensation during the year.

Husbands and wives may each have an IRA, even if one person in that marriage is not working with the annual contribution limited to the lesser of total taxable compensation or to the normal yearly amount as described by current law. Persons age 50 or older may make an additional catch-up contribution in the amount also set by law.

There are at least 11 types of IRAs each appropriate for a particular situation. We will describe more about each type in the future. In the mean time you can read more about IRAs from Investopedia.

Imagine the day your child comes to you with an acceptance letter from "the" college. The one he’s been dreaming of all through high school. The one that perfectly matches her career aspirations. Perhaps even your own alma mater.

Only one thing could make you prouder – knowing that you have done your homework, too. That no matter where your child is accepted or what financial aid is offered, you have the resources to afford the college of choice.

Your child’s college tuition could be one of the largest expenditures you ever make. And, if you have more than one child, the financial commitment is even greater. The financial challenge you face is shared by millions of others.

Fortunately, saving for future college expenses now have more options than ever before. Traditional investment options—savings accounts, taxable investment accounts, annuities, and U.S. Savings Bonds—are now joined by powerful new investment vehicles including Section 529 college savings programs and Coverdell education savings accounts.  These options will be discussed in the future.  You can also read more about saving for college at the College Savings Guide.

Step 8:  Buy your first home.

A house is one of the best investments you can make.  Your payments increase your equity and the interest and real estate taxes you incur are tax deductible.  Over time your house is likely to increase in value.  Buying your home is an exciting experience. Take the time to learn all you can so you are fully prepared has some good articles and The New Complete Book of Home Buying is a good book. 

While we are not real estate advisors, there is a common adage in real estate, namely Location, Location, Location.  The location of your real estate investment is the most important consideration by far.  Another point to consider when buying a house is not to buy the biggest house in the neighborhood, but rather buy one of the average or smaller sizes in the best location. If you own the largest house, then your price appreciation is held down by the less expensive homes. And buy a house you where you want to live, not just for the potential price appreciation. Just something to consider.

Step 9:  Set up a diversified investment program that guides you to create wealth.

If you have carried out the investing for beginners steps 1 through 8 then you are well on your way to financial success.  The next step in learning to invest addresses how to become a more complete investor by understanding your personal style, risk tolerance, time frame and investment objectives.

Personal Style

The way you live your life and how you handle risk go a long way to define your approach to investing.  If you enjoy taking risks then you will likely be able to take on more risk in your investments.  If you enjoy examining companies' financial reports and research stocks, then you will likely be happy at managing your own investments.  If you do not have the time to investigate many stocks to find the few good ones, then you should find other resources to assist you.  Look at your self and decide how you want to handle your investments.  There are investment vehicles and ways to invest that will match your personal style.

Risk Tolerance

If you have trouble sleeping at night worrying about your investments then that is a good indication you have taken on to much risk.  One of the greatest investors of all time, Peter Lynch said that the "key organ for investing is the stomach, not the brain."  Meaning, you need to know how much volatility you can tolerate in your investments.  There are many ways to mitigate risk to help you sleep at night.  There are a number of techniques that reduce risk without eliminating the up side potential.

Time Frame

When you are young you have time to take advantage of compounding to help build your net worth.  Saving 10% or more of your monthly pay check now will build up over time to create a nice nest egg.  However, as you approach retirement, you will need to adjust your timeframe and the type of investments you should consider, becoming more concerned with conserving your capital and generating income.

Investment Objectives

Your investment objectives depend on why you are investing (retirement, buy a 2nd home, etc.), your age and position in life (25 and just starting out in your career, 65 and retiring, etc.) and your personal circumstances (have a $500,000 to invest, have difficulty saving any money).  These factors help to determine your need for current income to help pay your living expenses or capital appreciation to create wealth. When you will need to access this money must also be considered.

Step 10:  Learn to invest in stock.

If you want to learn to invest in stock, start by developing your stock investing system such as our Beat the Market - Stock Investing System. While we like our approach, since it has worked so well for us in the past, the important thing is you need to have a process that works for you. One that fits with your available time and focuses on the saving and investing.

I also encourage you to test your approach before committing real money. You can learn to invest in stocks, while developing your investment skills using the various stock market trading simulation games such as Virtual Stock Exchange - HOME, which is free and Stock-Trak :: Portfolio Simulations which charges a small one time fee. These are great ways to practice your investing skills before you commit real money.

Once you feel you are ready and you understand the risks, proceed to open an account with a broker.  Most brokers require at least $1,000 just to open an account.  This is risk capital that may be lost should your investment go wrong.  For every buyer who believes the price will go up, there is a seller who believes otherwise.  And the professionals like nothing better to take a new investors money to get them out of a stock.

There are a number of good web sites and books that you might consider checking out to help learn to invest. To be good it takes work you your part. The rewards can be great, especially when you reach some of your financial goals. I encourage you to start learning now, as it will help you with your future.  I list several good investing books at Investing Library and web sites at Investing Sites pages, to help you get started.

Investing for beginners provides you the basics so you can achieve financial independence. After all, no one else will do it for you. If you have any questions, please feel free to send an email to us at [email protected] and we will do our best to assist you.

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