5 simple steps to start investing today

Ever wondered how rich people made their money? Well for many millionaires, the answer is not a secret. They simply made the wise decision to start investing – often from a young age.

Australia is currently facing a cost-of-living crisis. So, with increasing inflation leading to higher rent and mortgage payments, rising petrol costs and the price of food, utilities and other basic necessities going through the roof, it is understandable that investing might be the last thing on your mind at the moment.

But while an estimated 48% of Aussies live paycheck to paycheck, if you are able to save a little bit of money for the purposes of investment every month, you will set upon a path that can eventually lead you to accrue a decent wealth.

Sounds good right? 

However, wanting to invest and knowing how to do so are two different things, especially if you are a beginner. You'll likely have many questions, including how to get started and what are the best investment strategies for beginners.

For this reason, we've put together this handy guide of five simple steps you can take to start investing today. Hopefully, we will make the process that little bit easier for you to understand and kickstart your journey towards a stronger financial position.

1. Don't Wait

It doesn't matter how old you are, the best time to invest is now because it is a terrific way to earn substantial returns on your money.

That said, ideally, the younger you are the better. You will have a longer period of time to enjoy the benefits of compound earnings – a process where the money you have invested starts to earn returns that increase your overall balance as time goes on.

There is a bit of a myth that says you need a good amount of money as an initial lump sum to start investing. However, nothing can be further from the truth. If they know where to do it, anyone can invest with a small amount of money, thanks to the availability of no or low investment minimums, fractional shares and zero commissions. Indeed, there are plenty of investment options available for a relatively small initial outlay, including as exchange-traded funds, index funds and mutual funds.

If you are worried about whether the amount you are able to contribute will make a meaningful difference, try to focus on what amount feels manageable based on your financial situation and goals. It doesn't matter whether that amount is $5,000 a month or $50 a month, it is just important to make regular contributions to your investments.

Here is an example of how it can work in practice. Suppose you invest $200 every month for ten years and earn an average annual return of 6%. At the end of the ten years, you'll have made $33,300 due to your investment. Of that amount, $24,200 is the money you would have contributed through the monthly contributions, while $9,100 would be the amount you have earned in compound interest for your investment outlay.

It is worth noting that there are always ups and downs when it comes to investing in the stock market, but doing so at as young an age as possible means you have decades both to ride them out and make your money grow. Therefore, it is a good idea to start investing as soon as possible.

2. Work Out How Much You Can Invest

Once you have decided to invest, it is important to determine how much money you should devote to doing so. This should depend on several factors including your current financial situation, what goals you are trying to achieve by investing and when you want the investment to mature.

For many people, particularly those who start to invest later in life, one of the most common investment goals is to save for their retirement. Should this be the case, a good rule of thumb if you can manage it, is to aim to invest at least 10% to 15% of your annual income towards your retirement.

Although it may seem unrealistic at first, you can start small and gradually increase your contributions over time. Additionally, making small sacrifices like ordering one or two less coffees a week, not buying as much alcohol at weekends and reducing the number of times you order takeaway can provide you with more disposable income in which to invest.

If you have a specific goal in mind, such as investing to buy a home or to go on a once-in-a-lifetime, round-the-world trip, it is a good idea to work out when you want to achieve this goal by and how much money you will need to do so. You can then work backwards to break that amount down into the figure you would need to put away for weekly or monthly investment.

3. Open an investment account

If you are planning to invest specifically for your retirement, a good starting point is to make concessional payments to your superannuation account. You can contribute up to $27,500 every year, if you earn less than $250k without being taxed. If you are over the age of 55 you can make a non-concessional, tax-free contribution of up to $300,000 to their superannuation.

However, depending on your eligibility, most superannuation can only be accessed between the age of 55 and 60 at the earliest and have restrictions about when and how you can take your money back out. Therefore, you might want to invest in other ways or for other purposes.

To do this, you will need to open a taxable brokerage account like a Moomoo cash management account which enables you to withdraw the money you have invested and made from at any time without paying additional taxes or penalties. 

4. Decide upon an investment strategy

It is important to have a definitive investment strategy in mind and as previously mentioned, this will depend on factors such as what you are saving for, the amount of money you require and when you want the money to mature.

If you are saving for a goal that is more than 20-30 years away - such as retirement - a good option is to invest almost all of your money in stocks. However, picking specific stocks can be confusing, time-consuming and challenging. Thus, for most people, the best way to invest in stocks is through ETFs, index funds or low-cost stock mutual funds.

For those wanting to save for a short-term goal, such as a wedding or home renovation and expect to need the money within five years, it's better to keep your money safe. You can do this by investing in an online savings account, term deposit, or low-risk investment portfolio, which tends to provide you with a guaranteed return.

Alternatively, if you can't decide on which investment to make, you can invest through a robo-advisor, which is an investment management service that uses computer algorithms to build and manage your investment portfolio.

Typically, robo-advisors build their portfolios using index funds and low-cost ETFs. They offer low costs, no or low minimums, and enable you to get started quickly. Just be aware that some might charge a small fee for managing your portfolio, usually around 0.25% of your overall account balance.

5. Pick your investments

After deciding how you will invest your hard-earned money, all that is left to do is to work out what you will invest in.

However, before committing to anything, it is important to remember that all investments some with risk – essentially high, low or medium risk. Therefore, you should take the time to establish what level of risk you are prepared to take because this will go a long way to determining what options are available to you.

That said, some of the most popular investments for those just starting out include:

Stocks

Stocks are also known as equities and take the form of ownership of a specific company.

They can be bought at a share price, which can range from as little as 1 cent for each one to $2000 or more, depending on the industry and company.

For new investors, a good way to buy stocks is via mutual funds.

Mutual funds

Mutual funds are a combination of investments that are banded together as one package. These types of investments enable you to buy a wide range of stocks without having to pick them out individually, which makes them less risky overall.

While some mutual funds can be run on your behalf by a professional, these tend to come with higher fees. Therefore, you might want to pick an index fund, which is influenced by its performance on a particular stock market index, for instance, the S&P 500, which usually have lower fees.

Most mutual funds do not impose a minimum investment level, although so may do. Hence, it is important to pick wisely.

Bonds

A bond is a type of investment where you loan money to a government or company. Essentially, they agree to pay you back within a certain period of time, during which you accrue interest on that amount.

Bonds tend to be less risky than stocks as you known how much money you will receive and by what date. That said, they might not provide you with as high returns in the long-term, so you might want to only devote a small portion of your investment portfolio to it.

Exchange-traded funds

Similarly to mutual funds, exchange-traded funds (EFTs) comprise of several individual investments that have been mixed together. The main difference is that EFTs are traded all through the day (like a stock) and bought for a share price.

Generally speaking, an ETF's share price is lower than the minimum level of investment needed for mutual fund. As a result, they can be a very attractive option for those investing for the first time or with a small weekly budget.

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