Investing Money: A Beginner's Order of Operations for Getting Started

Investing money starts with building a strong financial foundation. Before choosing investments, focus on managing high-interest debt, setting aside emergency savings, and defining your financial goals. From there, you can select suitable investment accounts and build a diversified portfolio.

For beginners, the challenge is often deciding where to start. With so many investment options and conflicting recommendations, it can be difficult to know where to begin. Following a clear order of operations can make the process easier. Instead of rushing into investments, you can focus on one step at a time and make decisions that support your long-term financial goals.

If you're unsure how investing fits into your overall financial plan, speaking with a fiduciary advisor may help. Our free Advisor Quiz can match you with up to three fiduciary advisors who can discuss your financial goals, answer your questions, and help you explore investment strategies that align with your needs.

Start With a Cushion Before You Invest a Dollar

Before investing, build an emergency fund to cover unexpected expenses. This cushion can help you avoid selling investments when you need money for an emergency so that you can stay focused on your long-term goals.

Without sufficient savings, an unexpected medical bill or major car repair could force you to sell investments during a market downturn. If their value has declined, you may have to sell at a loss. For this reason, many financial planners suggest saving enough to cover three to six months of essential living expenses in an accessible savings account. However, the amount you need may vary based on your income stability, monthly expenses, and financial responsibilities.

Regardless of the amount, keep your emergency savings easily accessible rather than focused on high investment returns. Once you reach your savings goal, you can start investing with more confidence.

Capture Any Employer Retirement Match Next

After building your emergency fund, prioritize contributing to your workplace retirement plan if your employer offers matching contributions. This benefit adds money to your retirement savings based on your contributions, helping you build your investment portfolio with additional employer support.

An employer match is part of your compensation, but you generally need to contribute to receive it. For example, if your employer matches 50% of your contributions up to a certain limit, contributing $100 could add another $50 to your retirement account. This provides an immediate benefit before reviewing any investment gains or losses.

However, matching formulas, contribution limits, and eligibility requirements vary by employer. Some plans also require you to work for a certain period before you fully own the employer's contributions. Check your retirement plan documents to understand these rules and find out how much you need to contribute to receive the full employer match.

Pay Down High-Interest Debt as an Investment

Paying off high-interest debt can be one of the most effective ways to improve your financial position before investing more money. By reducing expensive debt, such as credit card balances, you can save on interest payments and free up money for future investments.

Unlike investment returns, the interest savings from paying off debt are more predictable. For example, paying off a credit card balance with a 20% annual interest rate eliminates future interest charges on that balance. This gives you a financial benefit without exposing your money to market fluctuations.

Therefore, after securing your employer's retirement match, you may want to prioritize high-interest debt before making additional investments. However, lower-interest debt, such as some mortgages or student loans, may not require the same urgency. Comparing your borrowing costs with potential investment returns can help you decide which financial obligation to address first.

Understand the Difference Between Accounts and Assets

Paying off high-interest debt can free up money to invest. Before investing, it's important to understand how accounts and assets work. An investment account holds your money, while assets are the investments you buy within it, such as stocks, bonds, or funds.

For example, opening a retirement account does not automatically mean your money is invested. In some accounts, contributions may remain in cash unless you select investments. So check whether your contributions are invested or sitting in the account.

The account type you choose also affects how your investments are taxed. Tax-advantaged accounts, such as 401(k)s and IRAs, offer tax benefits that depend on the account type and applicable rules. In contrast, taxable brokerage accounts generally offer more flexibility but fewer tax advantages.

For this reason, many investors prioritize tax-advantaged accounts before investing through taxable ones. However, the best choice depends on your financial goals, tax situation, and available account options. A financial advisor can help you compare these accounts and see how they fit into your overall tax-planning strategy.

Use Tax-Advantaged Space, Then Diversify Broadly

Once you've selected a suitable investment account, build a portfolio with different types of investments. By spreading your money across assets such as stocks and bonds, you can reduce the risk of relying too heavily on any single investment.

For beginners, broad investment funds offer a simple way to spread money across different assets. Instead of buying individual stocks, you can invest in multiple companies through a single fund. This reduces your reliance on any one company's performance, but it does not eliminate market risk.

Additionally, investment costs need attention. Many funds charge annual fees that reduce your returns. Over time, even small fee differences can affect how much your portfolio grows.

In practice, you don't need many investments to build a well-balanced portfolio. A few broad, low-cost funds may be enough, depending on your financial goals and risk tolerance. For additional guidance, you can explore our investing resources to learn more about different investment strategies.

Match Risk to Your Time Horizon

Short-term goals generally require safer investments, while long-term goals may allow more risk for potential growth. Specifically, longer investment periods provide more time to recover from market downturns, while short-term investments may not recover in time.

For example, someone saving for retirement in 30 years may be comfortable holding a larger portion of stocks. In comparison, someone planning to buy a home in 18 months may prefer lower-risk options, such as savings accounts or short-term Treasury securities.

Your ability to handle potential losses is also an important factor. Even with a long investment timeline, taking too much risk may lead to impulsive decisions during market downturns. Therefore, choose investments that align with your financial goals and personal risk tolerance.

These factors are particularly relevant to retirement planning, as your financial priorities may shift when you stop working and rely on your savings. Review your portfolio regularly to adjust your investments and support your retirement goals.

Automate With Dollar-Cost Averaging

Once you've chosen investments that match your financial goals and risk tolerance, you can set up regular contributions through dollar-cost averaging. With this approach, you invest a fixed amount at regular intervals without trying to predict market movements.

For example, if you invest $200 each month, you'll purchase more shares when prices are low and fewer when prices are high. Over time, this approach spreads your purchases across different market conditions, but it doesn't guarantee profits or protect against losses.

Moreover, automating your contributions can make it easier to maintain a consistent investing routine. By scheduling transfers from your paycheck or bank account, you can continue investing without making a new decision each month. This can reduce the temptation to react to short-term market movements and help you stay committed to your long-term investment plan.

When to Bring In a Fiduciary

You may benefit from a fiduciary financial advisor when your financial situation becomes complex, or you need professional guidance on major investment decisions.  For instance, stock compensation, business ownership, or major financial changes may require specialized knowledge. In these cases, a fiduciary advisor can help you understand your options and make informed decisions.

Before making a decision, it's important to understand an advisor's legal responsibilities. Investment advisers registered with the SEC or state regulators generally owe fiduciary duties to their clients. In comparison, brokers must follow Regulation Best Interest (Reg BI) when recommending securities to retail customers. Brokers have been required to comply with this rule since June 30, 2020. These standards create different legal obligations, so knowing an advisor's role can help you evaluate the advice you receive.

To check these responsibilities before choosing an advisor, you can use the SEC's Investor.gov resources to review their registration details and disciplinary history. You should also ask whether the advisor acts as a fiduciary at all times when providing advice and requesting written confirmation. Taking these steps can help you assess the advisor's background and understand their obligations before working with them.

Struggling to Balance Saving, Debt, and Investing? Our Advisor Quiz Can Match You With a Fiduciary

Balancing savings, debt, and investing can make it challenging to choose your next financial step, especially when every goal feels urgent. You want to build your financial future without straining your current needs. But committing too much to investments may limit the cash available for everyday expenses. At the same time, delaying debt payments may increase your interest costs.

You can get support with these decisions through our free Advisor Quiz, which can match you with up to three fiduciary advisors. A fiduciary can review your finances, discuss your priorities, and help you evaluate a suitable approach to saving, managing debt, and investing. These meetings can help you understand your options and identify next steps that fit your goals and current financial responsibilities.

FAQs

Can I Buy Less Than One Full Share of a Stock?

Yes, some brokerages offer fractional shares, allowing you to buy a portion of a stock instead of a full share. Before buying, check which stocks qualify, minimum purchase amounts, and trading restrictions, since availability and rules vary between brokerage firms.

Do All Stocks Pay Dividends?

No, some companies reinvest their profits instead of distributing dividends to shareholders. Also, companies that currently pay dividends may reduce or stop those payments. Check the company’s dividend policy before assuming a stock will provide regular income throughout your ownership.

Should I Read a Fund’s Prospectus Before Investing?

Yes, a fund’s prospectus explains its objectives, investment strategy, risks, and charges. Start with the summary prospectus, if available, for a shorter overview. Then review anything you don't understand before deciding whether to invest in the fund.

Should I Trust Investment Offers Promising High Returns With No Risk?

No, promises of high returns with no risk are warning signs of investment fraud. Instead, research the offer independently and request details in writing. Pressure to act immediately or keep the opportunity secret is another reason to question its legitimacy.