Investing isn't just for the wealthy—it's how ordinary people build wealth over time. Thanks to low-cost index funds and commission-free trading, anyone can start investing with as little as $10. This guide walks you through everything you need to know to begin your investment journey.
Why You Should Start Investing
Money sitting in a savings account loses purchasing power to inflation (averaging 3% annually). Investing allows your money to grow faster than inflation, building real wealth over time.
$10,000 invested in an S&P 500 index fund in 2000 would be worth over $60,000 today—even after two major market crashes. That's the power of long-term investing.
Step 1: Before You Invest - The Prerequisites
Before putting money in the market, make sure you have these foundations in place:
Build an Emergency Fund
Save 3-6 months of living expenses in a high-yield savings account. This prevents you from selling investments at a loss during emergencies.
Pay Off High-Interest Debt
If you have credit card debt (typically 15-25% APR), paying it off provides a guaranteed "return" higher than most investments. Keep low-interest debt like mortgages while investing.
Get Your 401(k) Match
If your employer offers a 401(k) match, contribute enough to get the full match before investing elsewhere. It's essentially free money—a 50-100% instant return.
Step 2: Understanding Account Types
Where you invest matters for taxes. Here are the main account types:
401(k) / 403(b)
- Tax treatment: Contributions reduce taxable income now; withdrawals taxed in retirement
- 2025 contribution limit: $23,500 ($31,000 if 50+)
- Best for: Getting employer match, high-income earners
Traditional IRA
- Tax treatment: Contributions may be tax-deductible; withdrawals taxed
- 2025 contribution limit: $7,000 ($8,000 if 50+)
- Best for: Those without workplace retirement plans
Roth IRA
- Tax treatment: Contributions from after-tax income; withdrawals tax-free
- 2025 contribution limit: $7,000 ($8,000 if 50+)
- Best for: Young investors, those expecting higher future tax rates
Taxable Brokerage Account
- Tax treatment: Dividends and gains taxed annually
- Contribution limit: None
- Best for: Short-term goals, flexibility, after maxing tax-advantaged accounts
For most beginners, the priority order is: 1) 401(k) up to employer match, 2) Roth IRA to max, 3) Back to 401(k) to max, 4) Taxable brokerage.
Step 3: Types of Investments
Index Funds and ETFs (Recommended for Beginners)
Index funds track a market index like the S&P 500, giving you instant diversification across hundreds of companies. They have low fees (0.03-0.20% annually) and consistently outperform most actively managed funds.
- Total Stock Market: VTI, VTSAX, FZROX
- S&P 500: VOO, SPY, FXAIX
- International: VXUS, IXUS
- Bonds: BND, VBTLX
Individual Stocks
Buying shares of individual companies. Higher potential returns but also higher risk. Requires research and emotional discipline. Best kept to a small portion of your portfolio until experienced.
Target-Date Funds
All-in-one funds that automatically adjust asset allocation as you approach retirement. Pick your expected retirement year (e.g., "Target 2055") and the fund handles everything. Slightly higher fees but maximum simplicity.
Step 4: Getting Started - Your First Investment
Here's a simple path to your first investment:
- Choose a brokerage: Fidelity, Vanguard, Charles Schwab, or M1 Finance all offer commission-free trading and excellent index funds
- Open an account: Roth IRA if eligible, taxable brokerage otherwise
- Fund your account: Link your bank account and transfer your initial investment
- Buy your first investment: A total stock market index fund (VTI or VTSAX) is a great starting point
- Set up automatic investments: Schedule regular contributions (weekly or monthly)
A "three-fund portfolio" covers everything most people need: 60% Total US Stock Market (VTI), 30% International Stocks (VXUS), 10% Bonds (BND). Adjust bond percentage based on age and risk tolerance.
Step 5: Common Mistakes to Avoid
- Trying to time the market: Even professionals can't consistently predict short-term moves. Invest regularly regardless of market conditions
- Checking your portfolio too often: Daily volatility is noise. Check quarterly at most
- Panic selling during downturns: Market drops are temporary; selling locks in losses
- Chasing hot stocks or trends: By the time you hear about it, it's usually too late
- Paying high fees: A 1% fee difference can cost hundreds of thousands over a lifetime
- Not starting because you don't have "enough": Start with whatever you can. Consistency matters more than amount
Key Takeaways
- Build an emergency fund and get your 401(k) match before investing elsewhere
- Use tax-advantaged accounts (401k, IRA) before taxable brokerages
- Start with low-cost index funds—they outperform most alternatives
- Invest consistently regardless of market conditions
- Keep fees low (under 0.20% for index funds)
- Don't panic sell during market downturns
Frequently Asked Questions
You can start with as little as $1 using fractional shares at most brokerages. Many index fund ETFs can be purchased for under $100. The key is starting early and investing consistently, not starting with a large sum.
Robo-advisors like Betterment and Wealthfront offer automated portfolio management for 0.25% annually. They're a good choice if you want complete hands-off investing. However, you can achieve similar results for free using target-date funds or a simple three-fund portfolio.
Statistically, the best time to invest is always "now." Studies show that investing a lump sum immediately beats waiting for a "better time" about 2/3 of the time. If you're nervous, dollar-cost averaging (investing fixed amounts regularly) reduces timing risk.