Investing 101: How to Start Investing

Picture your life in 10 years. What do you want it to look like? How about in 20 or 30 years? No matter what dreams you have, the choices you make today have the power to set you up for financial security later on. That’s why I love coaching people on how to start investing!

Building wealth opens up exciting options for your life. It helps you make your dreams a reality and gives you the chance to impact other people through living generously. But I want to make something very clear: This is not a get-rich-quick guide. Investing is like a marathon, not a sprint. The road to building wealth is slow and steady. 

Are you ready for your investing 101 crash course? Let’s do this.

What Is Investing?

Investing is intentionally setting aside money that will multiply over time and produce a profit down the road. Eventually, you can build a solid nest egg that will allow you to live your dream retirement when you’re no longer collecting a paycheck.

Saving, on the other hand, is setting aside money for short-term goals, like buying a house or paying for a wedding. If you’re saving for something in the near future, you want to keep that cash in a savings or money market account so that it’s liquid (meaning easy to get to).

Types Of Investments

Pretty much every investment you could make falls into one of four asset categories: cash, bonds, real estate, and stocks (single stocks and mutual funds). An asset is something valuable that increases your net worth.

I hope you’ve got your nerd goggles on, because we’re about to dive into some important financial topics!

Cash Assets

We all need to have cash on hand to cover living expenses and savings goals. In fact, before you start investing, you should be debt-free and save up an emergency fund that can cover three to six months of living expenses. You’ve heard of Murphy’s Law, right? Anything that can go wrong will go wrong. So, save up enough cash to cover unexpected emergencies. This will give you peace of mind as you start investing.  

But keeping your money in a checking, savings, or a money market account is a low-risk and low-return way to store your money. It won’t keep up with inflation. Inflation simply means that life gets more expensive over time. For example, in 1999, gas averaged $1.14 per gallon. But now, gas averages $2.72 a gallon.1 Inflation generally increases by 1–3% each year.2

Let’s talk about CDs (no—not those small discs that you used to put in a Walkman. Uh-oh, I just dated myself!) Certificates of deposit are basically a bank account with a certificate that says you put your money in the bank and will leave it in there for a certain amount of time. CDs have very low interest rates and will not grow your money. I don’t even consider them a true investment.    


A bond is a loan agreement between the borrower (like the government or a corporation) and you as the investor. There are three common types of bonds: government (backed by the U.S. Treasury), municipal (issued by state or local governments), or corporate (issued by companies to fund growth).

The borrower usually agrees to pay you a set interest rate after a fixed amount of time. For example, if you buy a $10,000 corporate bond with an interest rate of 8%, you’d get your $10,000 back plus $800 (interest on the loan). The bond will give a specific maturity date, which is the point when you can redeem the money you invested, plus interest.

People have a notion that bonds are safe and reliable, but their values actually fluctuate the way that stocks do, and you can lose money investing in bonds. And overall, the return on investment is wimpy, especially compared to growth stock mutual funds, so I do not recommend investing in bonds.

Real Estate

Real estate is land and anything you can build on it. Houses, apartments, retail space, or commercial buildings are all types of real estate investments. Real estate is a smart investment because it’s an appreciating asset, meaning that its value goes up over time. If you’re a homeowner, you’re already investing in real estate. Congrats! If you’ve made good decisions about your house, you should be able to sell your home for a lot more than you bought it for.

Lots of people purchase extra homes that they rent out to generate income. But hear me on this: Real estate is a very active investment that demands your time and effort to manage. Only invest in real estate if you absolutely love it. Also, don’t buy real estate properties with debt. Use cash so that you’re not taking on unnecessary risk.


Stocks represent tiny pieces (or shares) of a company. When a company goes public, they sell these small shares to people to fund their growth. We’re going to camp out on stocks for a while and talk about two categories of stocks: single stocks and mutual funds.

Single Stocks

If you buy stocks in a specific company, you’re investing in single stocks. There are two primary ways to make money on single stocks: 

  • Dividends: Some companies will pay stockholders a regular share of the company’s earnings.
  • Selling your stocks for a profit: As the company earns more money, the value of its stock will go up. If you buy 100 shares of a stock at $25 a share, and you later sell that stock when the value rises to $50 a share, you’ve doubled your money and made a profit.

I do not recommend investing in single stocks. I’ve done it—and it ended up being a million-dollar investment mistake! Buying single stocks is like playing a sophisticated game of poker. In fact, when you hear phrases like investment opportunity, timing the market, and hedging your bet, I want you to lace up your tennis shoes and run in the opposite direction!

With that being said, if you’re already investing 15% of your income in growth stock mutual funds, then you can consider single stocks as an additional investment. But be prepared to lose money if something goes south with the company you’re invested in.

Mutual Funds

The best way to invest for long-term, consistent growth is to put your money into mutual funds. A mutual fund is created when a group of people have pooled their money together to buy stocks in different companies.

Mutual funds allow you to diversify—one of the most important principles of investing. Diversification is just a fancy word for don’t put all your eggs in one basket. You want your money to go to work across different kinds of stocks with different levels of risk.

The four main types of mutual funds that I recommend are:

  • Growth and income funds: These are the most predictable funds in terms of their market performance.
  • Growth funds: These are fairly stable funds in growing companies. Risk and reward are moderate.
  • Aggressive growth funds: These are the wild-child funds. You’re never sure what they’re going to do, which makes them high-risk, high-return funds.
  • International funds: These funds invest in companies around the world.

With me so far? Good. Now, hang with me a little longer. You’ve probably heard the word cap attached to mutual funds. That word is short for capitalization, which describes how much a company is worth. Here’s how companies are classified:

  • Small-cap: Companies valued below $2 billion
  • Mid-cap: Companies valued between $2–10 billion
  • Large-cap: Companies valued over $10 billion

Now, let’s put this together with an example. A large-cap, growth stock mutual fund is made up of big companies (worth more than $10 billion) that are growing (like Amazon, Facebook, Microsoft). A small-cap, aggressive growth fund is made up of small companies (like tech start-ups) that have a high chance of financial gains, but also a high chance of failure.

So, by spreading out your investments across a variety of mutual funds and company sizes, you balance high-risk investments with more steady and predictable funds.

Compound Interest: The Secret To Investing Success

To be a successful investor, you need to let your money hang out with its two best friends: time and compound interest. Albert Einstein called compound interest “the eighth wonder of the world.” Basically, when you invest your money in mutual funds and leave it alone for a while, compound interest allows you to earn interest on interest. It’s like a mathematical explosion!

Let me break it down in simple terms. I think that this example will interest you (dad joke—had to do it). Say that you’re 35 years old and you haven’t invested a single penny in retirement.

  • You start contributing $687.50 a month in your company’s retirement plan.
  • You invest for 30 years.
  • You earn 10% interest on your investments. The historical 30-year return on the S&P 500, an index that tracks the performance of the top 500 companies in the U.S., is actually 12%.3
  • When you retire at age 65, you’ve got over $1.5 million in your retirement nest egg—but you only put in $247,500! That’s what compound interest can do for your retirement!

Remember: Patience is key to seeing the power of compound interest in action.

How To Start Investing

So far, we’ve been talking about a lot of the fundamentals of investing. Here’s the part where I pull out my playbook and coach you through some practical ways to start investing.

1. Invest In Your Workplace Retirement Account Up To The Company Match.

Last, year, my team and I conducted the largest study ever done on millionaires to prepare for my book Everyday Millionaires. One of the incredible truths we uncovered is that eight out of 10 millionaires made their money primarily through investing in their 401(k) or 403(b). This is huge, people! (If you don’t have a retirement plan through work, don’t worry. I’ve got something for you in step three.)

Now, you might feel like you’re staring into a bowl of alphabet soup when you read about these plans! But they’re simpler than you’d think. While there are some differences between a 401(k) and a 403(b), they are both ways that employees can invest pre-tax dollars in mutual funds. The plans were named after the section of the tax code that created them. The 401(k) is literally from page 401, section k of the tax code. Brilliant, huh?

I’ve got two magic words for you: employer match. A lot of employers will offer a company match for money that you invest in your workplace plan. This is code for free money, people! Let’s say your company will match up to 4% of your total gross income. If you make $40,000 a year and invest 4%, you’d get a $1,600 match. In 20 years, that 4% match by itself earns you over $100,000 at a 10% rate of return. Look at it this way: If you’re not taking advantage of that company match, you’re throwing away $100,000! Have I convinced you to go talk to HR? Good!

2. Diversify Your Investments.

Think of your workplace plan like a grocery bag and your investments as the groceries. You put your money into different funds inside of the plan that go to work for you and make a profit.

I recommend diversifying your investment by spreading it across the four types of mutual funds that we covered earlier (growth and income, growth, aggressive growth, and international). If you want an equal balance between risk and return, then you’d designate 25% of your contribution to go to each of the four funds.  

Make sure that you automate your investments. You can choose to contribute a fixed percentage or a dollar amount from every paycheck. Sweeping those investment dollars straight from your paycheck into your 401(k) is like flexing your wealth-building muscle. It gets stronger over time and becomes second nature!

3. Open A Roth IRA.

IRA stands for individual retirement arrangement. It’s a great way for you to open a retirement savings account if you’re self-employed or your employer doesn’t offer a plan. You can go to a bank or a brokerage firm to open one. And even if you do have a traditional 401(k) at work, I still advise you to open a Roth IRA.

The word Roth means tax-free. I get goose bumps when I hear it! Here’s why: With a Roth, you invest after-tax dollars now, but your investments grow tax-free and your withdrawals (when you reach age 59 ½) are tax-free!  

There are more specifics on how to make the most of a Roth IRA and a 401(k) , but the general idea is that you should:

1) Invest in your company’s retirement account up to the free match.

2) Then max out a Roth IRA.

3) Return to your workplace retirement account and increase your contributions until you’re investing 15% of your income.

Now, if your company offers a Roth 401(k), you can put all of your 15% retirement investment into that plan and call it a day! This plan gives you the advantage of tax-free growth and withdrawals, plus the employer match and a higher contribution limit!

How Much Should I Invest?

If you’re debt-free (except for a mortgage), you should invest 15% of your gross income in retirement. It’s enough to make real progress on your retirement and leaves enough left over for you to reach your other goals, like your kids’ college fund and paying off your mortgage early.

Now, I have one more important piece of advice: Leave your investments alone, especially when the market slumps. Don’t panic! Investing in the stock market is like riding a roller coaster. There are lots of ups and downs. But the worst decision you could make when riding a roller coaster is to get off in the middle of the ride!

In the investing world, what goes down eventually comes back up. For example, during the financial crisis of 2007–2009, the S&P 500 Index (which tracks the performance of the top 500 companies in the U.S.) dropped 57% between October 2007 and March 2009.4 However, the S&P recovered—and by 2013, stock prices had recovered and have been steadily improving since.5 

Should I Get A Financial Advisor?

I encourage everyone who is just starting their investment journey to sit down with a pro. But I only want you to work with the best! SmartVestor is a free service that connects you with investing professionals in your area. Each one has been vetted by our team at Ramsey Solutions. They have the heart of a teacher and will patiently walk you through the process and advise you on how to move forward.