How to start investing

Investing works best when you can leave the money alone for years. Before you put in the first dollar, three things should be true.

• 1You have income you can count on, even if it is modest.
• 2You have a cushion of cash for emergencies — one month of expenses to start, three to six months over time. This is the money that keeps a car repair from becoming credit card debt.
• 3You are not carrying high-interest debt, meaning anything above roughly 8%: credit cards, payday loans, some personal loans. Paying off a card charging 24% is a guaranteed 24% return. No investment can promise that.

This is the step that confuses people most, so here it is plainly: the account is the container, and your investments go inside it. Choosing an account is not the same as choosing what to invest in — that comes later, in Step 9. Different containers follow different tax rules.

A simple order that works for most people: contribute enough to your 401(k) to get the full employer match, then fill a Roth IRA, then go back and add more to the 401(k), then use a regular brokerage account for anything beyond that.

A provider — also called a broker or brokerage firm — is the company that holds your account. Vanguard, Fidelity, and Charles Schwab are the three most commonly recommended for beginners: large, long-established, and free to open and maintain a standard account.

You are not committing for life. Accounts can be moved to another provider later, and the new one will do the paperwork for you.

• •No account fees, and no commission on stock and ETF trades. This is standard now — if a provider charges these, look elsewhere.
• •Low expense ratios on their own funds. An expense ratio is the yearly fee a fund charges, shown as a percentage. Under 0.10% is excellent; above 0.50% is expensive.
• •SIPC membership, which protects your account up to $500,000 if the brokerage itself fails. Every legitimate US brokerage has it.
• •A website, app, and phone support in a language you are comfortable using.

Opening an account is a legal process, so the provider has to verify who you are. Have these ready before you start and the whole thing takes about fifteen minutes.

• •Your Social Security Number, or your ITIN if you have one instead.
• •A government-issued photo ID: driver's license, state ID, or passport.
• •Your current home address — a PO box usually is not accepted — plus your phone number and email.
• •Your employer's name and address, or your employment status if you are not working.
• •Your bank's routing number and account number. Both are printed along the bottom of a check, and both appear in your bank's app under account details.
• •Your date of birth, and your citizenship or visa status.

Go to the provider's website by typing the address yourself rather than clicking a link in an email or an advertisement. Look for a button that says "Open an account."

Approval is usually instant. Occasionally a provider asks for a photo of your ID, which can add one to three business days.

• 1Choose the account type you settled on in Step 2. If you are asked between "individual" and "joint", individual means the account is yours alone.
• 2Enter your personal details exactly as they appear on your ID. A missing middle initial is one of the most common reasons an application gets held up.
• 3Answer the questions about employment, income, and investing experience honestly. They are required by regulators, not a test. Answering "none" or "limited" for experience changes nothing about what you are allowed to buy.
• 4Name a beneficiary — the person who inherits the account if you die. It takes thirty seconds and saves your family months of court process. You can change it whenever you want.
• 5Read the agreements, accept them, and submit.

Linking your bank is what lets you move money in and out. There are two ways, and both are safe.

• •Instant verification: you pick your bank from a list and sign in to it through a secure window. Fastest, and it works immediately.
• •Micro-deposits: you type in your routing and account numbers, and the provider sends two tiny deposits — a few cents each — to your bank within one to three business days. You come back and enter those amounts to confirm. Use this if your bank is not on the list.

Transfer money from your bank into your new account. The button is usually labelled "Transfer", "Deposit", or "Move money".

The first transfer normally takes one to three business days to settle. Later ones are often faster.

Start with an amount you would not miss if you could not touch it for five years. There is no minimum that makes this real — $25 that you keep adding to beats $2,000 once.

This is the most common and most expensive mistake beginners make, so please read it twice.

When your transfer arrives, the money sits in the account as cash. It is not invested. It is not growing. People deposit money, see a balance on the screen, and assume they are finished — then find out years later that it has been sitting still the whole time, quietly losing value to inflation.

Your account balance and your invested amount are two different numbers. Until you place a buy order in Step 10, you own nothing but cash.

Providers show this money as a "settlement fund", a "core position", or "cash available to invest". That last phrase is the clearest one: available to invest means not yet invested.

Now you decide what to buy. For a long-term investor starting out, this whole decision can be a single broadly diversified, low-cost fund. That is not a beginner's compromise — it is what the evidence points to for nearly everyone.

If you want the shortest possible answer: a target-date fund inside a retirement account, or a total US stock market index fund. Both are ordinary, boring, and widely recommended.

ETFs fill within seconds while the market is open — 9:30am to 4:00pm Eastern on weekdays. Mutual funds fill once, after the market closes, so your order may sit as "pending" for a few hours. Neither is a problem.

Once it goes through, your balance will move up and down a little every day. That is what invested money looks like. It is working.

• 1Find the fund's ticker symbol — a short code such as VTI or FXAIX. Search the provider's site for the fund by name and the symbol will be listed beside it.
• 2Choose "Buy" or "Trade".
• 3Enter the amount. Most providers now let you buy by dollar amount instead of number of shares, which is easier: type $100 and you get $100 worth.
• 4For order type, choose "Market". That means buy at the current price. "Limit" orders are for people trying to hit a specific price, which is not what you are doing.
• 5Review the order and confirm it.

This step does more for your long-term result than any fund choice. Set up an automatic transfer that moves money from your bank on every payday, and an automatic investment that buys your fund with it.

Look for "Automatic investments", "Recurring investment", or "Auto-invest" in the account settings. Setting up only the transfer leaves you back in Step 8, with cash sitting uninvested. Set up both, or confirm that your provider's automatic investment covers both halves.

• •Pick an amount you could sustain in a bad month, not a good one. You can raise it whenever you want — and should, whenever you get a raise.
• •Match the schedule to your paydays, so the money leaves before you have planned around it.
• •Buying on a fixed schedule regardless of price is called dollar-cost averaging. You end up buying more shares when prices are low and fewer when they are high, without having to predict anything.

Many funds pay dividends — your share of the profits the underlying companies hand out — usually every three months. By default, some providers drop that into your account as cash, which puts you back in Step 8 with a small amount of money doing nothing.

Find the setting called "Dividend reinvestment" or "DRIP" and set it to reinvest. Every dividend then automatically buys more of the same fund, and those new shares earn dividends of their own. That is compounding, running without you.

The rest of the job is mostly not doing things. A workable routine is about an hour a year.

Markets will fall. Somewhere in the coming decades your balance will drop 20%, 30%, perhaps more, and the news will make it sound final. Historically every one of those declines has been temporary for people who kept contributing and did not sell. The plan is not to dodge the drops — it is to still be invested when they recover.

• •Check in once or twice a year. Daily checking turns ordinary dips into emergencies and tempts you to sell at the worst possible moment.
• •Raise your automatic contribution whenever your income rises. You never miss money you never started spending.
• •Rebalance once a year if you hold more than one fund: sell a little of what grew and buy what lagged, to return to your intended mix. A target-date fund does this for you.
• •Update your beneficiary after a marriage, a divorce, a birth, or a death.
• •When you change jobs, move your old 401(k) into an IRA or your new employer's plan so it is not forgotten. Ask for a "direct rollover" so the money never passes through your hands and no tax is withheld.