Investing has differences to saving - but the need to put a plan in place is common to both. Realising this need to plan is one of the first steps of investing and helps answer the question: I'd like to invest but where do I start?.
Step 1 to start investing: Make a budget
Making a budget is key to planning and getting started in investing. As detailed How much should I be saving?, budgeting involves working out how much money you have coming in and how much going out, as well as sorting priorities and setting financial goals.
It should become clear how much money is available to invest.
And think about paying off high-interest debts before investing, as the interest would likely end up costing more than money made on investments.
Step 2 to start investing: Set investment goals
An investment goal should ideally be long term - think building up a retirement fund, saving for a child's education or a wedding.
A fund to cover emergencies, for example, is not suitable for investing as it should be extremely easy to access in times of need. In fact, building up the emergency savings fund before investing is a good idea as it limits the likelihood of having to sell investments at a bad time if crisis strikes.
Step 3 to start investing: Know your attitude to risk
By definition, investing is riskier than saving. So it's important know your comfort level. If you are willing to take more risk, you can opt for more volatile assets (such as shares) in your portfolio and fewer lower-risk assets (such as cash and bonds).
On the flipside, if high risk makes you uneasy, perhaps lower-risk options are for you.
Tolerance for risk can also depend on the time period available for the investment. As detailed in the eZonomics video on the life cycle approach to investing, it is important to tailor investments to the amount of time until the money will be needed. New college graduates saving for retirement, for example, can afford to take more risk than someone aged 55 with the same end goal. This is because the longer the investment horizon, the more time that is available to recoup losses that may happen along the way.
Banks and financial advisors weigh up customers' needs, attitudes, investment horizons and investment goals using questionnaires to try to reveal their risk profiles. So if you are unsure how strong your appetite for risk is, consider seeking professional advice.
Starting investing is as simple as 1, 2, 3
With budgeting, goal setting and considering appetite for risk, even the least experienced investors can be ready to invest. The three steps can put you on track to manage money better - and create an opportunity to earn higher returns than by simply saving.