STEP 1: PRELIMINARIES

Get your finances adequately under control

First, don’t worry. Even if you’ve never invested before, you can do it successfully. You just need a bit of patience and a bit of persistence. The following relatively simple steps will guide you.

Before you get started, make sure to think through your plans for a financial emergency such as a layoff or illness. In a crisis, if you’re young, perhaps you would turn to your family for help. Otherwise, before investing, you might need to set aside a reserve fund of at least three months’ living expenses. (The Sensible-Investor section on investing principles contains a further discussion of this subject.)

Don’t delay investing because you don’t have your spending perfectly under control -- no one does. In fact, developing a simple investment plan is one way to get your finances in order. But if you have difficulty establishing even a minimal emergency fund because your spending is excessive, turn to one or more Web sites on budgeting for help.

STEP 2

Choose how you’ll pay for investments

These are the possibilities, in order of preference:

 

• Regular payroll deductions. (This is the most painless way. It's especially beneficial if your employer matches your investments, as many do for retirement plans such as 401(k)s.)
• Regular withdrawals from your bank account. Many mutual fund companies will help you set up these  automatic investment plans (T. Rowe Price, American Century, Invesco, Dreyfus, Strong, TIAA-CREF and USAA, for example. You can find many more through a program like  Morningstar's Fund Selector.
• Investments that you make on your own on a regular basis. This requires more will power and self-discipline than automatic withdrawals, but it can be done. Try to make the regular investments at the beginning of your bill-paying cycle; think of these checks as "paying yourself." Don't wait until the end of the month to see how much money is left.
• Sporadic investments of whatever spare cash you can afford. (This is better than nothing, by far. But it's the least reliable method, and the most difficult to follow through on consistently.)

(For a further discussion of this subject, see the Sensible-Investor section on investing principles.)

STEP 3

Avoid taxes, if possible

If you’re saving for retirement, put as much as possible in tax-deferred retirement plans such as 401(k) plans and IRAs.

If you’re saving for college education, put as much as possible in tax-deferred college plans such as 529 Plans. 

STEP 4

Choose specific investments

This section starts with two basic recommendations. Next comes a simple explanation of those recommendations. Finally, you’ll get specifics on how to follow this advice.

BASIC RECOMMENDATIONS*:

• Put your money in stocks rather than bonds, but do so through mutual funds rather than by buying stocks directly.
• If you can, invest in an index fund (a type of mutual fund). Most, but not all, companies’ retirement funds allow you to choose index funds.

* These recommendation don’t apply if you’ll need the money you’re investing in just a few years (such as if you’re close to retirement age or are about to owe tuition payments. If that’s the case, consult Sensible-Investor’s Step-by-Step Tuneup page.)

SIMPLE EXPLANATION:

Stock mutual funds (also called equity funds) are best because:

• In the long-run, stocks have consistently outperformed other investments.
• Investing in mutual funds protects you from the huge losses you can suffer if you buy stock of an individual company and that company fails.

Index funds are best because their expenses are low -- they put more of your money to work for you instead of diverting it to highly paid managers who attempt the fruitless task of outsmarting the stock market.

SPECIFICS ON FOLLOWING THIS ADVICE:

Look for index-fund options offered through your company’s retirement plan --  if you don’t see one, ask.

If you’re on your own, you can use Morningstar’s Fund Selector to locate low-cost index funds. Here’s how. You could also simply start by investing in one of the basic index funds run by the big, successful pioneers of index funds, the Vanguard Group, or the huge teachers’ retirement association, TIAA-CREF. You’re unlikely to go far wrong with any of these three index funds:

Vanguard’s Total Market Index Fund. Requires a $3,000 minimum initial investment, or $1,000 for an Individual Retirement Account.

Vanguard’s S&P 500 Index Fund. Requires a $3,000 minimum initial investment, or $1,000 for an Individual Retirement Account.

TIAA-CREF Equity Index Fund.  Requires a $1,500 minimum initial investment, or $500 in an IRA account, or just $50 if you set up an Automatic Investment Plan.

STEP 5

Do it

Fill out the paperwork to open your first investment account, and start accumulating the money that will help you accomplish your goals for the future.

STEP 6

The tuneup

Congratulations! You’re on your way. Pat yourself on the back, celebrate, and  keep making the regular investments you have planned.

When you’re ready to go further, turn to Sensible-Investor’s Step-by-Step Tuneup page.