How to Start Investing in 2023: A Beginner’s Guide

Starting anything new can be intimidating—especially when it’s something that can have long-term effects on your finances—but don’t give up. Anyone can invest—including you. And it’s okay if you have a ton of questions. Here are five easy-to-follow steps to help you get started.

1. Decide on Your Investing Goals

We’ve always said one of the keys to following the 7 Baby Steps and getting out of debt is knowing your why. Why are you getting out of debt? What’s the big, specific goal you have that’s driving you to kick debt to curb? Having a definite reason for getting out of debt gives you a finish line to look forward to in your race to financial freedom.

That’s also true for investing—a key to starting your investing journey on the right foot is being clear about your goals. Why do you want to start investing? Is it to build your retirement? To pay for your kids’ or grandkids’ college? To save a down payment for your first house?

Getting clear on why you want to invest your hard-earned money will help you with the next step, which is to . . .

2. Understand Your Investing Options

Before you dive into investing, it’s important to take a step back and look at all your options.

Different types of investing accounts (like IRAs or 529 plans) are made for different investing goals. You’ll also have different types of investments (like stocks, bonds or mutual funds) to choose from for those accounts.

So check out these common types of investing accounts for long-term savings (like building retirement) and short-term savings (like saving for a down payment) and see which one might work for you:

Saving for Retirement

Whether you’re self-employed, a small-business owner, or you work for an employer who offers a retirement plan as part of their benefits package, there’s plenty of investing accounts to help you start saving for retirement. These are the highlights of each type, but always talk to an investing pro to get all the details:

Traditional or Roth 401(k)

Many employers offer their employees either a traditional 401(k) or Roth 401(k) as part of their benefits package. They’re both retirement savings plans, but there’s one major difference—how they’re taxed.

With a traditional 401(k), your money goes in tax-deferred. In other words, you’ll get a tax break now, but you will owe the IRS taxes once you start using the money in retirement. That also includes taxes on any employer contributions and—you guessed it—taxes on all the growth of your contributions as well.

With a Roth 401(k), your contributions are taxed up front. But when you start withdrawing at retirement, you won’t owe Uncle Sam any taxes on those contributions or their growth. The only thing you’ll still owe taxes on is any employer contributions. Sweet!

Traditional or Roth IRA

Market chaos, inflation, your future—work with a pro to navigate this stuff.

An individual retirement account (IRA) is similar to a 401(k) because it lets you invest for retirement with some special tax advantages—either a tax deduction now with tax-deferred growth (a traditional IRA) or tax-free growth and withdrawals in retirement (a Roth IRA, the rock star of retirement accounts).

But unlike a 401(k), an IRA isn’t sponsored by your employer. And that’s a good thing! That means you usually have thousands more options when it comes to choosing your mutual fund investments.

SIMPLE IRA or SEP IRA

If you’re a small-business owner, a SIMPLE IRA plan makes it easy to save for your own retirement while also contributing to your employees’ retirement savings.

As of 2023, employees can save up to $15,500 in the plan per year (anyone age 50 and older can put in an extra $3,500 as a catch-up contribution) and the employer usually has to offer up to a 3% match for their employees every year.¹

A simplified employee pension (SEP IRA) is another retirement plan option for small-business owners or self-employed people that offers many of the major tax advantages of a traditional IRA. 

Unlike a SIMPLE IRA, which lets employers and employees to contribute to the plan, only employers are allowed to contribute to SEP IRAs on behalf of their employees. For 2023, employers can put up to 25% of an employee’s salary into their account each year, up to a total contribution of $66,000.²

Saving for Education

Once you’re investing 15% of your income for retirement, you’re ready to start saving for your children’s college fund. Remember, your retirement comes first.

Let’s take a look at your investing options for college savings and why we recommend them (or not):

529 Savings Plan

Named after its section in the IRS code, a 529 plan is a state-run tax-advantaged account that lets you set aside money for educational expenses. It’s a great option if your investing goal is to save for your child or grandchild’s future college.

There are lots of 529 plans, but the two most common are savings plans and prepaid plans. Stay away from a prepaid plan. They have a lot of restrictions, including how you can use the money (expensive textbooks or housing are off the table).

A 529 savings plan, on the other hand, is a great choice for college savings. There’s no age limit for contributions or distributions. If your 30-year-old decides to go back to school, they can still use the money in the account. And thanks to the Secure 2.0 Act, you can roll over any unused money from a 529 savings plan into a Roth IRA for the plan’s beneficiary (if you meet several qualifications).³

Education Savings Account (ESA)

An ESA (sometimes called a Coverdell ESA) is a trust or custodial account that lets you invest money to pay for someone else’s education.

ESAs are different from 529 plans in a few important ways—first, ESAs have a contribution limit of $2,000 per child per year, while there’s virtually no limit on 529 plan contributions. And with an ESA, you can choose almost any kind of investment, including stocks, bonds, and our number one recommendation, mutual funds. Having more control over your investments while saving so your kiddos don’t have to take out student loans? Sounds like a win-win to us!

Before deciding on an ESA or 529 plan for your college savings, talk with an investing pro who can answer any questions you have about tax implications, rollover rules, and income and age qualifications for you as the investor and for the students you’re saving for.

Short-Term Saving

If you’ve started putting 15% of your household income into retirement and are looking for ways to save money short-term, here are some of your best options:

Index Funds

Index funds are a type of mutual fund designed to mirror a market index like the Dow Jones Industrial Average or the S&P 500. That makes them relatively low risk and predictable.

Index funds will give you an average rate of return based on stock market conditions. But like with all investing, the longer you keep your money in an index fund, the more likely you are to see growth. That makes them a great option for growing your savings for a down payment or buying your first rental property as long as you’re not planning to use that money for at least five years.

Money Market Account

A money market account (MMA), also known as a money market deposit account or money market savings account, is a great option for low-risk, short-term savings.

An MMA usually pays a better interest rate than you’d get with a regular savings account, and another perk of an MMA is its liquidity (that’s banker-speak for easy access to your money). You can use the money in an MMA to pay for things with checks or a debit card.

But there are some downsides to an MMA: The bank limits the number of times you can withdraw your MMA money in a month (usually only six times). Plus, there’s a higher minimum balance compared to typical accounts, and you’ll get slapped with a wonderful account maintenance fee if you don’t maintain that balance.

Keep in mind, this is a place for money like your emergency fund or savings you plan to use in five years or less. The interest you’ll earn likely won’t keep up with inflation, so that makes it a bad choice for a long-term investment.

Those are just some of the most common types of investing and savings accounts, and which one you should choose depends on your investing goal and whether you’re investing for the long term or saving for the short term. It’s never a bad idea to talk with a financial advisor so they can answer any questions you have before opening an account.

Types of Investments

Let’s talk about the most common types of investments and why we always recommend mutual funds for long-term investing.

Bonds

A bond is a kind of loan between an investor and a corporate or government borrower that promises to repay the money with interest. They’re kind of like the certificates of deposit (CDs) of the investing world: easy to set up, relatively low risk, but often low reward.

Bonds have a reputation for being “lower-risk” investments because they don’t fluctuate as wildly as stocks. But lower risk doesn’t mean no risk. When interest rates rise, like they have been lately, bond values fall. And even in “good” times for bonds, the returns just aren’t that impressive (especially when compared to mutual funds) because they barely outpace inflation. Remember, you want to beat the market so you can build wealth.

Single Stocks

Stocks are basically tiny pieces, or shares, of a company. When a company goes public, they sell shares of the company to investors to fund future company growth. Picture a pizza cut up into tiny slices. If you buy a slice, you actually become a part owner in the company.

When you invest in single stocks, you’re putting all your money into one particular company, and that’s extremely risky. It’s better to diversify your money, especially if you’re just getting started in investing.

Once you’re full steam ahead with Baby Step 4, then you can consider single stocks as an additional investment. But stocks should never make up more than 10% of your portfolio—and be prepared to lose money if the company you’re invested in takes a nosedive.

Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are similar to index funds. They invest in stocks from the companies included on a particular index, but here’s the twist—they’re bought and sold like single stocks.

ETFs and index funds are passive investments, meaning no one is managing your investments for you. That can mean lower fees, but the trade-off is that you’re on your own. Wait to invest in low turnover ETFs in a taxable investment account after you’ve maxed out your retirement accounts.

Mutual Funds

The best way to invest for long term, consistent growth is to put your money into good growth stock mutual funds. A mutual fund is an investment that pools money from a group of people to buy stocks in different companies.

Unlike ETFs and index funds, mutual funds are actively managed, meaning an investment professional makes decisions about how to invest the fund’s money. Also, there are thousands of mutual funds, which means you can choose funds that have a long history of outperforming other funds in their category.

What types of mutual funds should you pick? Great question. Let’s talk about how to build your investment strategy with mutual funds.

3. Pick an Investment Strategy

Like we said earlier, good growth stock mutual funds are the best way to invest for long-term, consistent growth. Why is that? Because they let you spread your investment among many companies—from the largest and most stable to the new and fast-growing. Spreading your money around like this is an important investing principle called diversification, and it helps you avoid the risks that come with buying single stocks.

Ever heard the expression, “Don’t put all your eggs in one basket?” Well, mutual funds put your eggs in many different baskets. And we recommend spreading those eggs out even more by investing in four types of mutual funds:

• Growth and income funds (also called large-cap funds): These are the most stable and predictable funds because they invest in stable, predictable companies. 
   
• Growth funds (also called mid-cap funds): These are fairly stable funds that invest in growing companies. They’re slightly more risky and come with the potential for higher reward.
   
• Aggressive growth funds (also called small-cap funds): These are the wild-child funds. You’re never sure what they’re going to do, which makes them higher risk, and potentially higher-return, funds.
   
• International funds: These funds invest in foreign-owned businesses.

One of the biggest myths out there is that millionaires take big risks with their money to become wealthy. That couldn’t be further from the truth!

The Ramsey Solutions research team conducted the largest survey of millionaires ever done, called The National Study of Millionaires. Our team talked to more than 10,000 millionaires so we could finally get a clear picture of what a real millionaire looks like and how they built their seven-figure net worth.

Guess how many of them said single stocks were one of their top three wealth-building tools. The answer? Zero. Not a single one!

4. Open an Investing Account

Once you reach Baby Step 4, you’re ready to start investing for retirement. So where do you start? It’s pretty simple:

• Start with your workplace plan. Most employers offer a match when you invest in your workplace retirement plan (a 401(k) or Roth 401(k) for most people). If you don’t have a Roth option, invest up to the match in your 401(k), then skip to the next step. If you do have a Roth option and you have a selection of good growth stock mutual funds to choose from, you can invest your entire 15% at work and you’re done.
   
• Open a Roth IRA. Like we said before, the Roth IRA is the rock star of retirement plans. You can invest in the best mutual funds, and you won’t have to pay taxes on the growth in the account when you use it in retirement. Max out a Roth IRA for yourself and your spouse if you’re married.
   
• Go back to your workplace plan. If you’ve maxed out your Roth IRA and you still haven’t reached your 15% goal, bump up your contributions to your 401(k) until you do.

It’s super easy to start investing in your employer-sponsored retirement plan. Here’s how to open an account:   

1. Check with your HR department to see if you’re eligible. A lot of companies will allow you to enroll as soon as you’re hired, but some require you to hit the one-year mark before you become eligible.
2. Fill out any required paperwork and submit it to HR online or in person.
3. Pick and choose your investments.
4. Set up automatic contributions.

Opening a Roth IRA is just as easy:

1. Set up an account online with help from an investing professional.
2. Fill out that pesky paperwork.
3. Pick and choose your investments.
4. Set up automatic contributions.

Your investing professional can also help you open an account and choose your investments to save for your kid’s college. And once your house is paid off, you can max out your tax-advantaged retirement accounts and even open a taxable investing account if you’re interested in investing in more mutual funds, stocks or ETFs.

5. Work with a Pro to Start Investing and Keep Learning

The last step to set yourself up for investing success is to actually start investing. Don’t let 2023’s economy or the scary, exaggerated news about everything that’s wrong with the stock market or the housing market keep you from getting on board. Instead, get with an investing expert who can give you real knowledge and guidance about starting your investing journey.

You’ll have lots of questions—it’s a given. Which are the best funds to choose? How do I manage my 401(k) or set up a Roth IRA? Your investment professional can show you how to start investing and answer all your questions so you can make the best decisions possible for your retirement savings.

The right investment professional will:

• Educate you on investment choices so you stay in the driver’s seat
• Help you keep your investments on track with regular check-ins
• Offer a client-first approach

Before you start investing, you need to work your way through the first three of Ramsey’s 7 Baby Steps. That means saving $1,000 for a starter emergency fund, paying off all your debt except your mortgage using the debt snowball method, and then saving a fully funded emergency fund of 3–6 months of expenses.

If you’re new to the 7 Baby Steps, no problem! Simply put, it’s a plan millions of people have followed to get out of debt and start building wealth for retirement. Let’s break it down:

• Step 1: Save $1,000 for your starter emergency fund.
• Step 2: Pay off all debt (except the house) using the debt snowball.
• Step 3: Save 3–6 months of expenses in a fully funded emergency fund.
• Step 4: Invest 15% of your household income in retirement.
• Step 5: Save for your kids’ college fund.
• Step 6: Pay off your home early.
• Step 7: Build wealth and give generously!

Here’s the deal—your income is your most important wealth-building tool. And as long as it’s tied up in monthly debt payments, you can’t build wealth. It’s like trying to fill a bucket with water when there’s a hole on the bottom—it just doesn’t work.

By building a debt-free foundation and stashing a good chunk of savings in the bank, you’re setting yourself up to build wealth the right way.

When you reach Baby Step 4, start putting 15% of your household income into tax-advantaged retirement accounts, like your 401(k) at work or Roth IRAs. With your income freed up from debt payments, you’ll be able to throw that 15% at your retirement without blinking an eye.

Tackle Baby Steps 1–3 in order—put all your focus and energy on one financial goal at a time. But when you reach Baby Steps 4, 5 and 6, you can invest in retirement, save for college, and pay off your mortgage all at the same time. Why? Because you crushed your debt and freed up your income! And now you’re on the road to building real wealth.

In fact, there’s a whole group of millionaires called Baby Steps Millionaires who’ve followed the 7 Baby Steps to hit the million-dollar mark. They were able to pay off all their debt and reach a million-dollar net worth in about 20 years.

Start Investing Today

As you start investing and working with a pro, keep this in mind: Never invest in anything you don’t understand. It’s your money! Ask as many questions as you need to and take charge of your own investing education.

To do that, you need to work with a pro who has the heart of a teacher—that’s why we recommend SmartVestor Pros.

They’re a group of financial professionals who want to super-serve their clients. They’re committed to educating and empowering you to create a plan to build wealth for your retirement.

Reach out to a SmartVestor Pro today!

This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.