3. Build an Emergency Fund
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One of the most important steps before you start investing is to ensure you have a solid financial foundation. This includes building an emergency fund—money set aside for unexpected expenses like medical bills or job loss. A good rule of thumb is to have three to six months’ worth of living expenses saved in an easily accessible account, such as a high-yield savings account. An emergency fund helps protect you from having to sell investments at a loss during times of need.
4. Start with Low-Cost Investments
For beginners, low-cost investments like index funds or exchange-traded funds (ETFs) are excellent options. These funds track a broad market index, like the S&P 500, and offer instant diversification by investing in a wide range of companies. They tend to have lower fees than actively managed funds and generally provide steady returns over the long term. Because index funds and ETFs spread risk across many companies, they reduce the volatility associated with investing in individual stocks.
5. Diversify Your Portfolio
A key principle in investing is diversification, which means spreading your investments across different types of assets to reduce risk. By diversifying, you’re not relying on the success of a single investment, such as a specific stock or sector. A well-diversified portfolio typically includes a mix of stocks, bonds, and possibly other assets like real estate or commodities. As a beginner, you can achieve diversification through mutual funds or ETFs, which hold a variety of assets within one investment.
