Before you start, you need to get rid of you high-interest debt (such as credit card debt). This debt can compound and increase at a faster rate than you would be able to make money on Wall Street. "Every dollar you can put toward investing is a dollar that can work for you. And every dollar you avoid putting in the pocket of a financial professional, is also a dollar that is creating value for you." (Motley Fool Guide to Investing)
3 Questions to Ask Yourself (by Peter Lynch):
1. Do I own a house?
1. Savings Account: These accounts earn a small amount in interest. They are better than hiding your money in your mattress
A house is one good investment almost everyone makes. It almost always appreciates. Also, if the value goes down, you don't get calls in the middle of the night telling you to put up $20,000 by morning or you are out of an investment. Plus, you get a tax deduction on top of everything else.
Like stocks, houses are more likely to be profitable when held for long periods of time. Most of all, you probably know about houses. You can poke through the attic and the garage, paint the walls on the inside, put pride into ownership, and most of all, have a roof to rest your head under at night.
Do I need the money?
If you need the money you are planning to invest is for your children's college education in three years or for your retirement in five years, it may not be the best idea for you to put it into stocks. Stocks are fairly predictable over ten years, but any time period less than that is close to gambling.
Most of all, keep in mind that you should only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future.
Do I have the personal qualities it takes to succeed?
The qualities it takes to succeed at stock investing: patience, reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, a willingness to admit mistakes, and an ability to ignore general panic.
An individual investing in stocks needs to be able to make decisions without complete or perfect information. It is a rarity that the information you are given to base your decision on will be as complete as you would like. On top of all this, you need to be able to resist your human nature of responding to your gut feelings.
Pay Yourself First:
This goes back to getting rid of your high interest debt. When you sit down to pay your bills for the month, pay yourself first. Write yourself a check to put away and you will most likely not even miss the money.
Set your goal to save 10% of your annual income. However, as long as you are saving something, it doesn't matter how much. If it is just not feasible right now because you will feel the need to eat beans and rice for a month, wait until the time is right. Set a goal for when you will start and be sure to stick to that goal.
Savings and Investment Vehicles:
2. Money Market Funds: These are a specialized form of mutual fund that invests in extremely short-term bonds where shares are designed to be worth $1 at all times. Interest rates for these accounts typically pay better than a savings account.
3. Certificates of Deposit (CDs): A specialized deposit made at a bank or similar financial institution. Interest payments are made at regular intervals until the CD matures, at which point you get the originally deposited plus the accumulated interest payments.