How to Create an Investment Plan in 4 Easy Steps

Create a budget

The first step to creating an investment plan is to use a written monthly budget. A budget will help paint a clear picture on where your money is going and give you an idea of how much you can invest each month. If you don't want to use old fashioned pen and paper to track your expenses, you could look into a budgeting app such as Mint to track your expenses.

Understand your risk tolerance

Secondly, you need to understand your risk tolerance. Your risk tolerance is simply the amount of risk you are willing to take on as you invest. It is important to understand this because it will determine what you should invest in. If you have a low risk tolerance, your asset allocation should be weighted towards more stable investments.

If you have a high risk tolerance, your asset allocation can be more weighted towards high risk investments. There are many free risk tolerance questionaries online that can help you determine what your risk tolerance is.

Establish your goals and timelines

The obvious goal of investing that everyone shares is to make money. Beyond that, you should define your individual investing goals. Are you investing for your retirement? Are you trying to save up for a down payment on a home?

We recommend writing down each goal that you have. Next to each goal, you can also list the timeline you have to reach that goal. For example, your goal could be to save for your retirement at age 65. If you are currently 35 years old, you have a 30 year timeline to reach your goal.

Think about accessibility

As you are setting up your goals, you also need to think about having access to your money for those goals. There are certain investments such as bonds and CDs in which you have to wait to get access to your money. There are also certain accounts such as 401(k)s and IRAs that don't allow you to have access to the investments within them until later in life (usually age 59 and a half).

For example, lets say that one of your goals was to save up for a down payment on a home within the next three years. You would not want to invest for that goal in your 401(k) as you would not be able to access the money without incurring a penalty. Instead you could place the money for that goal in something like a high yield savings account so that you have access to the money when needed.

Determine how much help you want

Now that you have determined where you are at and set some goals on where you want to be, you need to actually create your investment plan. The first step in doing this is to determine how much help you want as you invest. You have two options: do it yourself, or have someone help you.

If you opt for the do it yourself method, you will be responsible to open your investment account, and choose the investments for the account. Although being a do it yourself investor has some advantages, it can be quite challenging as a beginner.

If you would rather have someone help you, you have a few options. First, we recommend using a robo advisor. A robo advisor is a digital financial advisor that can help create and manage an investment portfolio on your behalf. Robo advisors are a great low cost way to start investing. You can check out our picks for the top robo advisors to learn more.
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Your second option is to use a licensed financial advisor. Not only can a financial advisor help you choose investments, but they can also create a comprehensive financial plan based upon your individual needs and goals. Many full service online brokers offer financial advisors.

Open your account

The second step in creating your plan is to open an investment account. There are a wide variety of account types available, but we recommend starting with an IRA if your goal is for retirement, or a brokerage account if you have a more general goal.

If you opt to be a DIY investor you can open your account through an online broker or a trading platform. If you opt for more help, both a robo advisor and human financial advisor can help you open an account. When you open your account expect to have to provide your contact information, address, income, and social security number.

Invest in a diversified mix of assets

Finally, you can add your investments into your account. Whether you are doing it yourself, or getting help choosing your investments, it is so important to invest in a diversified mix of assets. Essentially, diversification in investing is the idea that you should not put all of your eggs in one basket. When one of your investments is not performing well, the others in your portfolio can help make up for it.

Monitor your investments occasionally

Although there are short term investing goals, most investing is a long term play. With this in mind, you should periodically check in on your investments to make sure they are perfoming well. If you have financial advisor, they will check in on this for you.

Adjust your risk tolerance

As you get closer to retirement, most financial experts advise to move your investments to less risky options. On the flip side of that, if you are young and have a long time horizon to reach your goals, you can afford to take on more risk which can help you reach your goals sooner.

Make sure you are investing enough for your goals

Finally, you need to make sure you are investing enough to reach your goals. The exact amount you should be investing will depend upon a variety of factors including your income, your goals, and your time horizon. To help you get started, a general rule is to invest around 15% to 20% of your income each year.

In summary, you need to evaluate where you are at, set goals on where you want to end up, create your plan, evaluate your progress and adjust as needed. Keep in mind that the guide above is a good general guidline to follow. However, the exact steps that you should take to create an investment plan will come down to you as an individual.