How to start investing: the essential steps.

Since I've just started putting together my partner's investment plan, in this article I'm going to explain how to do it for people who, like her, are starting from scratch.

Although I already have an article with a similar title where I explained where and why to invest, here I'm going to focus on the system itself, the steps you need to follow and the concepts you need to understand beforehand.

The first important idea is that this isn't “I know why I should invest > I invest today”.

No. It doesn't work like that. At least not if you want the plan to last over time.

There is a series of preliminary steps you need to follow, because if you skip them your investment will have no foundations, and at the slightest setback it will collapse like a house of cards.

In this article I'll explain the steps you need to take from the moment you're sure you want to invest until you have your portfolio set up. As you'll see, investing itself is the last step in the process.

Step 1. Calculate your expenses

Right, this may seem obvious to anyone who wants to manage their money, but hardly anyone actually does it.

Try it: ask anyone, whether they invest or not, how much they spend on average each month. You'll see that hardly anyone can give you an answer.

And there's a reason for that: there are fixed expenses we more or less know about. But there are also variable expenses we don't have a damn clue about. And without adding the two together, we can't know the baseline we're starting from.

Because to know how much we can invest, we need to know all these variables in advance:

Income – Expenses (Fixed expenses + Variable expenses) = Savings capacity

It seems obvious that if we don't know our savings capacity, we can't know how much to invest or how to invest it.

But I'm telling you, hardly anyone knows theirs, and I'm talking about smart people who handle money.

That's why the first step before setting anything up is to calculate our expenses.

Here are two ways to do it:

• Start recording and categorising expenses with an app, Excel or however you prefer.
• Use your bank statements from the last twelve months and classify your expenses as fixed or variable.

I prefer the second option for two reasons: the first is that they have been your actual expenses, so when you calculate the average it should come pretty close to what we're trying to work out.  

The second is that you can do it right now instead of waiting several months from the moment you start writing everything down. You also avoid forgetting to record something.

The drawback is exactly the opposite: using bank statements is ideal… provided all your expenses are there. If you use cash, it isn't recorded anywhere and there's no way you'll remember everything you spent that way 12 months ago. And those are expenses we should also include when calculating our average.

So if you choose the second method, do two things:

1. Gather as much information as you can from every account and/or card you use.
2. If you use cash, make a rough estimate of your monthly spending.

With that, we can calculate our average monthly fixed and variable expenses.

The good thing about doing this, besides getting the information, is that we'll become aware of the ridiculous expenses we have (such as subscriptions to X, Y, Z) and we'll be able to cut back and start saving more money.

In short, the key takeaway from this step is that your savings capacity is one of the most important figures in your financial life. One of the few you really need to keep under control.

Step 2. Divide your expenses into three categories 

Yes, we previously classified expenses as fixed and variable, which is ideal for knowing the minimum amount we need in the account each month, but for the next step we need a different classification:

CATEGORY	INCLUDES	TARGET
Needs	Housing, food, utilities, transport, clothing, hygiene	40-50%
Wants	Leisure (travel, eating out, Netflix…), things (technology, jewellery…), sport	20-30%
Savings	Emergency fund, investment	20-40%

These estimates are for average cases, because living alone in Madrid isn't the same as living with your parents in Villarcayo. Likewise, sport, which I consider a need, can cost almost nothing (going running or doing calisthenics on your own) or considerably more (a top gym, padel three times a week…). In any case, it gives you a rough idea and serves as an example for two things:

1. Define your ideal allocation according to your circumstances.
2. Analyse whether your actual expenses match your allocation.

Depending on whether the two models (ideal and actual) line up, you'll need to adjust one or the other, or neither.

As a result, once you've done the exercise, we'll have calculated our savings capacity, which determines everything from this point on.

Step 3. Build your emergency fund

We now know how much we spend and how much we can save on average each month. The first figure will help us estimate how large our emergency fund should be. The second will tell us how many months it will take to build it.

We'll look at an example in a moment, but first I want you to understand what this fund is and what it's for.

This fund has only one purpose: to stop you having to dip into your invested money or future investing capacity when an emergency hits. And by emergency I mean things like:

• You lose your source of income (job, clients, etc…)
• An unexpected medical expense.
• A broken appliance or car.
• Urgent travel for family reasons.
• Having to move because your lease ends.

And not much else.

In other words, things that cost money and that you have to pay for, no matter what.

Examples of what is not an emergency:

• A holiday travel deal.
• Or a launch offer on the new Xiaomi.
• Gifts for your child.
• An investment opportunity.
• Insurance or taxes.

Those are NOT emergencies and this fund shouldn't cover them.

So what should this fund cover: the needs category from the previous step for a number of months that varies depending on your personal circumstances. That's it.

What do I mean by differences in personal circumstances? Living alone in a rented home at thirty isn't the same as being over fifty, living with your family in a mortgaged home and being the household's only source of income.

In the first case, six months may be perfectly adequate for your fund. In the second, it could range from twelve to twenty-four months depending on how long you think it would take you to find a new source of income if your current main one disappeared overnight.

Let's look at two examples to make this clearer: 

Case 1: you're 25, live alone in a rented home in an area without housing pressure, earn 2.000€ a month, spend 1.000€ on needs and 200€ on wants.

With those figures, your fund needs to cover 1.000€ for 6 months. If nothing changes, with your current savings capacity (800€) and starting from zero, it will take you eight months to build the 6.000€ emergency fund (800€ x 8 months = 6.400€).

Case 2: you're 55, live with your wife and two children in a mortgaged home in a high-demand housing area, earn 3.000€ a month and spend around 1.800€ on needs and 400€ on wants.

With these figures, your starting position is worse because, although your savings capacity is similar (800€ a month), your fund should be around 43.000€ (1.800€ for 24 months). At your current savings rate (800€), it will take 54 months to build it if you're starting from zero.

Yes, as you can see in this second case, it's very tempting to skip all or part of the fund and start investing your savings from day one.

And it may work out for you, I'm not saying it won't, but the stars have to align. The moment your car breaks down or, God forbid, you lose your job, there's a good chance you'll need to withdraw some of what you've invested. Whatever your investment happens to be worth at the time.

That means that if it's at an all-time high—which is rather unlikely—the hit will be significant, but you'll be able to cope. But if it's at a normal level or near a low, you could lose a lot, and I mean a lot, of money. Even your life savings.

Having this fund protects you from that. It prevents you from having to sell at a loss. It gives you the peace of mind to make decisions calmly rather than in the heat of the moment. That's why it's essential if you want your investment to have a real chance of succeeding.

This fund should be kept in an interest-bearing account, because it gives you some return compared with a standard bank account while keeping the money immediately available.

Step 4. Be clear about your goals

Right, you've done the hardest part: you know your numbers and you've built your emergency fund. Now you can start investing, right?

Not yet. There's still one last step: knowing what you want to get out of that investment.

Because investing in your twenties so you can put down a deposit on a flat in your thirties is not the same as wanting some extra income so you can stop working full-time, or deciding to stay invested indefinitely until you generate lifelong income that lets you maintain your current lifestyle without trading your time for money.

In each case, the time horizon for when you'll need the money changes. So do the risks you can take, given the later consequences of a possible mistake.

If you're starting in your twenties and you get it wrong, you have your whole life to fix it. If you do it in your sixties with substantial wealth behind you, the consequences can be devastating.

The good thing is that you can have several goals at the same time, and you can create different portfolios or invest in different assets according to each one.

That's what I do with my investment system, but I'll summarise it here.

1. Property: 1-2 year horizon.

That's how I started, but I don't like it (I explain why in the link) and it isn't for me. As soon as I can, I'll keep just one property investment: my main home. Everything else will go into accumulating or distributing index funds.

2. Accumulating index funds: 5-year horizon.

For now I'm accumulating as much as I can here, although the idea is to move it into distributing funds in a few years so I can live on the income they generate.

3. Stocks: 5-15 year horizon.

Although they've done very well for me, now that I understand the different assets better, I prefer less volatile ones. The idea is to transfer a little each year into funds so I stay in the lowest tax bracket. I'm in no hurry because, as I said, they're performing very well for me.

4. Gold and Bitcoin: very long term.

They're my safe-haven assets, so I don't plan to sell them. They provide peace of mind over time and are also uncorrelated with the assets above.

5. Liquidity: always.

This includes both my emergency fund and what I need for the next few months' expenses. As I said, it's essential for supporting everything else.

As you can see, each asset has a purpose, which is why I hold it. One mistake I made was starting without being clear about what the different types of assets you can invest in are for..

That's why some worked out badly for me (property) and others very well (stocks). In both cases, luck—not my knowledge or my system—determined the result, and that hasn't happened to me again.

Step 5. Define your portfolio

You've almost done all the work, because you already know: 

• When you'll be able to invest (after building your fund).
• How much you'll be able to contribute each month.
• What goal or goals you have for your portfolio.

All that's left is to choose the right assets.

To do that, you need to understand three main aspects of them: expected return, risk and volatility.

In general, we can say that risk and volatility are the same thing. At least when we're talking about serious assets and not memecoins..

Volatility is an asset's ability to fall or rise in value over a short period of time. That's why risk is inherent in it: if you invest in volatile assets with a short time horizon, the risk increases.

But those same assets—again, serious assets—look different over the long term. The S&P 500 can fall 30%, but over the long term it has always grown.

Bitcoin is even worse: it can fall 60% in just a few months. It can also rise 400% in the months that follow.

So remember this: the greater the volatility, the greater the potential return, and your time horizon determines the maximum risk—and therefore potential return—you can afford.

That's why, if your time horizon is short (zero to four years, for example), you'll have to settle for interest-bearing accounts and deposits, with returns of around 2-3% a year.

If your time horizon is medium term (between five and ten years), you can add index funds or Bitcoin, since it will have gone through a cycle, which usually lasts four years.

And if you're investing for the long term, I'd say you can choose whichever asset you prefer, with index funds, gold and Bitcoin being my favourites.

By the way, before you decide, it's essential to be clear about your real risk tolerance. On paper we're all long-term investors, but enduring 20% drops makes all of us nervous, especially when we're starting out.

The good thing is that, if you've followed my advice, you'll never sell because you need the money, since that's what your emergency fund is for. You'll sell once you've reached the set time horizon and you'll almost always do so at a profit.

Lastly, one final point to consider is the size of your portfolio, because starting with 10.000€ isn't the same as starting with 500.000€. Yes, the theory is the same in both cases, but a 30% fall doesn't affect you psychologically in the same way: in one case you're losing 3.000€, which hurts, but you may be able to recover it in a few months. 

In the other case you're losing 150.000€ and, unless you belong to the top 0.001% of the world's elite, it will take you years to recover. If you ever do.

That's why the less you have invested, the more your savings capacity matters (that is, earning more money , basically), whereas the more capital you've put in, the more it matters how and where you invest it.

That's why properly allocating the weight you give each asset according to the purpose it serves is essential in large portfolios.

Step 6. Invest: build the portfolio

Right, once you've reached this point, there's only one last step left: deciding where to buy your assets. In the linked article, I explain all the options and their pros and cons. But to sum it up, your traditional bank is usually not the ideal place.

Each type of asset is bought in a different place. These are the providers I use:

Indexa: index funds.

MyInvestor: portfolio and funds.

Degiro: ETFs (index funds and gold).

XTB: stocks.

Chainflip, , Jumper, or Hyperliquid: Bitcoin.

Bankinter: cash.

The platforms I use are reliable, but if you use others, check how much capital they cover and look for genuine user reviews. Here, the guarantee matters more than an extra 1 or 2% in returns.

Before I finish, I do want to point out one more important thing: the monthly process matters in order to meet your savings goals, so each month should look like this:

1. You get paid or receive income.
2. You invest the amount set out in your plan.
3. You spend the rest (or save and invest more, which is also an option).

In other words, don't leave investing until later; do it right at the beginning. That gives you a better chance of sticking to your plan.

Conclusions

The most important takeaway is that once you've taken the step and decided to invest, the first thing you should do isn't talk to your bank and buy whatever fund they recommend.

Before that, you need to take a series of steps: analyse your circumstances, income, expenses and goals, and make decisions (assets, platforms) before you actually buy anything.

Doing it this way gives you two things: 

First, you'll notice that you have far more control over your finances even before you invest. 

Second, your chances of success—and of making investing part of your way of life—will increase considerably.

You'll notice the first one for yourself. For the second, you'll have to trust me.

You can also read all these articles, which explain each of the following aspects of investing in more detail:

Next steps

If you want to go a little further, I invite you to continue with the next article in the series:

1. Investing from scratch: where to invest your money.
2. Types of assets you can invest in according to their role in the portfolio.
3. How to buy assets: investment vehicles.
4. Investment platforms: where to buy investment vehicles or assets.
5. Risks and guarantees of investing.
6. My investment system.
7. Wealth: how to grow it, protect it and pass it on.

And the extras:

1. How to start investing: the essential steps.
2. When to start investing.
3. How to make extra money.
4. How to save money.