5 Basics You Need to Know About Before Investing, According to Graham Stephan

Start small and start soon, but mostly, just start.

Graham Stephan is an investment guru who advocates for financial literacy to his 4.2 million YouTube followers. He recently unveiled his 2023 investment plan, and he took to Twitter to specify what folks need to know before investing.

Here's what Graham Stephan says you need to know

Graham Stephan says, "If you are confused about where to start with investing -- start with basic financial literacy." He lists five essential categories: budgeting, taxes, retirement plans, credit scores, and index fund investing.

The financial guru's advice is practical. Most people are already familiar with at least some of these categories. Here's how learning about these things can save you money in the long run.

1. Budgeting

The b-word isn't pretty, but it sure is popular among finance hotshots. The biggest financial gurus in America, including Suze Orman and Dave Ramsey, recommend their followers track their finances. It's as easy as downloading a budget tracker and linking your bank account.

In the words of bestselling author James Clear, we optimize for what we measure. Optimize for more money in your bank account by spending three minutes creating a financial plan.

2. Taxes

Taxes seem complicated, and they often can be. Figuring out how to do the whole "tax thing" gives you the knowledge to choose the best tax software come tax season. Plus, you'll learn to take advantage of tax-free retirement plans and tax credits (like the EV tax credit).

3. Retirement plans

Retirement plans give tax-free benefits. They make savings easier, and there are a few types to choose from. Understanding the Roth versus Traditional individual retirement accounts (IRAs) can save you thousands when you retire -- they offer investors different perks.

4. Credit scores

Better credit means you pay less interest on loans. Consider buying a house using a mortgage. Compared to someone with an "excellent" credit score, someone with a "fair" credit score might pay $100,000 more in loan interest! That's enough money to buy two Teslas and then some.

Education is the key to forming healthy credit-building habits. The quicker you determine how credit works, the faster you can reduce the cost of borrowing money.

5. Index fund investing

Graham Stephan is a huge fan of index funds. In his 2023 investment plan, he allocates 35% of his investment portfolio to index funds. That's because they're stable and have a history of offering high investment returns.

Not all funds are created equal. Learn more about them to understand how they charge fees and compare them to alternative investments like ETFs, property, and individual stocks.

Best resources to start learning

Loads of free resources can teach you the basics of personal finance. Free financial literacy apps offer some of the best one-stop shops for lessons on money management.

Plus, valuable resources may be lurking under your nose -- check whether your financial institutions offer them. Many do. For example, my brokerage Robinhood offers Robinhood Learn, a free website that explains how investing works (yes, it offers an article on index fund investing).

But how much do you really need to know before you start investing?

Start small

The fastest way to get good at investing is to do it. Start small -- you don't want to risk more than you can afford to lose. Try it. Pop five bucks into a brokerage account and see what happens. The earlier you begin investing, the more time you have to learn from your mistakes. And the more your investments will grow, thanks to the market magic that is compound interest.

But when starting fresh, consider Graham Stephan's advice. Knowing the basics helps you avoid costly mistakes. Heck, I've lost thousands of dollars because I didn't understand how investing on margin worked. More research might've spared me from learning that the hard way.

Financial literacy makes you richer in the long run. Consider pairing it with a diversified, long-term investment strategy for the best returns.