Investing for beginners
Investing is one of the topics that most people, at some point in their lives, realize they want to or should get into, but the news headlines, horror stories from friends of investments gone wrong, and a host of other concerns scare them away. We’re going to walk through some simple steps to get your first dollars invested with confidence and simplicity.
1. Ensure you’re ready
Before you start investing, make sure your budget is in a place that will allow you to invest. If you are currently living pay check to pay check and don’t have any money left at the end of the month, you may not be ready to invest quite yet.
2. Start with your 401k
A 401K is an employer-sponsored retirement plan offered to many employees in the U.S. The 401K itself is not an investment, it is a type of account that you can invest in. We recommend low-cost index funds or target-date retirement funds for your investment holdings.
Your contributions can be either tax-deferred (Traditional) or post-tax (Roth). With Traditional, you will not pay taxes now, but you will pay taxes when you withdraw funds from the account in retirement. With Roth, you will pay taxes now, but will not pay taxes on withdrawals in retirement.
If your employer offers a 401k with a match, start taking advantage of it immediately!
3. Consider debt before going any further
If you have debt, especially high interest debt like credit cards, you need to stop and factor that debt into the equation before investing another dollar. High interest credit card debt will easily wipe out any earnings you make in your investment portfolio. You may also want to consider debt on depreciating assets like cars; many financial experts will recommend paying off all debt, or at least all debt on depreciating assets before investing.
4. Savings and Emergency Funds
Once you’ve looked at your debt position, it’s important to consider how much savings you have for upcoming purchases or emergencies. If you’re wanting to buy a house in the coming years, you may want to consider building up your down payment rather than investing right now. If you don’t have any cash saved up for emergencies (most financial experts recommend an emergency fund of 3-6 months of basic living expenses), you may want to save up some cash before investing your extra funds.
5. Roth IRA
Once you’re getting your full employer match on your 401k, have taken your debt into consideration, have saved up an emergency fund and considered upcoming purchases, your next step should be to open and invest in a Roth IRA. A Roth IRA (Individual Retirement Account) is similar to a 401k in that it is a type of account that you can invest in, it is not an investment by itself. Again, we recommend low-cost index funds or target-date retirement funds for your holdings.
If you meet the requirements, a Roth IRA can be an incredibly powerful tool in wealth building. At the time of this writing, in 2023, the maximum a qualifying individual can contribute to a Roth IRA each year is $6,500. In most circumstances, we recommend maxing out your Roth IRA before moving on to other investment opportunities.
6. Investment Rate
Once you have done the steps above, it’s time to calculate your investment rate. This is the amount of money you are investing each year, in total, divided by your gross annual income.
(401k contribution + employer match + Roth IRA contribution) / gross annual income
If you make $60,000 per year, and your employer matches up to 3% on your 401k contribution, and you are maxing out your Roth IRA, your investment rate calculation would look like this
401k contribution: 60,000 *.03 = 1,800
Employer match = 1,800
Roth IRA = 6,500
(1,800 + 1,800 + 6,500) / 60,000 = 16.8%
Most financial experts recommend savings/investment rates between 10% and 25% for a comfortable retirement. More on how to find your retirement numbers in a future article!
We hope you have found this information valuable, thank you for reading.