“The single most important part of investing is getting started. Life is all about habits, and if you never get into the habit of investing, you could be financially impaired for a lifetime. One of the primary reasons people don’t start investing is because they feel they don’t have enough money to do so. But even if you start investing with little money, it may be all that’s needed to kick start your way to greater investing later. If you don’t feel that you have enough money to invest, consider some of the options. If they seem to be decidedly on the conservative side, that’s not an accident. If you have very little money to invest, then you don’t want to take wild risks.”
In my last article Why You Should Start Investing Today we broke down the importance of starting to invest sooner rather than later.
Now we’ll get into the fun part: how you can actually start investing. We’ll focus on making long term investments, like retirement, and I’ll break down three options with some practical tips so you can get started quickly.
Option 1: Retirement Plans
Retirement plans are often the easiest places to start investing. Through your employer or through an investment account you set up yourself, your money is spread out over a diverse set of investments. A major benefit of retirement plans is that most of these plans allow your money to grow tax-deferred, which means you don’t pay taxes on it until you take distributions from the account.
If you have a company sponsored retirement plan, like a 401(k), it should be your first place to invest. Many companies offer sponsored plans with low fees and they will automatically take the money out of your paycheck—so you don’t miss the extra cash at all! In addition, some companies will match your contribution into your retirement account, so if you’re not taking advantage of that, you’re basically missing out on free money. If you do leave your company you are able to take the money with you by rolling it over to another retirement account.
If you’re self employed or don’t work for a company that offers a retirement plan, you can still take advantage of setting aside money in a tax-deferred retirement account with an IRA (individual retirement account). When you open an IRA, you’ll be given a list of investments the financial institution recommends, as well as the past performance of each investment (how much each investment has earned or lost over a 1, 5 and 10 year period). You can review the investments offered with your IRA and decide exactly where you’d like to put your money. Most financial institutions have online tools or advisors you can speak with to help you determine what type of IRA is right for you and which investments are best for you to choose.
Common types of IRAs include:
- Traditional IRA: This IRA is funded with pre-tax money, meaning you won’t pay taxes on that money now but you will pay taxes on your withdrawals in retirement. You can invest a maximum of $5,500 per year into a traditional IRA.
- Roth IRA: You fund the Roth IRA with money you’ve already paid taxes on, so when you take withdrawals in retirement you won’t have to pay any additional taxes. You can invest a maximum of $5,500 per year into a Roth IRA.
- SEP IRA: This is a traditional IRA for anyone who is self-employed. The major feature of the SEP IRA is that you are able to contribute up to $53,000 per year.
- Rollover IRA: This is a type of traditional IRA. If you leave a job where you had a traditional 401(k), you are able to take the money with you by rolling it directly to a Rollover IRA. When you open a Rollover IRA account, be sure to get specific instructions for how to do the rollover correctly so you don’t inadvertently get charged any early withdrawal penalties.