Investing in financial markets may seem like one of the most daunting aspects of managing your money, but it can also be the most rewarding. While significant market downturns can be scary, investing is one of the few ways to outpace inflation and increase your purchasing power over time. Simply saving in a bank account will not build wealth.
How to Get Started with Investing: 6 Things to Do
1. Check Your Retirement Accounts
2. Use Investment Funds to Reduce Risk
3. Understand Your Investment Options
4. Balance Long-Term and Short-Term Investments
5. Avoid Common Mistakes
6. Keep Learning and Saving
How to Get Started with Investing: 6 Things to Do
1. Check Your Retirement Accounts
For many people, the best place to start is with the retirement plan offered by your employer – likely a 401(k) plan – which comes with your employer’s benefits package.
In a 401(k) plan, the money you contribute from each paycheck grows tax-deferred until you start withdrawing it in retirement. Many employers even offer matching contributions up to a certain percentage for employees who participate in their sponsored plans.
These plans have other benefits as well, depending on the type of 401(k) plan you choose:
– A traditional 401(k) plan allows you to deduct your contributions from your paycheck so that you don’t pay taxes on it today, only when you withdraw the money later.
– A Roth 401(k) plan allows you to withdraw your money tax-free – after years of growth – but you must pay taxes on the contributions.
Regardless of which option you choose, here are all the details about 401(k) plans.
The Bankrate 401(k) calculator will also show you how much your money could grow over your career.
The logistics of a 401(k) plan can be confusing, especially for recent graduates or those who have never contributed before. Look to your employer for guidance. Your plan administrator – who is sometimes a large broker like Fidelity, Charles Schwab, or Vanguard – may offer planning tools and resources, helping you educate yourself on good investment practices and the options available in your 401(k) plan.
If your employer does not offer a 401(k) plan, or if you are a non-traditional worker, or if you simply want to contribute more money, consider opening a traditional IRA or a Roth IRA.
A traditional IRA is similar to a 401(k): you put in money before taxes, let it grow over time, and pay taxes when you withdraw it in retirement.
With a Roth IRA, on the other hand, you invest after-tax income, then the money grows tax-free and no taxes are levied on withdrawals.
There are also specialized retirement accounts for self-employed workers.
The IRS sets the maximum amount you can add to each of these accounts annually, so be sure to stay within these rules:
– For 2024, the contribution limit for 401(k) accounts is set at $23,000 (before employer match) and $7,000 for an IRA.
– Older workers (those over age 50) can add an additional $7,500 to a 401(k) as a catch-up contribution, while an IRA allows for an additional $1,000 contribution.
2. Use Investment Funds to Reduce Risk
Your risk tolerance is one of the first things you should consider when you start investing. When markets drop, as they did in 2022, many investors flee. But long-term investors often see such downturns as an opportunity to buy stocks at a discount. Investors who can withstand such drops can enjoy the average annual market return – about 10 percent historically. However, you have to be able to stay in the market when things get tough.
Some
people want to achieve quick results in the stock market without experiencing any downturns, but the market doesn’t work that way. You must endure periods of decline to enjoy the gains.
To reduce risks as a long-term investor, everything depends on diversification. You can be more aggressive in your stock allocation when you are young and your withdrawal date is far away. As you approach retirement or the date you plan to withdraw from your accounts, start to reduce the risks. Your diversification should become more cautious over time so that you don’t risk significant losses in the event of a market downturn.
Investors can quickly and easily build a diversified portfolio using an index fund. Instead of trying to pick stocks actively, an index fund passively holds all the stocks in an index. By owning a wide range of companies, investors avoid the risks of investing in just a couple of stocks, although they will not eliminate all the risks that come with investing in equities. Index funds are a core option in 401(k) plans, so you shouldn’t have any trouble finding one in your plan.
Another popular type of passive fund that can lessen your risk appetite and simplify your investment journey is a target-date fund. These “set it and forget it” funds automatically adjust your assets to become a more conservative mix as you approach retirement. They typically shift from a higher concentration in stocks to a portfolio that focuses more on bonds as you near your target date.
Understanding Your Investment Options
A brokerage account gives you many new investment opportunities, including the following:
– Stocks: Stocks give you a partial ownership stake in businesses and are one of the best ways to build long-term wealth for you and your family. However, in the short term, stocks can be highly volatile, so you should plan to hold them for at least three to five years – the longer, the better. Here’s how stocks work and how you can make serious money by being a stock investor.
– Bonds: Investors use bonds to create a reliable income stream, and by owning bonds, you’ll achieve lower-risk gains that are also less than the profits you’ll generate from stocks. Bonds fluctuate less than stocks, making them ideal to balance a portfolio of high-performing equities. Here’s how bonds work and how to use different types of bonds to enhance your portfolio.
– Mutual Funds: A mutual fund is a pool of investments, usually stocks or bonds, but sometimes both, owned by many different investors. You buy shares in the fund, which is often diversified across many investments, reducing risk and potentially increasing returns. A mutual fund is a great way for novice investors to achieve significant returns in the market.
– Exchange-Traded Funds (ETFs): ETFs are very similar to mutual funds, as they allow you to invest in stocks, bonds, or other assets, but they offer some advantages over mutual funds. ETFs tend to have very low management fees, making them cheaper to own than mutual funds. Additionally, you can trade ETFs throughout the day like stocks. Of course, ETFs can achieve significant returns even for beginner investors.
Balancing Long-Term and Short-Term Investments
Your time frame can influence the most effective types of accounts for you.
If you are focused on short-term investments, those you can access within the next five years, then money market accounts, high-yield savings accounts, and certificates of deposit will be the most beneficial. These accounts are insured by the FDIC, so your money will be there when you need it. Your return is typically not as high as long-term investments, but they are safer in the short term.
Generally,
It’s not a good idea to invest in the stock market on a short-term basis, as five years or less may not be enough to recover the market if there is a downturn.
The stock market is an ideal means for long-term investment and can yield significant returns over time. Whether you are saving for retirement, looking to buy a home in the next 10 years, or preparing to pay for your child’s college fees, you have a variety of options – index funds, mutual funds, and exchange-traded funds that offer stocks and bonds or both.
Starting has become easier than ever with the rise of online brokerage accounts designed to fit your personal needs. Investing in stocks or funds has never been cheaper, as brokers have reduced commissions to zero and fund companies have continued to lower their management fees. You can even hire a robo-advisor at very reasonable fees to choose investments on your behalf.
Don’t Fall for Easy Mistakes
The first common mistake that new investors make is being overly active participants. Research indicates that actively traded funds tend to underperform compared to passive funds. Your money will grow more, and you will have peace of mind if you refrain from checking (or changing) your accounts more than a few times a year.
Another risk is not using your accounts as intended. Retirement accounts like 401(k) plans and IRAs offer tax and investment benefits, but specifically for retirement. Use them for anything else, and you are likely to face taxes and an additional penalty.
While it may allow you to take a loan from your 401(k) account, not only will you miss out on the potential earnings these funds could generate, but you must also repay the loan within five years (unless it is used to buy a home) or you will incur a 10 percent penalty on the outstanding balance. There are some exceptions to the 10 percent penalty, however.
Your retirement account is designated for use in retirement, so if you are using it for another purpose, you’ll want to stop and question whether those expenses are truly necessary.
Keep Learning and Saving
The good news is that you are already working on one of the best ways to get started: educating yourself. Take advantage of all the reliable information you can find about investing, including books, online articles, experts on social media, and even YouTube videos. There are great resources available to help you find the investment strategy and philosophy that fit you.
You can also look for a financial advisor who will work with you to identify financial goals and tailor your personal journey. While searching for an advisor, you want to look for someone who has your best interests in mind. Ask them about their recommendations, and ensure they are financial advisors working for your best interests, and be sure to understand their payment plan so that you are not subjected to any hidden fees.
Overall, you will have fewer conflicts of interest from a fee-only financial advisor – one whom you pay, rather than being paid by large financial firms.
Why Investing Is So Important
Investing is the most effective way for Americans to build wealth and save for long-term goals like retirement, college expenses, or buying a home. The list goes on.
The sooner you start investing, the more you benefit from compounding, allowing the money you put in your account to grow faster over time. Your money earns money – without you having to do anything. You are looking for your investments to grow enough not only to keep up with inflation but to actually exceed it to ensure your financial security in the future. If your gains exceed inflation, your purchasing power will increase over time.
How Much
How much money do I need to start investing?
There is no strict minimum when it comes to starting to invest. You can begin your journey with any amount, even as little as one dollar, thanks to low or no minimum brokerage accounts and the availability of fractional shares. However, before you start investing, it is essential to assess your financial situation, create a strong emergency fund, and ensure that your debts are manageable.
When it comes to retirement, it is recommended to start as early as possible, even if the amounts are small, and aim to save about 10% to 15% of your income. For non-retirement investments, ensure that you are in a stable financial position and ready to handle the inherent risks of investing.
Conclusion
Many people feel a bit cautious about investing, but if you learn the basics, a rational approach can be profitable for you over time. Starting to invest can be the best financial decision of your life, helping you achieve lifelong financial security and a happy retirement as well.
— Brian Baker from Bankrate contributed to this story update.
Source: https://www.aol.com/start-investing-2024-151038069.html
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