I know, I know. No one really wants to talk about investing. It's confusing. And confusing isn't sexy, especially when it comes to investing money for beginners so it becomes less overwhelming.
Do you know what is sexy, though? Making money.
What else? Not eating cat food and having to live like a college student when you're elderly.
This is meant to be a guide for novices or for those who have “retirement accounts” set up but are looking to get better with them. I know the terminology of investing is intentionally tricky and scary, but you're tough so don't let it derail you.
This is your year to start investing, saving for retirement, and GROWING YOUR MONEY. Don't forget that.
So, here goes, the complete beginner's investing guide!
1) – Get a Ballpark of How Much You'll Need in Retirement
You can use the advice in this post for how to calculate how much you'll need to be saving for retirement throughout your 20's. In your 20's, 30's, or beyond? I like this retirement calculator from Fidelity Investments. If you want something a little more interactive and a LOT more fabulous, you can fill out a free Ellevest investment plan here. (Yes, this is an affiliate link and I may receive compensation if you decide to work with them.) I like it because it's like taking a fun quiz and then at the end they let you know how much you need to (realistically) save each month to achieve your targets.
2) Put Your Money In an Investment Account – there are lots of different kinds
Seems simple doesn't it? You just pick the type of investment account you want, and then open it. But people often get caught up in the many different kinds of investing accounts.
If you don't want a retirement account (or already have one) you can invest in the market through just a regular ol' brokerage account (PBA's). You can get one for yourself or jointly with a spouse. These work well for folks who want do more “hands-on” trading outside of what they invest/ save for retirement purposes, but these accounts offer none of the same tax benefits as retirement accounts (boo), but they also have no cap on how much you can contribute (yay!).
You can choose to stash your cash with Ellevest, or with other online brokerages.
Even though the tax code is tens of thousands of pages long and way too complicated for many Americans to understand, it still offers benefits to the average American taxpayer. One of those benefits is the Individual Retirement Account (IRA).
The concept of an IRA is based on a provision in the tax code that allows you to save for retirement with certain tax advantages. You want to be able to preserve as much of your wealth as possible, so when you’re ready to celebrate your sunset years you can do so with vacations and fun novelties.
There are several ways you can open an IRA account. Try contacting your local bank, a mutual fund company or an online brokerage. (Ellevest also offers IRA accounts. The investment plan shows, in plain language, how much you’d need to contribute in order to achieve your goals, and it might surprise you how little it takes to get started. Click here to fill out your form and play around with your goals. This is an affiliate link, btw.)
When you decide to create an IRA account, you should know there are two types of IRAs to choose from: Roth and traditional IRAs.
Everything You Need to Know about IRAs.
- Traditional IRA – Your tax burden is reduced while you contribute to the account, but you’ll pay taxes when you withdraw money during retirement.
- Roth IRA – You put after-tax money into your account. You won’t pay taxes when you withdraw money from the account later.
If you’d prefer to pay as much of your taxes during your working years as possible and have peace of mind knowing that Uncle Sam will take a smaller tax bite out of your income later on in life, you should opt for a Roth IRA.
On the other hand, if you need money for income now and would like to take advantage of the tax code to make contributions to your retirement account, select a traditional IRA. You'll need a brokerage account first. Click here to open a TradeKing IRA account. It's just $1 to start!
Here’s what you need to know about IRAs:
The sky is not the limit
You can’t make endless contributions to your retirement account in an effort to amass a fortune when you’re ready for retirement. There are limits to how much you can contribute.
You can contribute as much as $5,500 per year to a retirement account while you’re under the age of 50. After that, you can contribute as much as $6,500 per year to the account.
Although your IRA portfolio will grow tax-free, the amount of money that you can deduct from your taxes depends on couple of other factors, such as your tax bracket and whether you have a retirement plan at work.
This year, you lose the tax advantage for a traditional IRA once your income reaches between $61,000 and $71,000 if you’re filing single. If you file joint, you lose the deduction once your income reaches between $98,000 and $118,000.
For a Roth IRA, you lose the deduction once your income reaches between $116,000 and $131,000 (single) or $183,000 and $193,000 (joint).
You can contribute to both a 401(k) and an IRA at the same time
You may work for a company that offers a 401(k). That benefit will not only offer you certain tax advantages similar to an IRA, but you might also get a bonus if you’re employer matches your contributions.
A 401(k) account places an annual limit on how much you can contribute. So if you’ve maxed out your 401(k), you can still contribute to an IRA.
Withdraw early, pay a fine
Even though the money in a traditional retirement account is technically yours, you’re not supposed to withdraw it prior to retirement. The IRS will assess a penalty if you do so.
As of this writing, you’ll pay taxes on the withdrawal amount based on your tax bracket plus an additional 10%. For example, if your tax bracket is 35%, you’ll pay almost half (35% + 10%) of your withdrawal in taxes.
This is why many financial advisors tell their clients to have about 3-6 months’ worth of expenses in the bank. That way, they’re not tempted to withdraw money from their retirement accounts.
Roth IRAs operate a little differently, though. If you withdraw money from a Roth IRA, you won’t be subject to a penalty because you’ve already paid taxes on the money you contributed to the account.
Federal law allows you to put aside money for retirement in a way that offers tax advantages. Be sure to talk to your financial planner and select the plan that will best prepare you for your golden years.
3) Once you have an account, select your investments
I'm really blowing your mind with this stuff, huh? But if it were easy, a lot more people would do it.
- Ownership Investments: Stocks, Real Estate (I'm a real estate investor), investing in a business (yours or someone else's) and tangible items like art, jewelry etc.
- Lending Investments: This is where you play the bank. Less risk associated with these, but you do have to have a certain amount of capital. Well known examples of these are bonds (where you essentially lend a company money) and CDs.
- Cash & Alternatives: Alternatives include commodities, gold, and Real Estate Investment Trusts (REIT's…read a great article about these here.)
Funds are also worth mentioning here, although they aren't a type of investment, but rather a product you can pay for which gives you a bunch of different types of investments hand picked and managed by an investment company. You pay a small fee for the convenience of having the fund managed by “experts.”
Well known types of funds include: mutual funds, index funds, target date funds, exchange-traded funds (ETF's) and hedge funds (where I used to work, actually!)
4) Do Your Homework (Like Reading this Investing Money for Beginners Guide!)
It is important when starting out with your investments to spend a good amount of time researching companies, stock prices, and activity on “the markets.” (Imagine I'm doing my best Michael Douglas impression right there.) I want to encourage you that if you're a novice, don't get scared off. You're going to have to think for yourself about what would be a good fit for YOUR portfolio and YOUR money.
Homework also needs to be determining how much you'll need for retirement and setting a plan of how much to save each month. Use Ellevest's free investment planning tool to get an idea of how much you'll need to save. (This link is an affiliate link.)
You know that saying “don't put all your eggs in one basket?” Well, it works for relationships, job prospects, income streams, and investing too. If you put all of your money into one investing, like Lord Grantham did on Downton Abbey, you could stand to make a lot of money, or lose a lot of money. And if you don't have a lot of money, (or unless you like playing fast and loose with your finances) it makes more sense to spread out your wealth.
Investing isn't really a great avenue to “Get rich quick” (..but what is really?)
Bad things happen to good companies and technology advances can drastically change our lives. Let’s say you put all of your money in utilities and suddenly someone invents an incredibly cheap power cell and we no longer need big electricity companies because it’s basically free. Well, you just lost most of your money on something that you couldn't have foreseen. But if only 15% of your holdings were with electric companies, you aren't happy about the loss, but you’re still doing fine.
6) Invest ONLY in what you understand
This piece of advice comes from the most renowned investor in the world, Warren Buffet. He only invests in companies that he understands. This means in order to invest in something, we should/need to be able to understand the business model of the company so we can understand how we're going to MAKE MONEY.
Ford makes cars. Coke sells soda. ALCOA sells aluminum.
Stocks make you money when the company makes money. The price can go up and the company can pay you a dividend, which is actually a portion of their profits. Stocks are part ownership in a company, remember? Since you are literally owning the company, you should understand it’s basic operations.
7) Look for dividend-paying stocks
This can be a “golden goose.” Even if after 30 years the stock price hasn't moved an inch, but you've been earning yearly dividends of 5% (and have been automatically reinvesting the money) then you will have made a LOT of money.
- You start with $1,000
- End of year 1-$1,050
- Second year-$1,102.5
- Third year-$1,157.62
- Year 30-$4,322
This is how the rich get richer by letting their money make them money. Even if it is a small amount at first (as in our example), every little bit helps. Also, it's been proven that any money you contribute in your 20's in worth more than money in your 30's and 40's.
Take a shortlist of companies/things you're potentially interested in investing in and go to Google finance (or Yahoo or whatever you prefer) and search for the stock symbol and pull up a chart of that stock. Looking at the chart we can see the current stock price, any major trends over a long period of time and (most importantly) stock splits and dividends. It will show every dividend ever paid, the dollar amount and the percentage when compared to the stock price at that point.
8) Pull the Trigger….And Try not to Panic
Okay, so you've set aside some money for your account, done a little homework on what you'd like to buy, and now it is time to DO IT. Many brokerages offer super easy-to-use platforms for buying and selling stock online, or you can get old fashioned and call up the brokerage and let them know what you'd like.
But who the hell are we kidding? This is 2018, just do it online. This is probably the hardest part, but once you buy a stock or invest in a fund or any of the above….DON'T TOUCH IT. Stock prices fluctuate….Drastically. There could be hundreds of doubts in your mind about it.
If you have doubts, do more research. Not only is it expensive to make frequent trades (you'll get charged a trade fee by the brokerage for any trades you “execute”), but longevity can serve you well when it comes to holding a stock.
Don't panic just because of a bump in the road.
9) Make Regular Contributions
When you are investing, it is important to put in extra dollars to grow your investment, whether you are contributing to retirement or simply a standard investment account. You can either contribute a monthly amount to “max out” your Roth or SEP IRA, or contribute enough to get the employer match on your 401k (the match is FREE MONEY, always do this. I'm serious, even if you do really stupid sh*t for the rest of your 20s and 30 always save enough to get your employer match) OR contribute quarterly.
Another way to come up with a monthly figure to contribute is to figure out how much you'll need in retirement and work backward. Need more ideas on where to cut back? Here are 83 ways to save and the five quickest/no-pain things to cut when you're just starting out. Saving is hard – it has to be worked like a muscle in order for you to increase your strength.
Either way, putting aside money works in much the same way as saving for other goals: best when you “pay yourself first.”
*Anum Yoon of Current on Currency contributed to this post.