Investing is one of the best ways to grow your wealth over the long term, but it’s often intimidating for beginners. With so many investments to choose from and all kinds of charts and metrics to keep track of, it can get pretty complicated. But it doesn’t have to be. If you follow the three steps below, you’ll be racing in no time.
1. Decide how much you are willing to invest
You need some of your own money to start investing, but not just any money will do. You don’t want to invest your emergency fund because you never know when you’ll need to use it to help with an unplanned expense. If you invest this money, there is a chance that you may have to sell at a loss to get the money when you need it. So it is better to keep your emergency fund in a high yield savings account where it is always accessible.
You also don’t want to invest money that you plan to spend in the next five to seven years. If you’re saving for a down payment on a house or car, for example, keep that in a savings account as well. That way, you’ll only earn money from your savings and won’t have to worry about delaying purchases until you’re ready to sell your investments.
It’s best to invest money routinely if you can, but even if you can only afford a one-time contribution, it’s better than nothing. It’s okay to start small. Over time, you can increase your contributions as you gain more confidence in your abilities.
2. Decide where to invest your money
Retirement accounts are a great place for most people to invest their long-term savings because they offer special tax benefits. They usually fall into two categories: tax-deferred and Roth.
Tax-deferred retirement account contributions lower your tax bill this year, but you owe taxes on your investment gains — the money you make from selling your investments for a higher price than you bought them — in retirement. Roth account contributions don’t give you a tax break this year, but you do get tax-free withdrawals in retirement.
You can also divide retirement accounts by type. The two most popular are the 401(k) and the IRA. A 401(k) is offered through a job and, if you choose to participate, the employer automatically takes money from each of your paychecks and deposits it into the 401(k) each pay period.
You choose how much you want to contribute and what you want to invest in. In 2022, you can contribute up to $20,500 to your 401(k), or $27,000 if you’re 50 or older. Your employer may also give you some money in the form of a 401(k) match.
IRAs are retirement accounts that you can open yourself with any broker. You can’t have money deferred from every paycheck, but you can set up automatic transfers from your bank account in most cases. You are allowed to contribute up to $6,000 to an IRA in 2022 or $7,000 if you are 50 or older.
A final option worth mentioning is the taxable brokerage account. This is not a retirement account and does not offer the same tax benefits. But it is much more flexible. There is no limit to how much you can contribute to a taxable brokerage account and you can invest in whatever you want. You can also withdraw money at any time, while most retirement accounts penalize you for withdrawing money before 59 1/2.
3. Decide what you want to invest in
Index funds are a great option for both novice and experienced investors. These are bundles of shares designed to mimic the performance of a market index, such as S&P 500. This contains 500 of the largest publicly traded companies in the U.S. When those companies are doing well, the index does too. And so does an S&P 500 index fund.
One of these funds will quickly diversify your savings, so no single stock weighs heavily on your portfolio, and they’re usually pretty affordable, too. Most index funds pay just a few cents to a few dollars a year, depending on how much you have invested in the fund.
There are many indexes and index funds to choose from. They are very easy to identify because they list their index on the fund name. All you have to do is select the index you want, then search for funds based on that index.
Once you’ve chosen your investments, the money you add to your account will automatically be invested in the funds or stocks you’ve chosen. Now, all you have to do is keep them for a while.
Keep investing little by little and keep educating yourself so you can make better decisions in the future. But don’t wait to start because you don’t think you know enough. Often, the best way to learn is by doing.