When building long-term wealth, few methods are as effective as regular and consistent investing over time. Yet it’s hard to know exactly how to start, especially for beginners.
The good news is that there are a variety of ways to start investing. Let’s take a look at some of the most common options available and which one might be the best fit for you.
Common ways to start investing
Invest in a 401(k)
One of the most common ways that people start investing is through a 401(k) offered by their employer. If you qualify to contribute to a 401(k), this is often the easiest way to get started.
A 401(k) is a specific type of account to help people save for retirement. It is known as an employer-sponsored, tax-advantaged account because it’s offered through your employer and carries a number of powerful tax benefits.
Traditional and Roth are the two main types of 401(k)s. When you contribute to a traditional 401(k), you reduce your taxable income for the year in which you make the contributions, paying taxes only when you make withdrawals during retirement. When you contribute to a Roth 401(k), you pay income taxes up front — but then pay no income taxes in retirement.
Your 401(k) plan typically will offer a number of investment options, which usually include mutual funds, exchange-traded funds, or even target-date funds (which you select based on when you plan to retire). The funds allow you to own a diversified basket of investments without having to make all the individual investment decisions yourself.
As a bonus, many employers offer a company match on contributions. This is free money that you can use to jump-start your investment efforts.
One note about 401(k)s is that they should be used to save only for retirement because you may owe a penalty on top of taxes if you take money out of a 401(k) prior to age 59½.
Invest in an IRA
If you don’t have access to a 401(k), an individual retirement account (IRA) is another option if you want to save for retirement. Unlike a 401(k), IRAs are not sponsored by your employer. Anyone with earned income can open and contribute to an IRA for their retirement needs.
Like 401(k)s, IRAs also come in traditional and Roth varieties. Traditional IRAs also have penalties if you try to use the money before you turn 59½. Earnings in Roth IRAs are subject to the same penalty unless an exception applies.
Open a brokerage account to start investing
While 401(k)s and IRAs come with tax benefits, they’re also for a very specific purpose: retirement. You likely have other future goals, and for those, you may want to open a taxable investment account. Any earnings on investments in these accounts may be taxed annually and gains may be taxed at withdrawal, but you can use the money at any time for any reason.
A brokerage account is an account you can use to buy and sell different assets, including stocks and bonds and different types of funds that allow you to own a variety of investments through the single fund.
There are many different types of funds that you can invest in, but some of the most common include:
While funds can be a great way to quickly diversify your portfolio, they do come with a downside. Investors must pay the fund’s management fees, which can reduce your overall investment return. Before investing in a fund, be sure to understand the fund’s fee structure.
Your financial plan is about more than just investing
Investing is a powerful tool for wealth generation, but ultimately, it is just one aspect of a well-designed financial plan. It’s also important to consider other aspects of your financial picture to ensure that you are building a plan that empowers you to meet all of your financial goals.
In addition to an investing strategy, your financial plan should include:
A well-stocked emergency fund to see you through life’s unexpected challenges.
Looking at your financial situation broadly may feel a bit overwhelming. And that’s OK. That’s where a financial advisor can help. He or she can get to know you and your goals in life and then create a plan that shows you how all the financial aspects of your life come together in a way that helps put you on the path to reach your goals.
All investments carry some level of risk including the potential loss of all money invested. No investment strategy can guarantee a profit or protect against a loss. This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.