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How to Start Investing

by Sally Kelsies

If you plan on retiring, then it is safe to say that you will most likely need to invest. Investing is a great way to grow the money that you put aside. Through interest, dividends, capital appreciation, and compound interest, you can end up with a lot more money then what you put in. However, many people do not know how to start investing. They may be hesitant to take a leap into something they do not have a lot of background information here. Well here we will detail ways that you can start investing.

What’s the scoop with investing?

If you are just starting in your professional career, then you have found this article at the perfect time. The best advice anyone can give to someone starting to save for retirement is to start as soon as you can. Starting to invest and save money for retirement at a younger age will set you up for a solid future, and can be beneficial in the short-term as well.  Putting money away into an investing or retirement account when you are still in college or freshly graduated will help you develop the habit of doing so. 

Even if you aren’t new to working and saving money for retirement, you should start investing your retirement savings as soon as possible.

However, this may be easier said than done. There are so many options out there when it comes to investing. Below we will try to demystify some possible sources of confusion. Here are some methods, ways, and types of retirement savings plans and accounts that you should know about.

Employer Sponsored Plans

One benefit that many employers offer today is some sort of employer sponsored retirement account. Depending on your industry, this may be in the form of a 401k or a 403b. In this type of plan the employee contributes a percent of their pretax income. Your employer may even match a portion of your contributions. This is basically free money!

In most cases, the employer will work with a retirement plan sponsor such as Fidelity, and they will select a handful of mutual funds that employees can invest in. The employer and the retirement plan sponsor usually do the majority of the investment analysis to make sure they employees have access to the best funds.

An employer sponsored plan is a great way to start saving up money towards retirement because the money is not necessarily in your ‘possession.’  If you wanted to withdraw any of the funds before you come of age it will cost you when it comes time to pay your taxes.

Also, if you end up leaving your employer, you can take your money with you. Most people will just roll over their 401k or 403b into the retirement account from their new employer. In most cases this is free, however you may have to pay a small transfer fee of $50-$100.

Individual Retirement Accounts

Individual retirement accounts, or IRAs, are another great way to start investing. If you are wondering how to start investing, then you may want to look into IRAs. There are several different types of IRAs, the two most popular being a Traditional and Roth IRA. Before you decide which is right for you, be sure to understand the differences between a Traditional and Roth IRA. Also, note that an employer sponsored plan or an IRA should not be used as an emergency fund.

Now, with that out of the way, lets dive into what an individual retirement account, or IRA, is.

An IRA is a way that you can start saving for retirement. This type of account is not sponsored by an employer, so you do not need to have a job to open one. However, even if you do have an employer sponsored retirement plan, you can still open an IRA.

Opening one of these accounts is super easy and can be funded with as little as $500.  The first step that must be taken is to decide if you should open a traditional or Roth IRA.  A quick call with your accountant or advisor can help you decide which type of IRA is best for you.

Next, pick the funds that you want to hold, which can range from stocks and bonds to funds called all-in-one funds or target date funds. These funds automatically rebalance themselves, and gradually become more conservative as you get closer to retirement age. You can open your IRA with a company offering automated services (see Robo Advisor below) or with a more traditional brokerage firm (more details on these below as well).

Robo Advisor

Over the last decade or so, new types of investment advisors have opened. These companies leverage the latest technology to create a great user experience for their clients. Many of these companies use automated, algorithm driven services so their customers do not need to constantly check up on their investments. When opening one of these accounts, you usually will fill out a short questionnaire. The platform asks about your financial situation, income, age, retirement date, as well as time horizon. The platform then allocates your funds accordingly based on what they think you investment objective is. Some examples include an aggressive strategy focused on investing in more stocks, or more of a conservative approach. A conservative investment objective will hold a lager percentage of fixed income securities and hold a larger percentage of your total balance in cash or short term deposits.

Some of these platforms include Acorns, Betterment, and Wealthfront. Industry giants like Merrill Lynch and Charles Schwab have also started to offer services like this to complete with this new competition. The best part of this is that this competition is ultimately benefitting their customers.

There are many advantages to this type of investment service. First, they are very easy to use. These companies focus on their user experience and design to attract a younger demographic. Many of these services have awesome mobile applications that make investing very easy.

These new platforms are also relatively inexpensive compared to other type of investment services. They usually charge a very small monthly flat rate fee. The fee is in most cases under $5. Some of these platforms are even free to use if you are new to investing or a student.

Brokerage Accounts

We cannot discuss how to start investing without brining up your more traditional brokerage accounts.

Brokerage accounts are a type of taxable account that you open with a stock brokerage firm.  You deposit or transfer cash into this account and use the funds to invest in many different types of investments.  Some of the assets brokerage accounts can hold include: common stocks, preferred stocks, bonds, REITs, mutual funds, ETFs, and MLPs.

There are many considerations when deciding what firm you should open your account with, such as commission, account fees, how often you place trades, as well as account minimums.

Remember, you shouldn’t just pick any broker and sign up for an account, figure out what features are the best for you and make your selection based on that.  The best broker for one person is often completely different for the next person.

With a brokerage account, you are the one deciding where to invest your money. This is different than a robo-advisor as those platforms allocate your funds based on your financial situation. Brokerage accounts are more hands on. You need to stay informed as to what is happening in the broader market, the economy, and new possible regulations. If you are just starting out, you may want to hold off on opening a brokerage account.

When you do think you are ready to open a brokerage account, there are many options for you. The best brokerage account for beginnings is probably Robinhood. They offer an easy to use mobile app, have a ton of learning materials for you, plus each trade is free. You can also invest in cryptocurrencies which is a feature many traditional brokerage accounts to do not offer.

How to Start Investing – Summary

If you have yet to start investing, but are reading this article, then you are on the right track. The best advice anyone can give someone new to investing is to just start early. That being said, you may be wondering how to start investing. Well, there are many options for you. You can contribute to an employer sponsored retirement plan, or open your own Individual Retirement Account (IRA). You can also use the services of a Robo Advisor which offers you a complete hands off experience, or open a brokerage account and pick your own investments.

Either way, investing is a great way to save money for retirement or for other expenses. If you have further questions, a financial representative from a financial institutions can help. You can also reach out to an accountant.

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