In investing or anything financial for that matter, there’s a lot of information to take in, and that’s why I’m breaking it down in an invest series. I began the discussion of investing in Part 1 of my investing series, Thinking About Investing. This week, it’s all about places for beginners to invest.
When you’ve been doing all the right things with your money, staying out of debt and saving, the next step is to invest it.
You want to be making money on the money you’ve saved and the way you do that is by compounding interest. There’s a long definition for compounding interest, but I’ll sum it up with an example. Let’s say you deposit $100 in the bank and after six months you earned $3 in interest. Now you have $103 in the account, and you’ll earn interest on $103. Making money on the interest goes on and on and before you know it, you’re making money while you sleep. To make more money than you would in a savings account, I’ve listed five of the many ways to invest, for you to get started.
U.S. Savings Bonds
A personal favorite because it’s how I started investing my money when I graduated High School (thanks for the advice, Dad.) I started small and became used to living on less than I made. They may not make you millions, but they’re super safe (backed by the full faith of the U.S. government.) Of course because of this security blanket, the amount of money you make/earn from loaning Uncle Sam your hard earned money is low. The good news is, they’re affordable—you can buy them for as little as $25. Paper savings bonds are gone—now they’re all digital bonds. It’s easy to buy them, just go to TreasuryDirect.gov and set up an account. As a side note, these make great gifts.
Certificates of Deposit (CDs)
Another low-risk investment option is to loan your money to a bank or credit union for a certain amount of time. The more money you loan, and the longer you let them borrow it, the more interest they’ll pay you for the privilege. The interest they’re willing to pay varies from bank to bank, so it’s always good to shop around. NerdWallet.com has a comparison of the latest rates.
Individual Retirement Accounts (IRA)
These are accounts set up at places such as banks or with a broker and allow you to save for retirement. There are two main types: Traditional and Roth. One you pay the taxes later (deferred) and they other you pay the taxes now when the money goes in. The type you choose depends on many factors such as income, other retirement accounts, personal preference.
Employer Retirement Plan
Signing up for your employer’s 401k (named for the tax code number) is an excellent way to start investing your retirement. Especially if your employer offers to match the money you put into your 401k. That’s FREE money you’re giving up if you aren’t contributing money to it.
A 401k is also a tax-advantaged account, meaning you get to put the money in before you pay taxes on it, thus lowering your annual income. The money in the account also grows tax-deferred—you pay taxes when you take the money out, at retirement age.
There’s a little reading involved, but it’s worth the time to get it set-up and learn about the different investments. Most of the time, you will pick from various mutual funds (see below). Then you decided how much money you want to invest each month. All of this is set-up through your HR department, which is also the place to start if you have questions. There are always professionals if you want more help.
It’s usually a good idea to use tax advantaged accounts to do all your investing, first. Once you’ve reached the maximum you can put into those accounts, then check out mutual funds as another place to invest. A company creates mutual funds and then pool investor’s money and buy different investments such as stocks or bonds. It would be the same as everyone you work with throwing in $50 and buying Apple and Coca-Cola stock. Each person who put in money owns a percentage of the investment. Morning Star has a free tool to compare and research various mutual funds.
These five places are just some of the ways to invest. There are many others, but these will get you started. As I mentioned, there’s a lot of information, and many more factors that go into investing, taxes being a major one. Part 3 of my investing series will go into more detail on taxed-advantaged accounts such as IRAs and 401ks.