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How to Start Investing

The Best Ways to Start Investing for Beginners


1. Enroll in your company’s 401(k) plan

The first step in any financial plan, according to many financial advisers, is to enroll in your 401(k) plan, assuming your company offers one. You will be able to avoid income taxes on any money you deposit into the account (you will pay the taxes when you make withdrawals during retirement, giving you decades to grow your money without Uncle Sam taking a bite out of the profit because any dividends, interest, or capital gains on the investments in your 401(k) also avoid taxes).

If your employer offers matching funds, that is they deposit money into your 401(k) account based on how much you yourself commit in order to encourage you to invest for retirement, it is essentially free money. Due to the more favorable tax treatment, it’s better than most pay raises, in fact.

It’s important to understand one thing, though: A 401(k) itself is not an investment. It is an account in which you hold investments such as stocks, bonds, mutual funds, or cash. Many companies provide a list of mutual funds from which each employee gets to choose. If you don’t know how mutual funds work, take a few minutes to read Mutual Funds 101 or Bonds 101.

If you are a small business owner or your company is structured differently, you may have a SEP-IRA, Simple IRA, Roth 401(k), or in the case of Government and non-profit employees, a 403(b) plan. Although the rules are different for each, they serve the same purpose as a 401(k).

2. Develop your emergency savings

As you learned in Saving vs. Investing, saving is a very different thing than investing. They have different roles in your life. That’s why it’s important that you work to have adequate savings on hand before you even consider adding additional investments, other than your 401(k). For more information on how much you should be saving, read How Much Should I Be Saving?.

3. Max out your Roth IRA or Traditional IRA

If you qualify for a Roth IRA, then take advantage by maxing out your IRA contribution limits. Like a 401(k), an IRA is not an investment. It is an account that can hold investments such as stocks, bonds, mutual funds, real estate, or a large list of other assets the IRS permits according to law.

If you don’t qualify for the Roth IRA, go with the Traditional IRA anyway. Both the Roth and Traditional IRAs allow you to put money aside for retirement in addition to your 401(k), and give you substantial tax benefits to help you grow wealthier. For more information on the difference between the two, read Roth IRA vs. Traditional IRA.

4. Buy a Home

Now that valuations have begun to look more reasonable based on income-to-affordability levels, it may make sense to buy your own home if you are renting. When you are putting aside money for your down payment, don’t forget to read Best Places to Invest Your Down Payment Money.

5. Begin Building Your Wealth

Congratulations! Once you’ve completed the first four steps, you’re ready to begin the process of building your wealth (provided that you have Invested In Health Insurance. This can include opening a brokerage account and beginning to buy stocks or other investments.

Here are a few articles and resources to help you get started:

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