You want your money to work for you and a secure financial future. I get it thought, at first investing is overwhelming. Where do you start? How does everything work? Investing for beginners doesn’t need to be complicated. Here’s six steps to get started investing.
This is for you if you’re a complete beginner or if you’re investing now, but don’t quite understand everything.
Investing for Beginners: Six Steps to Get Started
1. Find out how much you’re currently investing
The first step is to get clear on how much you’re investing right now. Grab a paystub and find out what percentage (if any) of your income you’re currently contributing to retirement plans.
According to the Bureau of Labor Statistics 68% of people who work for private companies have access to company sponsored retirement plans, like a 401(k) plan, but only 51% contribute to the plan.
There’s a chance you setup to automatically contribute up to your company match, like for example 3% of your income. This is a great start, but you can invest more than your match!
2. View the current value of your retirement accounts
The next step is to see the total value of your retirement accounts right now. You can do this by simply logging into your accounts. The stock market fluctuates. This means your retirement account values increase and sometimes decrease.
It’s important to invest in the long-run and not get in the weeds about temporary drops due to slumps in the economy. I recommend Best Money Class Ever students to fill in their personal Balance Sheet once a quarter to view the total current value of your liabilities (debt) and assets (like investments and savings).
3. Understand what you’re investing in
Believe it or not, but retirement accounts have nothing to do with what you’re investing in. They only deal with how you’re taxed on the account. You can have your entire life savings in your companies stock (this is NOT a good idea, think of Enron!). Or you can have everything sitting in cash, not even keeping up with inflation.
According to Investopedia 59% of millennials have started saving for retirement, but 65% have there retirement fund in cash.
The third step is to see what exactly you’re investing in. Find out the name of your mutual fund or index funds. Be sure to have a basic understanding of what it is your putting money into!
4. Look at your investment fees
Now you know what you’re investing in, the fourth step is to find out what the fees are on your investment. There unfortunately are always fees on investments, or what’s called an expense ratio.
Standard mutual funds have fees between 1-3%.
If you think fees don’t matter. Think again. NerdWallet estimated just a 1% fee can cost an investor over $590,000 over their lifetime.
I’m a fan of Target Date Index Funds, with fees as low as .15%.
5. Learn the basics on how retirement plans work
The fifth step is to investing is to get familiar with how retirement plans work. Is your retirement account Roth or traditional? Are you contributing to an IRA and 401(k) plan? Do you know if you’re maxing out your accounts?
Here’s a quick cheat sheet to retirement accounts.
Traditional accounts are tax deductible (you lower your taxes now) and tax deferred (you don’t pay taxes as the value grows, but you do when you withdrawal money in retirement).
Roth accounts grow tax-free and withdrawals are tax-free!
Currently you can contribute up to $6,500 into an IRA and $22,500 in a 401(k) plan.
6. Decide how much of a nest egg do you need to retire
Lastly develop a big picture of what you need to retire. Or as Stephen Covey, the best-selling author of The Seven Habits of Highly Effective People said, “Begin with the end in mind.” You don’t want to work forever. What do you need to invest to confidently retire without running out of money?
A back of the napkin rule of thumb is to save 25 times your annual current expenses. With this you can safely withdrawal 4% of your nest egg, without running out of money.
For example, if you want to live off $80,000 in retirement, then you’d aim to have a nest egg of $80,000 X 25, or $2,000,000. Then you can safely withdrawal 4%, or $80,0000 ($2,000,000 X .04 = $80,000).
Start investing (confidently!) now with these six steps.
❤️ Carly
P.S. Want to learn more about investing? My FREE MONEY CLASS, “The Ultimate Guide to Managing Money,” is Sunday, April 2nd. Grab a drink at home and join me live. Save your spot now here. Know of friends, family, or coworkers who also geek out over personal finance? Share this with them!
