With a new year first kicking off, now’s the time for a lot of people to make financial resolutions. And one of yours may be to finally start investing. Investing your money is a great way to grow wealth, but if you’re a total newbie, the process may seem overwhelming. Here’s how to tackle it in the coming year.
1. Figure out how much you can afford to invest
It’s a good idea to commit to investing a specific amount every month as your budget allows for, so to that end, take a look at your existing expenses and see how much cash you can reasonably afford to part with. That way, you can arrange for your money to get invested automatically so you’re not tempted to spend it on other things.
If, for example, you earn $4,000 a month, of which $3,000 goes toward essentials like food and rent, you’ll be left with $1,000 to work with. Of that, you’ll probably want some money for leisure and discretionary spending, so you may decide to invest $500 and keep the remaining $500 for yourself.
2. Choose the right account to invest in
When it comes to investing your money, you have choices. You can invest in a retirement plan like an IRA or 401(k), or you can open a traditional brokerage account and use it to buy stocks.
Investing in a retirement plan has tax benefits. With a traditional IRA or 401(k), your contributions will be tax-free, and your gains in that account will be tax-deferred (meaning, you won’t pay taxes on them until you take withdrawals). With a Roth IRA or 401(k), you won’t get a tax break on your contributions, but gains in your account will be yours to enjoy tax-free, and withdrawals will be tax-free as well.
A traditional brokerage account, meanwhile, won’t give you any tax savings, but it will give you more flexibility. With a retirement plan, you generally have to leave your money alone until age 59 1/2 or otherwise face costly penalties. With a brokerage account, you can access your money at any time. You may decide to split your investments between a retirement plan and a brokerage account, but the key is to understand the pros and cons of each choice.
3. Map out a strategy
Your goal as an investor should be to generate the highest possible returns while keeping your risk to a minimum. To this end, your age should play a role in your decision. If you’re fairly young, it generally pays to go heavy on stocks, which have historically delivered much higher returns than bonds but are also a lot riskier. If you’re investing for the first time in your 60s, on the other hand, a bond-heavy portfolio may be a safer bet.
4. Choose the right investments
The stocks you add to your portfolio shouldn’t be random. Rather, you should pick stocks that offer great value and lend to solid long-term growth. Of course, identifying those stocks will take time and research, and while there are guides out there that can teach you how to choose the right stocks, you may instead want to start out with index funds.
Index funds are passively managed and aim to match the performance of the market indexes they’re associated with. When you buy index funds, you effectively purchase a bucket of stocks, and the value of your portfolio will generally rise and fall in conjunction with the broad market’s performance. Though you won’t beat the market with index funds, you can do quite well having them in your portfolio.
If you’ve yet to start investing, don’t wait a minute longer to get started. The sooner you do, the sooner you can put your money to work. And if you follow these steps, you should have an easier time getting things off the ground.