I’ve spent a lot of time lately reading about how to get started as a first time investor. For me, an avowed spender, the concept of risking money and hoping that it grows for use in the future is very foreign. The closest I had been to “investing” until recently was the blackjack tables in Vegas — or so I thought. But it turns out that things I have been doing for years are actually forms of investment and I just didn’t realize it.
Investing For Beginners: Basic Steps To Start Investing
Now that I know I’m on my way to becoming my own investing expert (move over, Suze Orman!), here are my investing tips for others who are just getting started:
- Get the 4-1-1 on your 401(k). OK, so it’s a little less glamorous and exciting than the idea of day trading, but don’t overlook the obvious. If your employer offers any sort of match for 401(k) contributions, try your best to take full advantage of that benefit before looking to other investment options. To not do so is to let money slip away. Plus, because 401(k) contributions are made from pre-tax earnings, you reduce your taxable income by the amount you contribute. Would you rather invest your money for your future, or hand it over to Uncle Sam so that it can fund more swank parties at AIG?
- Don’t forget the tax benefits of a good old IRA. You can further reduce your taxable income by putting your money into an IRA. The maximum IRA contribution for 2010 is $5,000 for people age 49 and younger and $6,000 for people age 50 and older.
- Invest in your child’s future with a 529 account. Setting up and regularly contributing to a 529 college savings plan for your kids as quickly as they can be legally counted on a census will not only help to buffer the pain of tuition costs for you when they hit college age, but will also allow them to avoid at least some college debt, giving them a nice head start into a financially secure adulthood.
- Buy a house. Do you own your home? If yes, you’re a real estate investor. Your home is a valuable asset and is subject to all sorts of market risk, as the hundreds of thousands of Americans currently facing foreclosure can attest. If you’re not already a homeowner, now is a great time to snap up a wonderful home at a price below its market value (well, unless you live in a major metropolitan area where real estate prices are still beyond reach). Live in your home for as long as you can, make improvements as needed, and don’t touch any equity that you build (Repeat after me: My home is not an ATM machine.). When retirement rolls around, you should be able to sell your little slice of paradise and buy a new slice of paradise in a tropical location for cash. Theoretically, of course.
Tip: If you decide to leave your employer, think of moving your 401(k) money to a rollover IRA, where you’ll have more control over your funds. Where to start? Check our list of best online brokers with reasonable commission rates and great resources for investment learning:
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Presuming that you’ve got money left over, here are a few more tips:
- Determine how much “extra” you have to invest. Do you have a little extra in your online bank account or credit union? Do you have more money than you really need to keep on hand to cover emergencies? Take the excess and make an initial lump sum investment with an online discount broker. Then, determine how much you can invest out of every paycheck. Even if it’s only $25 or $50 every couple of weeks, starting now will help you to get in the habit of putting money away regularly. As your income grows, increase the amount that you regularly sock away.
- Decide where you’re going to put the money. Hint: KISS (as the saying goes: keep it simple and stupid). If you consider yourself a small investor (most of us do) who does their investing on the side, then there’s no point in spending hours upon hours hand-picking stocks and bonds to build your portfolio. Instead, determine your needs and find a mutual fund, or set of funds, that fits those needs. Key points to look for: low fees, consistent performance, and a management company that is strong on service. I personally like Vanguard, but I’ve got a friend that swears by T. Rowe Price. You can also find index funds available through an online broker.
There are dozens of options for investment houses out there, and some even offer sign-up bonuses for new customers (check these online stock trading promotions for more information — and no, you need not be an active trader to receive a bonus). There’s nothing better than free money! Except, perhaps, knowing that you will be OK in your golden years, with or without Social Security.
Copyright © 2010 The Digerati Life. All Rights Reserved.
{ 11 comments… read them below or add one }
Repeat after me: Owning your primary residence is NOT an investment!
This chart should help you
-Erica
Erica
Do you mean owning your primary residence should never be considered an investment or just not a good investment today because of high real estate prices?
To me, an investment is something I put money in, expecting a return at a later time. You either get something back or you don’t. The term “investment” can even loosely and foolishly be applied to the lottery but there’s something else you call it — gambling. The thing is, the term “investment” is loosely applied to many things — including the education I’ve paid for to ensure that I have a career later on.
I agree it’s not the best or most efficient way to build wealth, but depending on your circumstances, buying a house may be a better financial option than renting (say if you stay in your home for a long time or you bought at a truly low price point). In my case, it will be. So as far as making money goes, I expect to come out ahead. But I would encourage anyone who’s trying to decide whether they should buy a house — figure out whether it makes sense to rent or buy. I wrote about it here.
you should have added that people should invest in their finance education this year and move from speculation to real value investing. that is one of my goals this year
My life experience is that it is the basics that matter most. If you get the basics right, everything else will sooner or later follow. If you don’t, you are doomed. Too often people direct huge amounts of effort to trying to understand details of a subject when what they need is to go over and basics again and again and again.
The basic that I would stress in investing is that — valuations matter. The valuation level for stocks is the price tag for stocks. The price tag matters for everything you buy. Including stocks.
If you get that, I really think you cannot lose because stocks offer such a great long-term value proposition. Unfortunately, the idea that investors should consider valuations when setting their stock allocations has become “controversial” in the Buy-and-Hold Era.
Rob
Without a doubt the most important first step is to just do it! Put away that little bit on a regualr basis and you’ll soon be surprised as to how quickly those little bits start adding up. Just get into the groove, and you’ll soon be wondering what has taken you so long!
I agree with every one of your statements, and actually that’s what I did over the years and when I started out…
Although instead of the traditional IRA, I opened a Roth IRA.
I wish I were buying a primary house today (since they are cheap, and have generous tax credits if you are a first time buyer), instead of 10 years ago. I’d rather build equity in a house instead of renting (the only exception to this is if you plan to leave the area in 5 years). Oh well, at least my house will be paid off next month…
I like your KISS analogy. If you’re a beginner, stock mutual funds are a good choice and less risky than buying stocks individually. I would also advise a beginner investor to educate themselves about investments. You shouldn’t invest in something you don’t understand. Good Post.
I have gotten started with my IRA at Vanguard and agree I like them as well.
Yeah, investing is very complex… but then again, it’s only complex because there are so many choices!
When it comes down to it, you simple need to find solid fund and stick with it for a few decades. The market will go up and down, but eventually (as history has shown) you will end up with about an 8% return. No telling what the future will do, but I’m at least investing my money in some index fund or lifecycle funds in order to keep up with future inflation.
Good luck to everyone investing! Thanks for the great post!
@Erica,
I disagree with you, chart or no chart.
Owning your own home CAN be a great investment if you purchase wisely. It can also be a poor investment, if purchased unwisely. A house is a real asset, which acts as a hedge against inflation, gets preferential tax treatment and can take advantage of leverage. Plus, your family can live in it.
I have been investing for 25 years and my house has been the single best investment I have made. Five or six years from now, when my house is paid off, it is going to seem like a phenomenal investment. My results aren’t typical, because I bough my house with one month of the market low in ’96. But, my house still would have been a great investment, even if I had bought it for much more.
Bret
I have a very a simple problem with this article: it’s aimed at beginners, but it points them at the “best” online brokers with “reasonable commission rates,” without mentioning the simple and important fact that you can invest directly with Vanguard without paying any commission rates on anything. The only the expenses there are (a) fund expense ratios, (b) paper statements delivery (waived if you opt for electronic statements), and (c) low-balance fees.