How do I get started investing?
We have been privileged to work with multi-generational families over the years, and we typically get this question from the latest generation of these families. They are often new college graduates, starting their first real jobs. This gives us an opportunity to help them lay some groundwork early in their lives as they say things like “I want to do what my parents or grandparents did”, which is an admirable goal. So how do you start?
Employer’s Retirement Plan…yes, even in your 20’s!
We often begin this conversation by asking “Does your new employer offer a retirement plan such as a 401(k), Simple IRA, etc. where they match your contributions?” If the answer is “Yes, my employer offers a plan”, this is a great place to begin, because not only are you saving money as an individual, but your company also contributes, which is essentially FREE Money!!
The next obvious question is “How much should I contribute? Answer: Begin with 3%, or whatever you need to contribute in order to get the maximum employer match. The long-term goal is to reach the target of saving 10% of your income- it is kind of like paying tithe to yourself, for our church going folks. Often this is a goal you will have to reach gradually, but the important thing is to begin.
These contributions will typically reduce your taxable income, but be prepared: when you contribute to the plan, you must accept that it will stay IN the plan (or another tax-sheltered plan) at least until you are age 59½, or you will incur not only taxes, but a significant tax penalty of 10%, so this is not your emergency fund.
But what if my employer does not offer a plan?
If you do not have access to an employer-provided plan, you have many other options:
- Set up an Individual Retirement Account or a Roth IRA. (I will talk more about Roth IRA’s in future posts). Contribute the maximum allowable: $5,500 per year, currently.
- Simply start a Savings Account that you contribute to every pay period. Set up automatic contributions, and don’t touch it. Once you have around $10,000 accumulated, you can look at opening your first investment account.
- If you own your own business, a SEP IRA or Simplified Employee Pension might work for you. I will talk about these down the road as well.
The most important component to building future wealth is the factor of TIME. Therefore, the most important thing you can do now is simply to start accumulating your own personal little pile of money in order to get it working for you, starting the cycle of creating wealth.