Investing 101
IN THIS LESSON
“A dream written down with a date becomes a goal. A goal broken down into steps becomes a plan. A plan backed by action becomes reality.”
I love this quote because here is why- if you follow the simple steps it actually works. You’ve made the decision to embark on your investment journey, and now it’s time to take the first steps. Here’s your guide to getting started:
Step 1: Define Your Goals
Before diving into the world of investing, it’s essential to have a clear understanding of your financial (and non-financial) objectives. Whether you’re saving for retirement, planning to purchase a home, or funding your child’s education, defining your goals will help shape your investment strategy.
Step 2: Create a Budget
It’s important to get a wholistic snapshot of where you are today in one place.
In a simple excel document, track your bank, credit card, mortgage, loan, brokerage, and other balances. Include your credit score and any interest rates for debt obligations.
In another tab, create a budget with your income, and projected, and actual expenses per month.
Step 3: Understand Your Constraints
Consider factors such as your income, existing financial obligations, and time horizon when crafting your investment plan. For instance, if you’re saving for a short-term goal like a home purchase within the next two years, your investment approach may differ from that of a long-term retirement plan. Factors such as beginning a family or supporting a parent through retirement could influence your budget and the funds accessible for investment purposes.
Step 4: Pay off High-Interest Debt
Prioritize paying off any high-interest debt before allocating funds to investments. Refinancing debt or adjusting your spending habits can help accelerate your debt repayment strategy. Explore options like transferring credit card balances to a 0% APR card with an extended introductory period to save on interest charges.
Step 5: Build an Emergency Fund
An emergency fund serves as a financial safety net for unexpected expenses. Aim to save 3–6 months’ worth of living expenses in a high-yield savings account. Having a robust emergency fund will provide peace of mind and prevent the need to resort to high-interest debt in times of crisis. By following these steps and laying a solid foundation for your financial future, you’ll be well-equipped to navigate the world of investing and work towards achieving your long-term goals.
Step 6: 401K Employer Matching Contributions = Free Money
One of the most compelling reasons to prioritize your 401(k) contributions is the potential for employer matching. Many employers offer matching contributions to employees’ 401(k) accounts, typically up to a certain percentage of the employee’s salary. This means that for every dollar you contribute to your 401(k), your employer will match a portion of that contribution, effectively giving you free money.
For example, if your employer offers a dollar-for-dollar match up to 3% of your salary and you contribute 3% of your salary to your 401(k), your employer will match that contribution, effectively doubling your investment. This employer match is essentially a guaranteed return on your investment and represents an immediate boost to your retirement savings.
By failing to take advantage of employer matching contributions, you’re essentially leaving money on the table. Maxing out your 401(k) contributions up to the employer match threshold should be a top priority to capitalize on this valuable benefit.
Step 7: Max out your IRA
Tax Advantages of Retirement Accounts: The Power of Tax-Deferred and Tax-Free Growth
In addition to employer matching contributions, contributing to a 401(k) and IRA offers significant tax benefits. Both 401(k) plans and IRAs provide either tax-deferred or tax-free growth on your investments, allowing your savings to compound more rapidly over time.
With a traditional 401(k) or IRA, your contributions are made on a pre-tax basis, meaning that you don’t pay taxes on the money you contribute until you withdraw it in retirement. This tax-deferred growth allows your investments to grow more quickly since you’re able to reinvest the money that would have otherwise gone towards taxes.
Alternatively, Roth 401(k) and Roth IRA contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. This tax-free growth can provide significant savings in retirement, especially if you anticipate being in a higher tax bracket in the future.
Maximizing your contributions to tax-advantaged retirement accounts like 401(k)s and IRAs allows you to optimize your tax strategy, minimize your tax liability, and maximize your retirement savings potential.
Step 8: Choose the Right Brokerage Account
After you’ve setup your emergency fund and maxed out your retirement account, we recommend opening a brokerage account, an investment account that allows you to buy and sell a variety of investments, such as stocks, bonds, mutual funds, and ETFs. Whether you’re setting aside money for the future or saving up for a big purchase, you can use your funds whenever and however you want.
Choosing the right brokerage account is a critical step in your investment journey. Whether you’re a seasoned investor or just starting out, selecting the right brokerage can significantly impact your investment experience and outcomes. By clarifying your investment objectives, researching different brokerage options, evaluating fees and commissions, considering account features and tools, reviewing customer service and support, and verifying security and regulatory compliance, you can open a brokerage account that meets your needs and helps you achieve your investment goals.
Step 9: Develop a Long-Term Perspective
Successful investing requires patience and a long-term perspective. Avoid making impulsive decisions based on short-term market fluctuations. Instead, focus on your long-term financial goals and stick to your investment plan through market ups and downs.
Step 10: Monitor and Adjust Your Portfolio
Regularly monitor your investment portfolio and make adjustments as needed to stay aligned with your goals and risk tolerance. Rebalance your portfolio periodically to maintain diversification and ensure that it reflects your evolving financial situation.