How do you invest as a beginner? We hear it all the time: invest to build wealth. Ever wonder what the heck a Roth IRA is? Or what the point of retirement accounts is? These can be intimidating questions for beginner investors. For those just getting started with investing, Clo Bare breaks down why it’s so important to invest, retirement account options, and the steps to get started.
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Have you been dying to start investing but you have no idea where to start?
Do you feel like investing seems like this super overwhelming thing that is only meant for the wealthy?
Do you want to learn how to make your money work for you?
Well then, this blog series is for you.
If you’re new here, I’m Clo Bare and I am a financial educator, coach, and creator. I focus on teaching people how to completely transform their personal finances so that they can start building wealth and making their money work for them.
How to Start Investing as a Beginner
Today we are going to cover what you need to have in place before you start investing, why investing is so important, and some of the common retirement accounts and how they work.
BUT FIRST: A disclaimer. This is not financial advice. This blog and all its content is for educational and entertainment purposes only. I am not a financial advisor, and I’m certainly not your financial advisor. If you’re looking for information on your individual situation, I recommend you do your own research and consult with a professional if needed. Cool? Cool. More on the terms of this website here.
Why You Can’t Save Your Way to Retirement
Now… before we dive in… why can’t you just SAVE your way to retirement?
That’s something I used to think I could do. Cause investing? That freaked me out. I could save money. I was really good at hoarding money.
But investing??? Nah. I’ll pass.
But here’s why that doesn’t work.
Let’s take a look at what it would take for you to save $1,000,000.
Say you were saving $1,000/month. It would take you roughly 83 years to save $1,000,000.
But by 83 years you won’t need that money anymore because you’re probably dead. Womp womp.
Now… How long would it take you to get to $1,000,000 if you were investing that $1,000/month instead?
If we did this for 35 years assuming a 10% interest rate (which is the average interest rate over the past 100 years), you would have 3.2 million saved.
That’s way more than what we could’ve saved in 83 years.
You really can’t save your way to wealth – you must invest.
If you don’t have 35 years until retirement, don’t panic.
Let’s take that down to 25 years.
You would have 1.2 million saved for retirement. That’s a whole lot faster than 83 years that it would take for you to save a million dollars for yourself.
Even if you only have 15 years until you plan to retire?
You’ll have to invest more than $1,000/month, but the same rules apply.
See why this is important? Because investing GROWS your money, while your money sitting in a crusty old bank account? It doesn’t do much for you.
Now let’s start talking about the how of how do you start investing as a beginner.
How to Start Investing Step 1: Emergency Fund
The very first thing that I want to stress before we dive into the basics of investing is that you need to have an emergency fund. Period, end of story.
Why? Because we need to be prepared for the inevitable emergencies. Without an emergency fund? We’re hustling backwards.
Now, does that mean you have to cease all investing?
Not necessarily, but you might want to prioritize the emergency fund over investing. So let’s say you’ve only got $200 a month to dedicate to investing or your emergency fund– maybe $175 goes to your emergency fund, while $25 gets squirreled away in your investments.
For most people, emergency funds should be a minimum of 3-6 months of your emergency expenses saved.
This is especially true if you have children or people that rely on you financially. Emergency expenses happen, and we need to be prepared for them. And no, credit cards do not count as emergency funds. Your emergency fund should be money set aside in a high yield savings account that you can access whenever you need it.
I have another blog post here for how to build your emergency fund, so be sure to check that out before you get started in investing.
With that being said, always take advantage of your 401k or 403b match. If your employer offers you a 403b or 401k match, take it, regardless of if you have an emergency fund or not.
Speaking of employer matches…
How to Start Investing Step 2: Always Get Your 401k Match
Do you remember when you got your first job?
Your dad or you mom might’ve sat you down and said “Be sure to get your 401k match”. You nodded and said yeah, sure whatever, and went on your merry way without thinking much about that employer match.
If you’re like me, I had no idea what a match was, let alone what my 401k was. But I listened– and when it came time to fill out my paperwork for retirement my first day on the job?
I got the full match.
Now first– what is an employer match?
A “match” is what your employer is willing to put into your 401k or 403b on your behalf and they’ll “match” up to a certain percentage of what you put in.
For example, let’s say you make $50k a year and your employer offers a 3% match, meaning for every dollar you put into your 401k, they’ll match 100% of that dollar, up to 3%. So, you decide cool– I’m going to put in 3% of my salary, which is $1,500 a year.
And since your employer match is also 100% up to 3%? Guess what. Your employer is going to ALSO put in $1,500.
Not bad, right? Get that free money.
If you didn’t take that 3% match– well then… you lose out on that $1,500 of extra money your employer was willing to give you JUST for contributing to your 401k.
Don’t Miss Out on That Match
It never ceases to surprise me how many people don’t take advantage of their employer match. In fact, according to CNBC, 17.5 million Americans leave money on the table because they DON’T get that match.
An employer match is essentially free money. It’s part of your overall compensation. Why would you say no to free money?
That’s part of your salary so it would be crazy for you to turn that down. It’s basically saying no to money that is already owed to you.
And if you’re wondering– Chloé… I don’t even know what a 401k is… I got you covered.
But Chloe, what is a 401k???
A 401k is just a retirement account that is sponsored by your employer. Your employer is paying the fees for you to have this account and the employer allows you to contribute a certain amount of your income to your 401k.
To learn more about 401k basics, check out this blog post here.
If you already have a 401k and you’re getting that match, good job! You’re already investing. Onto the next step.
How to Invest as a Beginner Step 3: Use Your Retirement Accounts like IRAs
Another retirement account you might want to consider opening is an IRA (individual retirement account) if you’re 18 or older. You can open an IRA even if you don’t have a 401k.
Why do you want to invest in your retirement accounts and not open a taxable brokerage account instead like your friend Joe who loves Robinhood?
Well, because you’re going to save money on taxes. And we like saving money on taxes.
It’s important that we invest in our retirement accounts before we start investing anywhere else.
Because taxes are our biggest, baddest expenses here in the US (and in most other countries), and retirement accounts are a way to legally reduce your tax burden.
Why wouldn’t we want that?!
For a detailed breakdown of retirement accounts– be sure to check out this post here.
How Retirement Accounts Save Us Money on Taxes
Now, I’m not going to dive too deep into retirement accounts in this post since we already have a post about those, but here’s what you need to know.
Retirement accounts will either save you money on taxes now, or they’ll save you money on taxes later. It all depends on what type of retirement account it is.
Roth vs Traditional
If it’s a Roth account– you’re paying taxes NOW so that your money can grow tax-free for the rest of your life. Pretty cool, huh?
So if you put $6,000 into your Roth IRA account, and it grows to $10k, you just made $4k completely tax-free.
Not bad, right? So Roth accounts save you money on taxes, in retirement.
If it’s a traditional account?
Well, you get a tax-deduction now, and your money grows tax-deferred until retirement.
So, for example, if we put $6,000 into a traditional deductible IRA, we can deduct $6,000 from our taxable income in the year we put it into our IRA. Then, if that money grows to $10k, in retirement, we will have to pay taxes on the $10k when we take it out.
You save money NOW and you’ll have to pay taxes in retirement.
Generally, I like using retirement accounts before using taxable brokerages because I like saving money on taxes. After I’ve maxed out my retirement accounts ($20,500/year for 401ks and $6,000/year for IRAs), then I go for the taxable brokerage account.
Often people do it in reverse and they go straight for the brokerage accounts like the Robinhoods of the world because they’re the ones that are more heavily marketed at us.
My biggest beef with Robinhood?
Robinhood doesn’t offer a retirement option, so you’re basically paying triple taxes.
In taxable brokerage accounts, you’re paying taxes not only on your income, but also on your capital gains. This means that when the value of a stock goes up in price and you sell it for more than what you paid for it, the difference is a capital gain.
Taxable Brokerage: You have to pay taxes on that.
You also have to pay taxes in a taxable brokerage account when you get paid dividends. At the end of the year when you report your taxes, you have to report any dividends in a taxable brokerage account.
If your investments are in a retirement account, you don’t have to pay taxes on the capital gains or dividends for life it’s a Roth, and you don’t have to pay taxes on capital gains or dividends until retirement if it’s Traditional.
It’s kind’ve like this little bonus that the government gives you to encourage you to invest in these retirement accounts. That’s why I preach using them because there’s nowhere else where you’re going to be able to save money on taxes like that.
The Note of All Notes: Retirement Accounts are Not Investments
Did you hear me shouting that from a rooftop?
Let’s say it again.
RETIREMENT ACCOUNTS ARE NOT INVESTMENTS.
So many folks get this confused, and here’s why that’s an issue.
Have you ever heard someone say– “yeah– my Roth IRA is doing really well this year.”
Or: “What’s the best Roth IRA to invest in?
Or: “I’m invested– I have a Roth IRA.”
Here’s the issue with those statements.
Many times, far too often, people think that when they open a Roth IRA and transfer money into the account– they’re invested automatically.
But that is not the case. Investing is a three step process and a Roth IRA? It’s only one step in the process.
Step 1: Open an account (like a Roth IRA or taxable brokerage)
Step 2: Connect your bank account and transfer money.
Step 3: BUY INVESTMENTS.
That last step? You do not want to miss.
Because imagine– imagine you had been putting $500 a month into your Roth IRA for thirty years.
And then, your old granny self goes to pull out their money thinking that if you got a 10% average annual return, you should have about a million dollars waiting for you.
But guess what…
You forgot to invest. You forgot step three.
So instead of having nearly a million waiting for you in retirement?
You’ve got $180,000.
You do not want to end up in that situation.
Do not forget: 401ks, taxable brokerages and IRAs act as buckets for your investments.
You buy your investments inside of those containers. And these particular containers have different tax benefits.
Think about it like a bucket full of rocks. The bucket is your Roth IRA or 401k and the rocks are the stocks, mutual funds, and index funds.
Alrighty– I think that’s enough for one blog post.
So, let’s recap.
We know how important it is to invest rather than save. We know that we NEED an emergency fund before we can start investing (unless your employer offers a 401k match). And we know what some of our retirement account options are.
If you’re just getting started with investing, start here with these steps.
Once you’ve movin’ and groovin’ with an emergency fund and working on maxing out your retirement accounts, come back for part 2 of How To Start Investing For Beginners: Investing 101.