We all know that we should invest and save for our future, but many of us don't know where to start. Fortunately, getting started may be easier than you think.
Investing can seem so complicated that you can just give up and do nothing, or feel like you need to hire someone to guide you. However, it should not be complex. You probably already have the ability to start where you work.
1. Join your employer's pension plan
For most people, learning how to start investing starts with signing up for your company's 401(k) plan. This is the easiest entry point for most workers.
But do not worry if you are self-employed or do not have a work pension. We'll have specific tips later in this article. For everyone else, the process of joining the employer's pension plan is very simple, although it varies depending on the location of work.
Start with a conversation with someone in the human resources department to get instructions on how to sign up. Your human resources representative should be able to answer all of your questions throughout the process.
Once enrolled, you can make automatic contributions to the pension plan each pay period. These contributions will come directly from your salary before you see the money.
When automating this process, do it "out of sight, out of mind." Over time, the clean result is that you begin to build a retirement nest without having to think too much.
2. Select your investments
Now is the time to select your investments. This part may seem complicated, but it doesn't have to be!
Many people now have the option of opening a Roth 401(k) at work along with the traditional option of a regular 401(k). Building a Roth 401(k) is far superior to a traditional 401(k). With a Roth 401(k), put money that has already been recorded into your 401(k) and is no longer recorded.
If you don't get a Roth 401(k) [and instead get a traditional 401(k)], you're just putting money in before taxes. Everything your plan builds over the years is taxed going forward.
We have a full explanation of the similarities and differences between a Roth 401(k) and a traditional 401(k), as well as an answer on whether you should have a Roth 401(k) here.
Whether you choose a traditional 401(k) or its Roth counterpart, think of it as a house or a shell for your money. You have to put furniture in the house, right? This is where the next part comes in.
The selected fund's mix of stocks and bonds automatically adjusts as you get closer to retirement. Basically, selecting a target date fund allows you to take a “set it and forget it” approach to investing.
3. Set your contribution level
Obtain the complete correspondence of the company. There's a hard and fast rule when it comes to setting your contribution level in your employer's pension plan: always contribute at least the minimum necessary to get full consideration from the company.
Many companies will match the money you invest 50% or 100%, up to a certain contribution level. Check with your human resources department for the details of your plan.
Suppose, for example, that you contribute 6% of your salary and there is an item of 100% up to 3% from your employer. This means that your effective contribution rate is 9%. You earn 6% and your employer gives 3% for the whole game.
Once you have completed this matching, Clark recommends that you increase your contribution rate by 1% every six months. Do this until you reach the limit of what you can legally contribute to a 401(k) or Roth 401(k).
4. Find out what to do with the extra money
Open a Roth IRA. Once you start saving in your employer's retirement plan, you need to find other places to make additional contributions.
For most people, opening a Roth IRA makes more sense. A Roth IRA is a tax-exempt account that allows you to contribute up to $6,000 a year ($7,000 if you're age 50 or older).
But there are income limits for qualifying. You can only contribute the full amount to a Roth IRA if your income is less than $125,000 as a single person or $198,000 as a couple. Plus, you can still contribute, but for a reduced amount.
We have a full explanation of how to open a Roth IRA, along with full eligibility criteria and income limits, here.
Special tips for freelancers
A Roth IRA is also a good place to start if you don't have access to an employer-sponsored retirement plan. Two other good options for freelancers and entrepreneurs include:
- SEP (Simplified Employee Retirement) IRA
- 401(k)
Many large retirement plan providers like Vanguard and Fidelity offer these plans.
Conclusions
Learning to start investing should not be complicated. It all starts with the goal of starting to save enough to get your company's entire 401(k) match, if available. From there, slowly increase your savings rate over time.
Most employers want to make it easier for you to save for retirement, because today very few offer pensions. Be sure to enjoy this useful fruit in your life. If you don't, you may have to work harder than you want.
If you don't have access to a retirement plan at work, be sure to research opening a Roth IRA, SEP IRA, or a single 401(k) at a site like Vanguard or Fidelity. For starters, you'll want to read our articles on Charles Schwab, Vanguard, and Fidelity!