The secret to investing is to get started early and make it automatic. It doesn’t have to be much. Once you get in the habit it begins to snowball. But where can you invest money and how do you do it? Continue reading to find out:

Retirement plan at work

A retirement plan at work is honestly one of the easiest and most beneficial ways to save. After you are hired you may need to wait for a certain period of time before you are eligible to enroll. Ask your HR person about that when you start so you know the rules. 

Generally, employers will offer some kind of matching policy. That means if you contribute $100, they contribute $100 as well. Getting the matching money is free money or extra pay on top of your base bay. The matching amount will be limited by some percentage of your salary, typically 3-5% but some employers are quite generous with matching. The matching contributions may also be on a vesting schedule. So you would have to stay at the company for 3-5 years until it fully becomes yours.

The other great thing about contributing to your work retirement plan is your taxable income will be reduced by the amount of your contribution. This is true for the most popular 401(k) plan, as well as other types of retirement accounts. Ask your HR person for details. For example, if you contribute $1,000 in a year, and your tax rate is 33%, that is $333 in taxes you don’t have to pay.

The types of investments you can make will be determined by the plan offered by your employer. Typically it will be a menu of mutual funds designed to allow you to pick what level of risk/reward you want to take. More on that later.

Note that if you are self-employed you can access similar retirement plans. They take a bit more work to setup. The plus side is you have full control and some plans offer the ability to defer 2-3 times more than what a regular employer sponsored plan would.
 

Personal IRA

A personal IRA is the most popular type of retirement plan among individual retirement plans. This is a good option for someone who does not have a retirement plan available at work.

Like an employer sponsored 401(k) a personal IRA counts as a tax deduction in the year you make the contribution. However taxes are incurred when you decide to withdraw the money when you retire.

If you want to start a personal IRA retirement plan, you need to open an account with a bank or brokerage. Depending on where you open your account you can hold investments of many different types such as CDs, bonds, mutual funds, stocks, and exchange-traded funds (ETFs). In this sense a personal IRA is a lot more self directed which means you will want to meet with a financial advisor on what to invest in. 

Keep in mind there is much less flexibility if you open the account at a bank or credit union because they only typically offer savings accounts, money market accounts or certificates of deposit (CDs). These kinds of cash investments are generally not used for long term retirement planning since their growth is expected to be low relative to stocks/bonds etc.
 

Consider Roth IRA

Despite having virtually the same name, IRAs and Roth IRAs are quite different.

The first difference is, contributions to Roth accounts do not reduce your taxes. So if you contribute $1,000, and your tax rate is 33%, you would still owe $333 in taxes on that income.

That is the negative part of it. The positive part of Roth is they money grows tax free, and withdrawals are 100% tax free as well (with some caveats). Also your original balance can be withdrawn once you are 59 years old or have had the account for at least 5 years. 

Having some money in Roth accounts gives you flexibility during retirement.

Like personal IRAs, you can open a Roth IRA account at several places, including banks, brokerage firms, and credit unions.

The rule of thumb for a Roth IRA is that you must make contributions by December 31st for the contribution to count for that tax year. Each year you may only contribute so much ($7,000 in 2024), so you “lose space” in your Roth if you don’t contribute. There are income maximums beyond which you are not allowed to contribute to Roth as well.
 

Investment options

Given that investment options can be different, beginners in investing should think carefully about how much risk they want to take on.

In general the younger a person is the more risk financial advisors advocate for. That is because time is on the side of young people. If you want to risk more, you should be prepared to lose more (at least in the short term). However, if your holding period is long enough (over 20 years) stocks have never shown a negative return! That fact includes the great depression era. Check out our portfolio allocation calculator for what history has shown about market returns relative to stocks and bonds. Note that historical returns are NOT a promise of future returns.

It's up to you to decide where to invest, but your choices generally boil down to stocks vs bonds. Stocks are more risky but offer more reward. Bonds are less risky, but offer less reward. Check out our post on asset allocation which goes into more detail about how these two types of investments work in your favor to help you build net worth.

If stocks/bonds, asset allocations, rebalancing, and everything else that goes into investing is just too much, you might look into a target allocation fund. All you need to do there is select the fund that matches your approximate retirement year and the fund does the rest. It starts off with a more aggressive allocation to stocks, and then slowly shifts into bonds as retirement approaches. This is a real set it and forget it approach and is designed to work well for everybody.

One important point to consider when selecting an investment is to check on the fees you are charged. If two funds both hold US stocks, but one fund has an expense ratio higher than the other, it would make no sense to pick the fund with the higher feeds. See our post on the golden rule of investing - keep your expenses low for more on that idea.
 

Conclusion: Investing for beginners can be very difficult since everything seems so unfamiliar. Once you get into the habit of investing it gets easier, even monotonous. However as time goes by and the money works for you it can be really fun to check your balance every so often. You may even want to start tracking your net worth using our Net Worth Dashboard tool.