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Thinking Beyond The Savings Account: 5 Tips To Get Started With Investing

July 29, 2013

Once you’ve graduated from college and have a job and income, a first financial challenge as an adult will be to learn how to live below your means. The idea behind spending less than you make is that, if you do so, you’ll be able to save the difference and build up a nice little nest egg over time.

Not only do you need to learn the imprtance of a savings account, but creating a 3-6 month safety net is also a recommended step to take. Once you’ve gotten the hang of putting some money aside from each paycheck, you’ll eventually begin to get eager to do something more sophisticated with that money. Indeed, you might find that you’re ready to start investing your funds and giving them an opportunity to grow in earnings.

Getting started with investing might seem intimidating at first, but once you’ve done your homework, you’ll find that investing is just as doable as saving. Check out the tips below to get started with investing today:

First, Create A Pool of Money to Invest

One of the biggest obstacles most people face when they’re just beginning to invest is to find the funds in their monthly budget to put towards their investment goals. This is because many investment options have minimum initial deposits that range from $1,000-$10,000, depending on the brokerage firm. Keep in mind however that it is also possible to find a brokerage firm that requires an initial balance as low as $0 – you just need to do your research to find the best broker for your needs.

This may seem like a staggering sum, but don’t be put off – you can get the money together in no time. The best way to do so is to set up a savings account dedicated to future investments and automatically have money transferred into it from you checking account with every paycheck you get. If you receive direct deposit for your paycheck, you can even set it up so that part of your payment directly gets deposited into your savings account. This way, you’ll be building up the funds you need to invest without even having to think about it.

Next, Look Into Money Market Accounts and CDs

Also consider putting your money into money market accounts and certificates of deposit (CDs) rather than just a regular savings account. Money market accounts and CDs are similar to typical savings accounts in that they are opened through a bank, but both offer significantly higher interest rates, which is why they are often considered an investment. Unlike most other types of investments, money market accounts and CDs are low risk, though they’re also somewhat inflexible. Money market accounts usually have high minimum balance requirements ($1,000-$2,500) and you can’t withdraw money early from a CD without incurring fees. Still, if you’re looking to gain some experience with investing before taking on a lot of risk, a money market account or CD might be just the ticket.

Then, Check Out Your Company’s 401(k) Program

One of the most common ways that people commonly invest is through their company’s 401(k) program and it’s no secret why: 401(k)s are special, tax-deferred retirement savings accounts where you decide how much you want to invest and your employer deducts your contribution from your paycheck before it hits your account. What’s more, many employers match their employees’ contributions up to a certain percentage. For example, if your company matches employee investments up to 5%, this means that if you put 5% of your pre-tax paycheck into your 401(k), your employer will pitch in another 5%. In this scenario, you’d be investing the recommended 10% of your income for retirement for half-price! Employer-matched 401(k)s are a great investment opportunity you shouldn’t pass up; get in touch with your company’s human resources department to find out more about the specifics of the programs available to you and be sure to take full advantage of the contribution match offered by your employer.

Also, Consider Mutual Funds

With your 401(k) plan, you also have the option to invest your money in mutual funds. This type of investment vehicle is unique in that they allow you to purchase a fund that’s made up of a lot of other investments. For example, a mutual fund might be made up of 60% stocks and 40% bonds; when you invest in shares of the mutual fund, you’re getting that 60% – 40% mix in each share you purchase. This is a simple and effective way to diversify your investments without having to spend a lot of time researching what particular stock you want to buy. Look for a fund with few (if any) fees so that you’ll be sure you’re maximizing your returns; for example, be sure to take a look at the fund’s expense ratio for an indication of after-fee returns.

Finally, Make Sure Your Investment Choices Support Your Goals

These days investors have a lot of different choices in terms of where to put their money, so it’s important to be as educated as possible about all the options available and learn how to be a trader. When choosing between different investments, ask yourself the following questions:

  • How much risk am I willing to take?
  • What is the money I’m investing going to be used for?
  • How soon will I need the returns from the money I’m investing?
  • What are my long and short-term financial goals?

Once you have answers to these questions, it will be easier to decide which type of investment (stocks, bonds, ETFs, etc.) is right for you. Be sure to look into each option thoroughly before committing to one over another. For more information about each type of investment out there, check out the SEC’s guide to types of investments.

BIO: Neda Jafarzadeh is a financial analyst for NerdWallet, a financial literacy organization that helps consumers learn how to choose the best credit card, the right broker, find cheap car insurance, and make smarter financial decisions overall.

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