The idea of investing can be intimidating if you’re just starting out, but it’s an important part of saving for financial goals and building wealth. And it’s not hard to get started.
But before making any investment, it’s important to think about your tolerance for risk. Before you invest in the stock market or other higher-risk investments, think about how long you can do without the money you’ll be investing and whether you’re comfortable not accessing it for a few years or longer — being able to let it sit means your money can ride out any market turmoil, and you can wait until the value rises again before you sell.
1. 401(k) or another workplace retirement plan
While a workplace retirement plan isn’t an investment, it’s a smart way to get started investing because generally these plans offer major incentives that could benefit you now and in the future. For example, most employers match a portion of what you save for retirement out of your regular paycheck. If your employer offers a match and you don’t participate in the plan, you’re turning down free money.
- Traditional 401(k): In a traditional 401(k), your contributions reduce your taxable income in the year you put the money in the plan, and then your money grows tax-free until you’re ready to retire. (Withdrawals are taxed at your income tax rate.)
- Roth 401(k): Some employers offer Roth 401(k)s, which don’t offer an upfront tax break but do offer tax-free growth and tax-free withdrawals in retirement.
These workplace retirement plans are great savings tools because they’re automatic once you’ve made your initial selections, allowing you to consistently invest over time. They also offer higher contribution limits than other tax-advantaged accounts such as IRAs. Often, you can choose to invest in target-date mutual funds, which are an all-in-one complete retirement portfolio based on a specific retirement date. As you get closer to the target date, the fund’s allocation will shift away from riskier assets such as stocks to account for a shorter investment horizon.
2. Mutual funds
Mutual funds are one of the best investments for beginners because they give investors the opportunity to invest in a basket of stocks or bonds (or other assets) that they might not be able to easily build on their own.
The most popular mutual funds track indexes such as the S&P 500, which is comprised of about 500 of the largest companies in the U.S. Index funds usually come with very low fees for the funds’ investors, and occasionally no fee at all. These low costs help investors keep more of the funds’ returns for themselves and can be a great way to build wealth over time.
One disadvantage of mutual funds, however, is that some require a relatively steep initial investment to get started, such as $1,000 or $3,000.
3. ETFs
Exchange-traded funds, or ETFs, are similar to mutual funds in that they hold a basket of securities, but they trade throughout the day in the same way a stock would, and ETFs don’t come with the same minimum investment requirements as mutual funds. ETFs can be purchased for the cost of one share plus any fees or commissions associated with the purchase, though you can get started with even less if your broker allows fractional share investing.
Both ETFs and mutual funds are ideal assets to hold in tax-advantaged accounts like 401(k)s and IRAs.
4. Individual stocks
Buying stocks in individual companies is the riskiest investment option discussed here, but it can also be one of the most rewarding. Before you start making trades, consider whether buying a stock makes sense for you. Ask yourself if you are investing for the long-term, which generally means at least five years, and whether you understand the business you are investing in. Stocks are priced every second of the trading day and because of that, people often get drawn into the short-term trading mentality when they own individual stocks.
A stock is a partial ownership stake in a real business and, over time, your fortune will rise with that of the underlying company you invested in — as long as that company grows and prospers. If you don’t feel you have the expertise or stomach to ride it out with individual stocks, consider taking the more diversified approach offered by mutual funds or ETFs instead.
5. High-yield savings accounts
This can be an easy way to boost the return on your money above what you’re earning in a typical checking account. High-yield savings accounts, usually opened through an online bank, tend to pay higher interest on average than standard savings accounts while still giving customers regular access to their money.
They can be a great place to park money you’re saving for a purchase in the next couple of years or just holding in case of an emergency.
6. Certificates of deposit (CDs)
CDs are another way to earn additional interest on your savings, but they will tie up your money for a set period of time, unlike a high-yield savings account. You can purchase a CD for different time periods such as six months, one year or even five years; generally, if you pull out your money before the CD matures you’ll pay a penalty.
CDs are considered extremely safe and if you purchase one through a federally insured bank, you’re covered up to $250,000 per depositor, per ownership category.
Why now is the best time to start investing
Investing is crucial if you want to maintain the purchasing power of your savings and reach long-term financial goals like retirement or building wealth. If you let your savings sit in a traditional bank account earning little or no interest, eventually inflation will decrease the value of your hard-earned cash. By investing in assets like stocks and bonds, you can make sure your savings keep up with inflation or even outpace it.
Short-term investments like high-yield savings accounts or money market mutual funds can help you earn more on your savings while you work toward a big purchase such as a car or a down payment on a house. Stocks and ETFs are considered better for long-term goals like retirement because they are more likely to earn better returns over time, but they carry additional risk.
Be sure to match an investment to the timeframe when you’ll need the money. Money that you need immediately should be in safe, accessible investments, while money you won’t need for a long time can be invested in higher-returning but more volatile assets.
