Investing 101: How, Where, When, and Why to Begin

401K, IRA, Stocks woman investing money on her computer

Are you searching for a way to build long-term wealth? Investing can help accomplish this goal. The best part is that you don’t need to be an investment banker or wealthy to start.

If you still need to invest your first dollar, you can see how you can start today, and how it can benefit your future. Plus, you will learn how to keep your investing costs and income taxes low.

What to Invest In

The number of investment options can feel mind-boggling. Index funds are the quickest and most cost-efficient way to diversify. Each fund mimics the performance of a broad market index. For instance, an S&P 500 index fund invests in 500 of the largest publicly-traded companies on the U.S. stock exchange.

You may consider building this “three-fund portfolio,” coined by Taylor Larimore, to invest in (almost) every market sector:

  1. Total U.S. Stock Market Index Fund: Large-, mid-, and small-cap U.S. stocks
  2. Total International Stock Index Fund: Developed and developing international markets
  3. Total Bond Market Index Fund: Investment-grade corporate and government bonds

Index funds are available from any online broker and most 401(k) plans. It’s possible to start with as little as $1 per fund. Most brokers have a questionnaire you can answer to determine your asset allocation for each fund.

What if you don’t feel comfortable managing your portfolio? No worries. A robo-advisor like Betterment puts your cash in a variety of funds corresponding to your age and risk tolerance.

Another hands-off investment idea is target-date retirement funds. Choose a fund closest to your planned retirement date. The fund managers will put your money in more conservative assets as retirement approaches. Target date funds can have more fees than index funds but still cheaper and less risky than picking individual stocks.

Invest in Retirement Accounts First

All investment income is subject to federal and state income taxes. To minimize your tax bill, consider contributing to your workplace 401(k) plan or an individual retirement account (IRA) first. With either retirement account, you only pay taxes on your cash once.

A traditional 401(k) or IRA contribution reduces your taxable income for your contribution year. Your contributions grow tax-deferred as you pay taxes on the withdrawal amount.

Roth 401(k) and IRA contributions require you to pay taxes in the current tax year. However, the contribution amount and lifetime earnings grow tax-free.

You might contribute to a 401(k) first, if your employer offers matching contributions. Otherwise, invest in the account with the lowest plan fees.

It’s also not a bad idea to put some of your cash in a taxable non-retirement account as you will need to pay penalties for early withdrawal if you are younger than 59 from retirement plans. Although your investment income is subject to annual taxes, the long-term gains can be higher than a bank savings account. Only invest cash you don’t need for at least five years to prevent selling for a loss. It may take several years for investments to rebound from a market correction.

When to Start Investing

The best time to start investing is today. The sooner you do, the more opportunities you’ll have to earn dividend income and capture share price growth. As you reinvest your earnings, your passive income begins to compound.

Successful investors put their money to work, but don’t try to time the market. Even if you can only start with $10 each paycheck, it’s better than nothing. You can increase your monthly contributions as your finances improve. Strive to invest at least 10% of your pre-tax income.

The average historical return for the S&P 500 is approximately 7%. If you have high-interest debt above 7%, you may use most of your free cash to pay off these debts first. However, you should still invest small amounts to begin working on earning passive income.

With each loan you repay, previous monthly loan payments can turn into financial growth. While investing might not be as exciting as spending cash, each investment helps build your net worth, so you can build your future.

Why Invest Now?

Investing is the primary way for most Americans to save for retirement. The sooner you start means you are less likely to delay retirement or outlive your savings.

Bank account interest rates are at historic lows and likely won’t generate enough compound interest to build a nest egg. Plus, inflation rates tend to outpace savings account rates. So, investing is one of the best ways for your cash to earn consistent returns with minimal effort.

Becoming a successful investor isn’t rocket science. A good starting point is putting as much as possible each month into an index or target-date fund. These types of funds give you diversification while keeping your investment costs low.

Don’t worry about knowing tax rules related to investing. TurboTax unveiled a redesign of TurboTax Premier that tackles the biggest pain points for the 21 million taxpayers with investments in the U.S., including personalized guidance, covering nearly every investment tax situation, including stocks, bonds, ESPPs, robo-investing, cryptocurrency, rental properties and more as well as data import to eliminate work. 

If you want additional assurance, you can connect live via one-way video to a TurboTax Live Premier CPA or Enrolled Agent with an average of 15 years experience to get your tax questions answered. TurboTax Live Premier CPAs and Enrolled Agents are available in English and Spanish year round and can also review, sign, and file your tax return.

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