Investing money has proven to be an effective means of increasing wealth over time. However, if you consider yourself completely ignorant about investing, you may be too intimidated to get started.
According to recent data from Webster Bank, 36% of Americans have “no idea where to start” when it comes to investing. If you feel the same way, here are some simple tips to get you on the right path.
1. Select the appropriate account
Perhaps your goal is to invest for the next 10 years and see how it goes. If you are in your 20s or 30s, you may decide to stick with a regular taxable brokerage account. That way, your money won't be restricted.
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On the other hand, your goal may be to start investing for retirement. In that case, it makes a lot of sense to utilize an IRA or 401(k) plan (if available) through your employer.
With a traditional IRA or 401(k), you receive a tax break on contributions up to annual IRS limits, which can change from year to year. This year, IRAs can be up to $7,000 for savers under age 50, and 401(k)s can be up to $23,000 for savers in the same age group. If you're 50 or older, the limit is $8,000 for an IRA and $30,500 for a 401(k).
So let's say you want to invest specifically for your retirement. He deposits $5,000 in a brokerage account and receives no tax benefit. However, if the same person invests $5,000 in an IRA, he will not have to pay taxes on the $5,000 of income. If he falls into the 22% tax bracket, he would save $1,110 in taxes this year.
That said, with an IRA or 401(k), if you withdraw funds from your account before age 59 1/2, you risk a 10% early withdrawal penalty. So if you think you're likely to need money at a young age, opening a regular brokerage account is probably your best bet, despite the lack of tax breaks.
2. Consider your investment horizon
It's important to consider not only what you're investing for, but also how much time you have between now and achieving that goal. Then you will know how much risk to take.
If your investment horizon is five years or less, you may want to invest a little less in stocks due to the potential for market volatility. If you happen to be investing for a milestone, such as retirement, which is 30 years away, it may be wise to invest the majority of your assets in stocks, so you have time to ride out adverse market fluctuations. not. You can also benefit from the high returns that stocks have historically been known to generate.
3. Diversification
Whether you're investing for a short or long term, it's important to have a diversified portfolio. Owning a wide range of stocks can help minimize losses during market fluctuations. And it can lead to bigger returns as well.
You can diversify in several ways. First, you can research a large amount of different stocks and build a portfolio consisting of stocks from different industries. Or you can include a broad market he ETF or exchange traded fund in your portfolio. The good thing is that you can essentially diversify your investments instantly, without having to research a ton of different stocks, which can be time-consuming.
If you're new to investing and don't know how to get started, you're not alone. These tips should help you get the ball rolling. However, there are many more detailed investment guides available online that won't cost you a penny. Read these to familiarize yourself with different concepts and terminology so you can build your portfolio with more confidence.
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