Hello again! When I talked to some of my friends about investing, they always seemed interested and wanted to learn more.
However, they always asked me this question: So, how do I invest?
Well, since I’ve talked about the different types of investment accounts and also different types of investments, it’s finally time for me to actually answer the question of how you can start your investing journey!
So tune in (and subscribe!), and you might make your first investment as soon as you’re done with this piece!
Disclaimer: This post is not financial advice, so do your own due diligence!
1. Determine your goal for investing
It’s important to know why you want to start investing. It could be that you just want your money to grow to a bigger amount. Or maybe you want to someday be able to retire and live off of your investments.
You could also be saving up to buy a house or to pay for your tuition, so keep that in mind as you start your investing journey.
In my case, my main investing goal is to have enough passive income that would allow me to be independent of my job.
2. Determine how much you want to invest
This really depends on your personal situation, but the general rule of thumb is to invest 10%-15% of your income.
If you work for an employer that offers a retirement plan (e.g. 401k plan) that has a matching program, then you could already almost reach the 10%-15% goal by just putting money into the retirement plan up to the matching amount (usually 3%-5%). After that, you could make up the difference by putting money into your personal investing account.
Another way to find out how much you can invest is by subtracting all expenses and outstanding debt payments you have, then you can invest all or part of the leftover money. The GF has written a blog post about budgeting and personal finance that I think will be beneficial for you to figure out how much you want to invest!
3. Pick your investments
This is the fun part where you can actually pick out companies that you want to invest in! If you are confident in your ability and have knowledge of how the stock market works, then you could definitely choose a specific company to invest in.
If you are looking to become more of a passive investor and don’t want to worry about which companies are bad or good, then you could look into mutual funds or index funds/ETF (e.g. VOO, VTI, SCHD, etc.). This means that your money will be invested in many different companies that are in that fund.
This is considered best practice for people who just started their investing journey, and there are reasons that suggest this way of investing gives more return than picking individual stocks and with fewer risks!
4. Determine the type of accounts you want to open
Aside from 401k (which your employer provides), the investment accounts that you can open are taxable accounts, Roth/Traditional IRA, education accounts (529 savings accounts), and custodial accounts.
The first account that you’d want to open and max out is the IRA. With IRA, you can choose between a Traditional IRA (kind of like a traditional 401k) or a Roth IRA (my favorite due to it being tax-advantaged AND easy to withdraw your contributions). I’d always go for the Roth IRA first to start out. If you want to know more about the different account types, I’ve covered them here!
After you’ve opened and maxed out your IRA, next would be a taxable account. This is a normal investment account that has no contribution limits, but your profits and dividends will be taxable.
An education account, like the 529 savings account, is a tax-advantaged account that you can hold your investments and use to pay for educational expenses tax-free. It is a great option if you are planning to pay for your education or if you’re planning for the future in the case that you have kids.
Lastly, there are custodial accounts. Just like it said, custodial accounts are ones that you can open for a minor. These accounts have no contribution or withdrawal limits, and while they are not tax-advantaged, they are taxed at the minor’s tax bracket.
For example, for 2022, the first $1,150 of unearned income is tax-free, and the next $1,150 is taxed at 10%. After that, more than $2,300 will be taxed at the parent’s rate.
When it comes to these accounts, I prefer to max out my Roth IRA first, then I will invest into my taxable account. I do not have a 529 account or a custodial account because I do not have any kids yet, but that could change in the future.
5. Open your first investment account
Now that you’ve decided how much you want to invest and what you want to invest in, it’s time to put it into action!
This is as simple as opening a bank account. You can basically look up the top investment platforms, go through the list, and pick out the one that suits your need the most.
One of my favorite online investment brokerages is M1 Finance (feel free to use my referral link!). They allow you to open many types of investment accounts, including taxable accounts, IRAs, custodial accounts, etc.
One of M1’s main features is called Pie. A Pie contains many slices, and each slice is a stock or ETF that you can personally pick out. You can choose the percentage of the slices, and this will add up to 100% of the Pie.
So each time you put money into the Pie, your money is automatically divided up to buy each slice of stocks up to the relative percentage that you set. Essentially, this means that you can create your own basket of stocks!
6. Deposit your money, invest, then sit back and relax
Now that you have everything set up, the last step is to make your first investment! It is as simple as depositing your money into your investment account, and you can buy your first investment!
To make investing even easier, many investment platforms allow you to set up automatic deposits, so you can invest regularly without even thinking about it. This also mitigates timing the market because you will be investing throughout the up and down cycle of the market!
Conclusion
Hopefully, after reading this post, you were able to learn more about investing and actually make your first investment! It might sound complicated at first, but trust me, it is as easy as opening a bank account or credit card. But unlike those, this can help you get closer to financial independence and one day help you retire from your job!
Thank you <333 This was super helpful!