If you’re feeling overwhelmed by investing, you’re certainly not alone..it’s almost as if it’s designed to be confusing and therefore we must all either (a)pay someone a lot of money to either explain it to us or manage it for us, or (b)be left out of the investment world all together, missing out on potentially massively growing our wealth! Both of these scenarios are unfair and impactful.
If you’re at all interested in dipping your toe into the idea of Investing, read below for a few things to ask yourself in order to get started. As always, just some financial literacy and not investment advice!
What will the money I want to invest be used for, and when will I need to cash it out?
When it comes to investing, your “time horizon” is everything. Investing involves risk, and one of the ways to mitigate your risk is to give yourself enough time for the ups, the downs, and everything in between while your money is in the market. By giving yourself time to ride-out the downturns, you have a better chance of keeping more of your own money. The agreed-upon thought here is: if you need the money in 7 years or less, it’s probably best to stick it in a High Yield Savings Account (HYSA), or a Certificate of Deposit (CD), which will grow your money faster than the average savings account, but with a lot less risk.
Identifying what the money will be used for can help you determine which type of Investment “vehicle” (account type) to use. If the money is for a down-payment on a house, a wedding, or expensive trip, you may want to consider a Brokerage account vs a Retirement Account. If the money is for Retirement, consider using a Retirement Account. You may already have one available through work. Check it out, and make sure to ask if there is a company match! That is free money for every dollar that you put in–usually up to a certain point.
Brokerage Accounts vs Retirement Accounts: What’s the Difference?
The main difference is that the Retirement Accounts are going to give you a lot more tax-advantages, possibly allowing you to keep more of your own money. The other difference is when you can have access to the funds.
Brokerage Investment Account Features:
–You can invest as much money as you like.
–You can pull the money out anytime you want.
–You may owe Capital Gains taxes when you take the money out. These are usually based on how long you had the account (it’s generally better for you, financially, if you had the money invested for 1 year or longer) and your income.
–If you choose certain types of funds, you may owe taxes on the growth of your money before you even cash it out. Do your research and understand the fees and taxes due before you invest your money anywhere.
Retirement Investment Account Features:
–Depending on the account type you choose, there will probably be maximums to how much you can invest annually. These maximums are different for each account type and they change every year. Usually people over a certain age (closer to retirement age) can invest an additional amount which they call “catch up” contributions.
–Depending on the account type you choose, you typically cannot touch the money in these accounts until you’ve reached a certain age (much closer to retirement). If you do pull the money out early, you may face not only taxes but penalties that can be hefty.
–Depending on the account type you choose, taxes due when you take the money out will vary. Generally, contributions you make to a 401(k) through your employer or to a Traditional Individual Retirement Account (IRA), on your own, will be tax-deductible at the time (lowering your annual tax bill, but costing you later when you take the money out) while contributions made to a ROTH Individual Retirement Account will be taxed now and not taxed later. Talk to a professional for more in depth information on which account type is best for you. Some accounts have income limits as well. For solo entrepreneurs, beyond Individual Retirement Accounts, you may want to look into a Simplified Employee Pension Plan (SEP) or a Solo 401(k). Again, best to talk to a tax professional to understand the risks, fees, and tax implications for each of these accounts.
–Most Importantly, with any Retirement Account you choose, investing is a 2 step process. You make the contribution (either on your own or your employer manages that for you) and the money goes into whichever of the vehicles you’ve chosen, and then, someone must be responsible for actually investing the money. You’ll want to understand how it’s invested and the risk of those investments. In an Enron scenario, the money was invested almost exclusively in the company that they all worked for, and the company folded. That’s a huge red flag. Usually you’ll want your money spread over several different types of investments, know as “diversification”, in order to mitigate your risk.
You can do this! Check out what investment vehicles are already available to you, and if there are none, talk to a trusted friend, colleague, or someone in a similar line of work as you, in order to see what has worked for them and might be a good first step for you! This book really helped me get started!
Unlocking Abundance 