When I got my first paycheck after college, I was so excited about all the stuff I could finally afford to buy. I was living at home with my parents at the time, so my expenses were low and my shopping wish list was long. Then my dad asked me if I had set up my 401(k), or thought about other investment accounts like an IRA or a brokerage fund.
My head began to spin: I barely made enough money after taxes and paying for insurance to save up to move out. Now I was supposed to put more of my income into an account I couldn't touch? And even risk losing some of it in the stock market?
Now, I understand how important (and smart!) it is to start investing for long-term goals like retirement from your first payday. That's because of compound interest—when your interest earns interest, a hundred dollars can grow into thousands over time. So if you put $5,000 in an account with an interest rate of seven percent and contribute $200 a month, after 30 years you'll have a little over $280,000.
If you're not already investing, now's the time to begin! Here are four steps to getting started:
1. Know why you’re investing
Are you looking to start saving for retirement, or grow a nest egg to buy a house down the road? The answer to this question will help determine what account to open. If you're thinking about retirement (my advice: always think about retirement), you should open a 401(k) and IRA. A 401(k) is set up by your employer and pre-tax, meaning you won't be taxed on this money until you withdraw it. Some companies even match your contributions.
A traditional IRA is also tax-deferred, but you don't need an employer to set up this account for you. If you earn less than $118,000 individually, or $186,000 as a married couple filing jointly, you can open a Roth IRA. Unlike a traditional IRA, this account taxes the money you contribute, but when you withdraw it for retirement, what you see in your account is what you get. The caveat: You can only invest $5,500 a year. Since these accounts are created for retirement savings, you'll face a fine if you withdraw money before you're 59 years old.
If you're already investing for retirement and looking to grow your money for a short-term goal, something you want in a few years, like buying a house or travel, consider opening a brokerage account. This is an investment you can access at any time. You can work with a broker to help you invest, or take a DIY approach to make some investments on your own.
2. Decide what to invest in
No matter what account you choose to open, you'll need to know how to actually invest your money. First, consider how involved you want to be in your investments. Look at investments like a restaurant menu: If you like to create your own meal and order à la carte, then invest in individual stocks. The key is to buy low and sell high, but once you invest in a stock, give it time to grow and dip over a few years. Not every IPO will reach Amazon heights.
An index fund is more like the chef's tasting menu. If you're not sure which individual stocks to invest in, an index fund offers a cross section of a specific part of the market, like the S&P 500. This fund gives you a taste of 500 of America's largest stocks. "Instead of buying each of these stocks individually, you can use a brokerage firm to invest in an index fund," financial guide Nicole Lapin tells Redbook. "Buying a share of an index fund gives you exposure to a sector of the market."
Some index funds are mutual funds, which are operated by money managers, who shuffle assets to try for the biggest profits, Lapin says. Others are exchange-traded funds (ETFs) that can be D.I.Y. and traded like stocks.
3. Diversify your portfolio
Savvy investors know this step is key. A diverse portfolio is an investment account with money spread out between various stocks, funds, and bonds. This way you don't have all your eggs (read: money) in one basket. Think about it: If all of your money is invested in Tesla and its stock crashes right when you need to cash out, you can kiss your retirement savings goodbye. But if you have money in various funds and one of these investments fail, the others act as safeguards. You might not have as much money as you'd have hoped for, but something is far better than nothing.
4. Manage your Accounts
The final thing to consider is what firm you want to invest with. If you go the traditional route, investing with a firm like Vanguard or Fidelity, you'll need around $3,000 to open an account. These firms let you buy, sell, and monitor your investments on your own or connect you with an advisor who can set up your accounts for you. If you want to start smaller, online firms like Wealthfront and Betterment have low or no minimum investment. These firms use algorithms to help you allocate your investments so you make the most money.
Want to start even smaller? Sign up for Acorns, an app that lets you invest your spare change. You connect your credit card, and after every purchase Acorns rounds up to the nearest dollar and invests the difference into recommended stocks and bonds. If you're still hesitant to start investing, financial planners and brokers can help you navigate your investment options for a fee. Just make sure yours is registered through the National Association of Personal Financial Advisors or the Financial Industry Regulatory Authority's Broker Check database.
Now that I'm investing, I track all of my accounts with Mint, and I really do see my money grow from year to year. It's important to monitor your investments—I check mine once a month to make sure I'm still happy with the ETFs I chose—but don't drive yourself crazy if a stock or fund has a bad day. Remember: You're in this for the long-term gain, not quick cash.