How to Start Investing: A Guide for Everyone
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The best time to start investing is today. If you just stick your paychecks in your checking account and let the money sit there, you aren't likely to earn much interest, and you may be tempted to spend more than you should. But don't just close your eyes and jump into the world of investing without doing your homework. Here are a few expert tips to get you started.
Put Together Your Own Personal Investment Plan
When you think about starting to invest, consider the advice of most experts — no two investors are the same. A good investment plan reflects your own financial objectives and stays within your own risk limits.
Figure out the big money items in your future that you need to save for. A home, education for your kids and eventual retirement are common milestones, but traveling around the world, moving to another country or going back to school are equally legitimate goals. It's hard to stay excited about an investment plan if you're saving for goals that don't relate to your dreams. Be sure your plan reflects who you are and what you want in your future.
Take the Time to Assess Your Risk Tolerance
Risk tolerance means how much risk you are comfortable taking with your investments. It is often a function of age — the younger you are, the more risk you can afford. If you're just out of college and invest money in a stock whose value goes down, you have decades before retirement in which to recoup that loss. But, if you are retiring next year, you're not likely to tolerate much risk.
Your time frame for investment is only one of several factors that go into figuring risk tolerance. Other assets and sources of capital are also considered. Those who own many valuable assets or who earn a higher income can afford to take on more investment risk.
Consider Buying a Home — or Even Two
You can't feather your nest until you have one. And, as real estate and mortgage expert Kristi Waterworth of Springield, Missouri, says, "With so many tax benefits available to homeowners, a residence can be your most valuable first investment."
Uncle Sam encourages new investors to buy a home — or even two — by allowing deductions for mortgage interest and property taxes for a primary residence, as well as a vacation home.
When you buy a home, you not only get a place to hang your hat, but also a hefty tax exclusion when it comes time to sell. If you and your spouse have owned the home for at least two years and lived in it for at least two of the last five years before selling, you can take the first $500,000 in capital gains free of federal tax.
Take Maximum Advantage of Employee Retirement Accounts
Retirement may seem eons away when you're just starting to invest, but if you are eligible to participate in your company's employee retirement account, don't turn it down without serious consideration.
Some of the most popular plans out there are 401(k) accounts, where employees determine how much to contribute every month, and the employer deposits that portion of the paycheck directly into the 401(k) account. You don't pay taxes on the earnings until you withdraw the funds, and some employers match part or all of an employee's contributions.
Employers may also offer other savings and thrift plans in addition to, or instead of, 401(k) accounts. Each will have its own rules and tax benefits, so be sure to see what works best for you. Some plans that might be available include:
Deferred profit sharing
Money purchase pension
Savings incentive match plan
Employee stock ownership
Simplified employee pension
The tax savings available in these plans may convince you to put an employee retirement account to the top of your investment list.
Stocks, Bonds and Cash All Play a Role in a Diversified Investment Portfolio
Everybody knows what cash is, but if you are just starting to invest, stocks and bonds can seem too complex. First, read up on the risks and benefits of each, since how you allocate your investment portfolio between them depends on your goals, how much time you have and your risk tolerance.
Here are a few tips to follow once you are ready to build a portfolio:
Divide your money between stocks, bonds and cash in a way that is comfortable for you, given your risk tolerance.
Never put all of your investment money in one stock or even one industry, no matter how promising it appears to you.
Keep your eye on the tax laws and take steps to reduce your tax burden when possible.