If you are looking to get started investing, you know you have a lot of options. Here is a quick breakdown of the five best ways to get started investing, and some vehicles and tools you should consider using.
One of the easiest ways to start investing is through your company’s 401K. If your company offers one, you should definitely be participating. The money that you contribute is tax deferred. It only gets taxed when you take it out. Companies generally match your contribution up to 6 percent of your wages also.
IRA or Roth IRA
If your company does not offer a 401K, you can contribute to an individual retirement account (IRA) or Roth IRA. The traditional IRA allows you to make contributions that are tax deferred now and the money is only taxed at the time of withdrawal. This means that should you take a withdrawal before you reach retirement age, you pay taxes on that money as normal income, plus an additional 10 percent penalty for early withdrawal. When you begin taking withdrawals at retirement age, you pay the current tax amount as if this were regular income. The Roth IRA assumes you are going to retire in a higher tax bracket as you build wealth and allows you to pay taxes on the money you invest now. When you retire, you pay no tax on the withdrawals.
Investing in bonds is a typically safe investment. Short term bonds (5 years), will pay a guaranteed interest rate. When you purchase a bond, you are loaning the company money and they are guaranteeing to pay it back at a certain percentage rate. Long term bonds (12 years) are more risky and generally pay more interest. Even though investing in bonds is one of the safest investments you can make, you should still research the bond and make sure you understand the rating and at performance before deciding on which bond to purchase. Plus, you need to understand the difference between buying individual bonds versus buying into a bond fund.
Exchange Traded Funds
Exchange traded funds (EFTs) are mutual funds that are traded like stocks. The EFT is a fund, which encompasses many different companies, that trades under one ticker symbol like a stock. They can be bought and sold throughout the day like regular stocks. The key point is that they container the diversification of a mutual fund. EFTs are also great for investors starting off with less money because you can buy one individual share; whereas an index mutual fund requires a larger buy in.
Direct Purchase Plan
You can buy stock directly from some companies without having a brokerage account. This is called a direct purchase plan (DPP). This type of investment allows you to make purchases based on a dollar amount rather than a number of shares purchased and has no brokerage fees. You buy directly from the company. This allows you to invest more money.
Readers, what other tips do you have to get started investing?