How Do I Invest, Where Do I Put My Money, and Do I Need More Advice?
Before you start working or actually even earn any income, your only real option for investing whatever money you may have is to invest in a regular investment account.
By “regular” I mean one that is taxed normally by our government without any special rules. Open a magazine, look online, watch TV and you will see all sorts of advertisements for brokerage firms and banks. TD Ameritrade, E*Trade, Fidelity, Vanguard, Charles Schwab—just to name a very few. It’s as simple as going online or calling and opening a regular taxable account and depositing your money.
And while they all offer different mutual funds and ETFs, different fee structures and different investing platforms, they all serve the same purpose: to provide an account for you to invest money. After you’ve researched and decided which brokerage shop is the best for you, open an account by filling out an application, decide what investments you want, deposit your funds and place your trade. It really is that easy.
But it gets a bit more complicated once you start earning money or have a job that offers retirement investment options.
If you don’t work for a company that offers a formal retirement plan of any sort, you should consider an IRA. IRA’s are creatures of our tax code and the federal government, and the rules surrounding them are mostly governed by the tax man (the IRS and its rules). The main difference between a regular taxable account and an IRA is that an IRA provides certain tax benefits that regular accounts do not.
You can elect, instead, to invest in a different type of retirement account that is sponsored by your employer, if that is available to you. A 401k is a retirement plan that allows you to set aside money directly from your paycheck to be invested. All of these plans are fairly similar, but these employee-sponsored plans may give you free money. True statement. Some employers will match some or all of the money you invest in these retirement plans. If you are lucky enough to work for a company that offers a match, then absolutely, unequivocally, you should take advantage and at least contribute the amount to get the full employer match. Literally, it’s free money.
So, you may ask, why wouldn’t I just put all my money in, say, my company’s 401k if I get the free-money-employer-match? Well, that should likely be your first retirement option. Unfortunately, there are limits on the amount of funds you can contribute to each plan—and some of those limits are based on how much money you make.
Another option your employer may offer, a health savings account (an HSA), is a tax-exempt account that is used with certain health insurance plans. Why, you ask, would this savings and investing book include a discussion on HSAs and health insurance? Assuming your employer offers a high-deductible health plan (the only plan that can be partnered with an HSA), then it’s the single best retirement vehicle around. Contributions to HSAs must be used to pay for health and medical expenses, but they don’t have to be used in the same year and can be left to grow for years or even decades.
Why is this the best retirement account? Well, it is a super-charged, tax-efficient vehicle. Contributions are immediately tax deductible. Growth is tax free. Withdrawals are tax free. It’s sort of like a Roth account and a traditional account got married and had a baby—the HSA combines the best of each. But, again, the amount you can contribute each year is limited, so you’ll still have to use other savings options.
At some point in your working career, after a few jobs and after your income (hopefully) increases, you’ll wake up one day with several accounts, and multiple types of different accounts. Traditional, Roth, IRA, 401k, HSA, previous employer’s 401k, etc. Accounts from prior employers can be combined and “rolled over” into one account at a large brokerage firm, but you may have several of these types of retirement accounts. And, there are yet more types of accounts if you work in the public sector or are self-employed (pensions, Thrift Savings Plans, SEP IRAs, Simple IRAs, Solo 401k, etc.).
How About Financial Advisors—Are They Worth It?
Why ask this question? Because financial advisors (FAs) customarily charge 1–1.5% per year on the total value of the investment portfolio. But studies have shown that utilizing a FA has the potential to add up to 3% annually to your returns—that is quite a significant improvement from investing alone! But after diving into the findings, here is what you’ll find:
