Although investing in the stock market can feel intimidating at first, it could be the key to achieving your financial goals. Short of hitting the lottery or building a thriving business that you can sell, buying securities that increase in value over time is usually the easiest path to wealth.
After all, the average savings account pays out a paltry 0.05% APY according to the Federal Reserve Bank of St. Louis, yet the average stock market return is around 10% per year before accounting for inflation.Â
Unless you want your money to languish in a savings account where itâs worth less with each passing year, learning to invest should be at the top of your to-do list.
6 Steps to Start Investing in the Stock Market
But, how do you start down a path that is notoriously complicated and has the potential to leave you withless money than you started? Here are a few top steps you should take to get started.
1. List Your Goals
Ask yourself what you hope to accomplish by investing in the stock market. A few examples of investment goals might include:
Making a quick profit by investing in the short-term, and reselling stocks at a higher price,
Creating a source of passive income you can use later on,
Growing investment earnings so it can cover your retirement, or
Saving money for a specific goal.
As you list out your goals, make sure you have the extra money to invest on a regular basis, while also having cash set aside for emergencies. If you have a lot of credit card debt or other high-interest debt, you might even consider paying it off before you begin investing. After all, the average credit card interest rate is currently over 16% â and you might not get an investment return anywhere close to that.
2. Start With Retirement Savings Accounts
There are advantages that come with investing in a retirement account. Accounts, like a workplace 401(k), a SEP IRA, or a Solo 401(k) are tax-advantaged, giving you the chance to reduce your taxable income (and thus, pay less in taxes) when you contribute.
With a 401(k) plan from your job, for example, you can contribute up to $19,500 in 2020 and again in 2021. If youâre age 50 or older, you can also contribute another $6,500 each year which is called, a âcatch-up contributionâ. The amount you contribute is taken off of your taxable income, so your tax liability is lower.
You might also qualify for an âemployer matchâ on contributions to your employer-sponsored retirement account. Check with your companyâs human resource department to learn if your employer offers this benefit.
Other retirement accounts to consider include a traditional or Roth IRA. You can deduct your full traditional IRA contribution from your taxable income, if you donât have a retirement plan at work. Another option is funding a Roth IRA which lets you contribute using after-tax dollars instead. This means you wonât get a tax deduction for contributing, but Roth IRA funds grow tax-free and you can take distributions at retirement age without paying any taxes.Â
In 2021, contribution limits for IRAs stay the same as 2020. You can contribute up to $6,000 to an IRA, or $7,000 if youâre age 50 and older.
3. Open a Brokerage Account
In addition to investing for retirement, you can also open a taxable brokerage account. You wonât get any upfront tax advantages for opening a brokerage account, but you get the chance to buy and sell stocks and other securities, or buy and hold them for the long-term.
There are excellent brokerage account options for beginners or experienced investors, many of which let you invest in some capacity without any fees. Some of the top firms to consider include:Â
Betterment: Best for Beginners
Robinhood: Best for No Minimum Balance Requirement
M1 Finance: Best for Free Trades
Learn More About Betterment
4. Compare Costs and Fees
You might not have a lot of options if youâre investing in your workplace retirement plan at first. If you have the option to select a brokerage firm, youâll need to compare the fees and costs involved in investing. Fees and costs to watch out for include:
Investment management fees. These fees can be nonexistent or as high as 1% of your account balance (or more).
Expense ratios. Specific funds, like index funds or mutual funds, might carry this fee.
Transaction fees. You might pay transaction fees when buying or selling a stock or another security.
Front-end loads. This fee can be charged on some investments upfront.
Annual account fees. A charge thatâs tacked on just for using your brokerage account.
These are just some of the main fees to watch out for, but there are plenty of others. If you want to figure out how much youâre paying in fees on your investment accounts, the free retirement fee analyzer tool from Personal Capital is a good place to start.
5. Start Off With Simple Investments
Youâve probably heard plenty about the âhot stocksâ of the last few years, and how investors who got in early have gotten rich by being in the right place, at the right time. Unfortunately, most âregularâ investors donât hear about hot stocks until itâs too late.
As a beginning investor, itâs usually best to keep your stock market strategy simple by investing in what you understand. Some beginning investments to consider include exchange-traded funds (ETFs), which are made up of various investments that track an index or focus on a specific industry sector. You could even stick to index funds, which are another type of investment that tracks an index and are mostly âhands-offâ for the investor.
Target-date funds are another type of simple investment to consider. These funds include a selection of stocks and bonds that adjust for less risk over time. If you purchase a target-date fund thatâs meant to last until 2050, for example, your risk would be high at first but slowly taper down as you approached 2050 or whatever âtarget dateâ you choose for retirement.
6. Research Before Jumping on Complex Strategies
If youâre curious about more complex investing options, youâll need to learn more about how and when to invest. Some resources to turn to include investing books, like:
The Little Book of Common Sense Investing by John C. Bogle
Investing All-In-One for Dummies by Eric Tyson
You could also check out top investing forums like Seeking Alpha or the Bogleheads forum, taking the time to read through questions and answers from investors at the top of their game.
Blog posts that can help you get started with some investing basics include:
How to Invest Essentials for Beginners & Intermediates
How the Stock Market Works
How to Buy Stock Online
The Bottom Line
Investing in the stock market can be nerve-racking, but starting with common-sense investments in place (e.g. employer-sponsored retirement account) and uncomplicated investments (like index funds), lets you ease into the process slowly.
Over time and with more experience, youâll have a better sense of when â and when not to â shy away from the risks of the stock market.
The post How to Start Investing in the Stock Market appeared first on Good Financial CentsÂ®.
Maybe you want to lose those stubborn 10 pounds, score a big promotion or run your first marathon. Whatever your priority, it all starts with setting a goal.
Financial priorities are no different. Whether you want to save for your child’s college education or get yourself out of debt, budgeting to help reach your financial goals allows you to determine what’s most important to you, make a plan to attain those goals and hold yourself accountable for success.
Still, when it comes to managing your money, knowing how to set financial goals and sticking to them can feel like opposite sides of the same coin. You might even find yourself asking, “How do I create a simple budget to reach my financial goals?” If you follow these three steps, you could be crossing the finish line in record time:
1. Pick a day to get started
Sometimes the hardest part of tackling a new project is simply getting started, especially if your to-do list feels like it’s never ending. There’s always tomorrow, or the day after that… right? To create a simple budget to help you reach your financial goals, pick a day and time to get started. Consider picking a time when you do your best thinking, are most focused and least likely to get interrupted. Maybe it’s Sunday morning over breakfast and coffee before kicking off a day of chores or on a weeknight after the kids go to bed.
Once you’ve landed on the best time to sit down and create a simple budget, add it to the calendar and schedule reminders on your computer or phone to hold yourself accountable.
2. Create a simple budget, however complex your finances
Chances are your finances are pretty complicated, with lots of moving parts. Things seem to be moving along nicely with your regular expenses like rent, groceries, transportation and entertainment… and then your carburetor goes kaput in your car and you must replace it right away. Or that toothache has become unbearable and requires a root canalâand you’ll have to cover some of the expense out of pocket. Just when you’re finally making a dent in paying down your debt and getting your finances on track, life throws you some curveballs. But that doesn’t mean you can’t create a simple budget.
One of the easiest ways to create a simple budget and stay on track is to follow the 50-20-30 rule:
50 percent of your income should address your needs, such as housing, utilities, healthcare and transportation;
20 percent should be put toward your financial goals, like building your savings and paying off debt;
30 percent should cover your wants or discretionary expenses, like shopping, entertainment and dining out.
Managing your finances with the 50-20-30 is a good first step when you’re first learning how to create a budget, but trying to deal with multiple financial goals within that 20 percent bucket can be overwhelming. When it comes to budgeting to help reach your financial goals, certified financial planner Jim White suggests taking your financial goals one step at a time.
“Make a simple plan to tackle debtâor maybe just one debtâthen when that goal is accomplished, work on a simple plan for the next debt,” White suggests. “A bunch of small victories goes a long way to changing your financial discipline and gives you a boost to keep moving forward,” White adds.
Similar to how you picked a day to begin the budgeting process, make a habit out of managing your finances by picking one day of the week and checking in with yourself at a scheduled time. After about two months, budgeting to help reach your financial goals can become habit forming. “When you focus on your goals on the same day every week, you are creating a habit, and a pattern, to follow,” says Karen Ford, financial coach and motivational speaker.
Budgeting to help reach your financial goals becomes even more effective when you’re reviewing your priorities every seven days and making adjustments to your spending and saving as needed.
“Make a simple plan to tackle debtâor maybe just one debtâthen when that goal is accomplished, work on a simple plan for the next debt. A bunch of small victories goes a long way to changing your financial discipline and gives you a boost to keep moving forward.”
3. Automate your financial plan
Now that you know how to set financial goalsâwhether it’s paying down debt, saving up for a car or putting money away for retirementâwhat’s next? Time to get moving! One way to do that is to automate your finances. By setting up automatic bill pay and account transfers, it will be easier to stick to your plan for paying monthly expenses and contributing to savings.
When it comes to paying your bills and learning how to set financial goals, consider automating the bills that you pay regularly, especially those that fall within the 50 percent budget category that covers your living essentials. To gain momentum with your savings progress, set up automatic transfers from your checking account to your savings account for the amount you wish to save each month. If your financial goal is retirement, you could even set up automatic transfers to an individual retirement account (IRA) so you’re consistently making progress. You could also arrange to have a portion of your paycheck automatically go into savingsâbefore you even have time to miss it.
By making automatic contributions to your savings accounts, you are “subscribing to the idea of paying yourself first,” says Riley Adams, CPA and blogger for Young and the Invested, a professional’s guide to financial independence. “By doing this, it removes the temptation to spend and takes any lack of discipline out of the picture,” Adams says.
Keep in mind that any time you automate your finances as part of creating a simple budget, you should monitor your accounts regularly. Check in to make sure your automated settings are up to date, that you always have the funds available in your accounts to cover your expenses and transfers and that your savings are growing according to your plan.
How to set financial goals in 3 steps
Once you find time to focus on your finances, create a simple budget and automate your payments and transfers, budgeting to help reach your financial goals is one habit that is sure to stick. By following these three rules and keeping yourself on track, you’ll be ready to build a solid foundation for your financial future.
The post How to Set Financial Goalsâand Crush Them appeared first on Discover Bank – Banking Topics Blog.
Back to school season is in full swing, and that means your kids will be coming home with more and more homework. They will need a productive space to study, and your home office can be a good option. But the office may need a few essentials before itâs ready for the school year.
Get Good Lighting
Studying in the dark can strain your eyes or put you to sleep. To avoid the likelihood of snoozing during study time, youâll want to have adequate lighting. Add a small desk lamp, a floor lamp, or a brighter bulb in your overhead lighting.
Your kids will ideally spend a lot of time studying in the office. Make it comfortable. Invest in a good chair or a lumbar support cushion.
Keep Supplies Within Reach
Your kids may need pens, pencils, paper clips, glue sticks, and all of the things on their long back to school shopping list. Try to fit the necessary supplies in arms reach. Set up pencil holders on the desk surface, or dedicate a drawer to school supplies. If they can simply grab what they need, theyâll be likely to save time and stay on track.
People are more productive when they work in an organized space. So instead of throwing supplies and papers anywhere, make sure everything has a place. Invest in folders, binders, and a file cabinet (and make sure the entire family uses them).
Creative work is done best in a visually pleasing space, so donât skimp when it comes to interior design. Personalize the space and make it one where your family actually enjoys spending time.
Get your home office in shape. Your entire family may be more productive as a result.
The post Back to School: Home Office Essentials first appeared on Century 21Â®.
You probably donât need us to tell you that the earlier you start saving for retirement, the better. But letâs face it: For a lot of people, the problem isnât that they donât understand how compounding works. They start saving late because their paychecks will only stretch so far.
Whether youâre in your 20s or your golden years are fast-approaching, saving and investing whatever you can will help make your retirement more comfortable. Weâll discuss how to save for retirement during each decade, along with the hurdles you may face at different stages of life.
How Much Should You Save for Retirement?
A good rule of thumb is to save between 10% and 20% of pre-tax income for retirement. But the truth is, the actual amount you need to save for retirement depends on a lot of factors, including:
Your age. If you get a late start, youâll need to save more.
Whether your employer matches contributions. The 10% to 20% guideline includes your employerâs match. So if your employer matches your contributions dollar-for-dollar, you may be able to get away with less.
How aggressively you invest. Taking more risk usually leads to larger returns, but your losses will be steeper if the stock market tanks.
How long you plan to spend in retirement. Itâs impossible to predict how long youâll be able to work or how long youâll live. But if you plan to retire early or people in your family often live into their mid-90s, youâll want to save more.
How to Save for Retirement at Every Age
Now that youâre ready to start saving, hereâs a decade-by-decade breakdown of savings strategies and how to make your retirement a priority.
Saving for Retirement in Your 20s
A dollar invested in your 20s is worth more than a dollar invested in your 30s or 40s. The problem: When youâre living on an entry-level salary, you just donât have that many dollars to invest, particularly if you have student loan debt.
Prioritize Your 401(k) Match
If your company offers a 401(k) plan, a 403(b) plan or any retirement account with matching contributions, contribute enough to get the full match â unless of course you wouldnât be able to pay bills as a result. The stock market delivers annual returns of about 8% on average. But if your employer gives you a 50% match, youâre getting a 50% return on your contribution before your money is even invested. Thatâs free money no investor would ever pass up.
Pay off High-Interest Debt
After getting that employer match, focus on tackling any high-interest debt. Those 8% average annual stock market returns pale in comparison to the average 16% interest rate for people who have credit card debt. In a typical year, youâd expect aÂ $100 investment could earn you $8. Put that $100 toward your balance? Youâre guaranteed to save $16.
Take More Risks
Look, weâre not telling you to throw your money into risky investments like bitcoin or the penny stock your cousin wonât shut up about. But when you start investing, youâll probably answer some questions to assess your risk tolerance. Take on as much risk as you can mentally handle, which means youâll invest mostly in stocks with a small percentage in bonds. Donât worry too much about a stock market crash. Missing out on growth is a bigger concern right now.
Build Your Emergency Fund
Building an emergency fund that could cover your expenses for three to six months is a great way to safeguard your retirement savings. That way you wonât need to tap your growing nest egg in a cash crunch. This isnât money you should have invested, though. Keep it in a high-yield savings account, a money market account or a certificate of deposit (CD).
Tame Lifestyle Inflation
We want you to enjoy those much-deserved raises ahead of you â but keep lifestyle inflation in check. Donât spend every dollar each time your paycheck gets higher. Commit to investing a certain percentage of each raise and then use the rest as you please.
Saving for Retirement in Your 30s
If youâre just starting to save in your 30s, the picture isnât too dire. You still have about three decades left until retirement, but itâs essential not to delay any further. Saving may be a challenge now, though, if youâve added kids and homeownership to the mix.
Invest in an IRA
Opening a Roth IRA is a great way to supplement your savings if youâve only been investing in your 401(k) thus far. A Roth IRA is a solid bet because youâll get tax-free money in retirement.
In both 2020 and 2021, you can contribute up to $6,000, or $7,000 if youâre over 50. The deadline to contribute isnât until tax day for any given year, so you can still make 2020 contributions until April 15, 2021. If you earn too much to fund a Roth IRA, or you want the tax break now (even though it means paying taxes in retirement), you can contribute to a traditional IRA.
Your investment options with a 401(k) are limited. But with an IRA, you can invest in whatever stocks, bonds, mutual funds or exchange-traded funds (ETFs) you choose.
If you or your spouse isnât working but you can afford to save for retirement, consider a spousal IRA. Itâs a regular IRA, but the working spouse funds it for the non-earning spouse.Â
Avoid Mixing Retirement Money With Other Savings
Youâre allowed to take a 401(k) loan for a home purchase. The Roth IRA rules give you the flexibility to use your investment money for a first-time home purchase or college tuition. Youâre also allowed to withdraw your contributions whenever you want. Wait, though. That doesnât mean you should.
The obvious drawback is that youâre taking money out of the market before itâs had time to compound. But thereâs another downside. Itâs hard to figure out if youâre on track for your retirement goals when your Roth IRA is doing double duty as a college savings account or down payment fund.
Start a 529 Plan While Your Kids Are Young
Saving for your own future takes higher priority than saving for your kidsâ college. But if your retirement funds are in shipshape, opening a 529 plan to save for your childrenâs education is a smart move. Not only will you keep the money separate from your nest egg, but by planning for their education early, youâll avoid having to tap your savings for their needs later on.
Keep Investing When the Stock Market Crashes
The stock market has a major meltdown like the March 2020 COVID-19 crash about once a decade. But when a crash happens in your 30s, itâs often the first time you have enough invested to see your net worth take a hit. Donât let panic take over. No cashing out. Commit to dollar-cost averaging and keep investing as usual, even when youâre terrified.
Saving for Retirement in Your 40s
If youâre in your 40s and started saving early, you may have a healthy nest egg by now. But if youâre behind on your retirement goals, now is the time to ramp things up. You still have plenty of time to save, but youâve missed out on those early years of compounding.
Continue Taking Enough Risk
You may feel like you can afford less investment risk in your 40s, but you still realistically have another two decades left until retirement. Your money still has â and needs â plenty of time to grow. Stay invested mostly in stocks, even if itâs more unnerving than ever when you see the stock market tank.
Put Your Retirement Above Your Kidsâ College Fund
You can only afford to pay for your kidsâ college if youâre on track for retirement. Talk to your kids early on about what you can afford, as well their options for avoiding massive student loan debt, including attending a cheaper school, getting financial aid, and working while going to school. Your options for funding your retirement are much more limited.
Keep Your Mortgage
Mortgage rates are historically low â well below 3% as of December 2020. Your potential returns are much higher for investing, so youâre better off putting extra money into your retirement accounts. If you havenât already done so, consider refinancing your mortgage to get the lowest rate.
Invest Even More
Now is the time to invest even more if you can afford to. Keep getting that full employer 401(k) match. Beyond that, try to max out your IRA contributions. If you have extra money to invest on top of that, consider allocating more to your 401(k). Or you could invest in a taxable brokerage account if you want more flexibility on how to invest.
Meet With a Financial Adviser
Youâre about halfway through your working years when youâre in your 40s. Now is a good time to meet with a financial adviser. If you canât afford one, a financial counselor is typically less expensive. Theyâll focus on fundamentals like budgeting and paying off debt, rather than giving investment advice.
Saving for Retirement in Your 50s
By your 50s, those retirement years that once seemed like they were an eternity away are getting closer. Maybe thatâs an exciting prospect â or perhaps it fills you with dread. Whether you want to keep working forever or retirement canât come soon enough, now is the perfect time to start setting goals for when you want to retire and what you want your retirement to look like.
Review Your Asset Allocation
In your 50s, you may want to start shifting more into safe assets, like bonds or CDs. Your money has less time to recover from a stock market crash. Be careful, though. You still want to be invested in stocks so you can earn returns that will keep your money growing. With interest rates likely to stay low through 2023, bonds and CDs probably wonât earn enough to keep pace with inflation.
Take Advantage of Catch-up Contributions
If youâre behind on retirement savings, give your funds a boost using catch-up contributions. In 2020 and 2021, you can contribute:
$1,000 extra to a Roth or traditional IRA (or split the money between the two) once youâre 50
$6,500 extra to your 401(k) once youâre 50
$1,000 extra to a health savings account (HSA) once youâre 55.
Work More if Youâre Behind
Your window for catching up on retirement savings is getting smaller now. So if youâre behind, consider your options for earning extra money to put into your nest egg. You could take on a side hustle, take on freelance work or work overtime if thatâs a possibility to bring in extra cash. Even if you intend to work for another decade or two, many people are forced to retire earlier than they planned. Itâs essential that you earn as much as possible while you can.
Pay off Your Remaining Debt
Since your 50s is often when you start shifting away from high-growth mode and into safer investments, now is a good time to use extra money to pay off lower-interest debt, including your mortgage. Retirement will be much more relaxing if you can enjoy it debt-free.
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Saving for Retirement in Your 60s
Hooray, youâve made it! Hopefully your retirement goals are looking attainable by now after working for decades to get here. But you still have some big decisions to make. Someone in their 60s in 2021 could easily spend another two to three decades in retirement. Your challenge now is to make that hard-earned money last as long as possible.
Make a Retirement Budget
Start planning your retirement budget at least a couple years before you actually retire. Financial planners generally recommend replacing about 70% to 80% of your pre-retirement income. Common income sources for seniors include:
Social Security benefits. Monthly benefits replace about 40% of pre-retirement income for the average senior.
Retirement account withdrawals. Money you take out from your retirement accounts, like your 401(k) and IRA.
Defined-benefit pensions. These are increasingly rare in the private sector, but still somewhat common for those retiring from a career in public service.
Annuities. Though controversial in the personal finance world, an annuity could make sense if youâre worried about outliving your savings.
Other investment income. Some seniors supplement their retirement and Social Security income with earnings from real estate investments or dividend stocks, for example.
Part-time work. A part-time job can help you delay dipping into your retirement savings account, giving your money more time to grow.
You can plan on some expenses going away. You wonât be paying payroll taxes or making retirement contributions, for example, and maybe your mortgage will be paid off. But you generally donât want to plan for any budget cuts that are too drastic.
Even though some of your expenses will decrease, health care costs eat up a large chunk of senior income, even once youâre eligible for Medicare coverage â and they usually increase much faster than inflation.
Develop Your Social Security Strategy
You can take your Social Security benefits as early as 62 or as late as age 70. But the earlier you take benefits, the lower your monthly benefits will be. If your retirement funds are lacking, delaying as long as you can is usually the best solution. Taking your benefit at 70 vs. 62 will result in monthly checks that are about 76% higher. However, if you have significant health problems, taking benefits earlier may pay off.
Use Social Securityâs Retirement Estimator to estimate what your monthly benefit will be.
Figure Out How Much You Can Afford to Withdraw
Once youâve made your retirement budget and estimated how much Social Security youâll receive, you can estimate how much youâll be able to safely withdraw from your retirement accounts. A common retirement planning guideline is the 4% rule: You withdraw no more than 4% of your retirement savings in the first year, then adjust the amount for inflation.
If you have a Roth IRA, you can let that money grow as long as you want and then enjoy it tax-free. But youâll have to take required minimum distributions, or RMDs, beginning at age 72 if you have a 401(k) or a traditional IRA. These are mandatory distributions based on your life expectancy. The penalties for not taking them are stiff: Youâll owe the IRS 50% of the amount you were supposed to withdraw.
Keep Investing While Youâre Working
Avoid taking money out of your retirement accounts while youâre still working. Once youâre over age 59 Â½, you wonât pay an early withdrawal penalty, but you want to avoid touching your retirement funds for as long as possible.
Instead, continue to invest in your retirement plans as long as youâre still earning money. But do so cautiously. Keep money out of the stock market if youâll need it in the next five years or so, since your money doesnât have much time to recover from a stock market crash in your 60s.
A Final Thought: Make Your Retirement About You
Whether youâre still working or youâre already enjoying your golden years, this part is essential: You need to prioritize you. That means your retirement savings goals need to come before bailing out family members, or paying for college for your children and grandchildren. After all, no one else is going to come to the rescue if you get to retirement with no savings.
If youâre like most people, youâll work for decades to get to retirement. The earlier you start planning for it, the more stress-free it will be.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.