If you are beginning to get a handle on your personal finances and your budget gives you money to invest, what should your first investment be? Many of my experienced readers may already have an answer forming in their head, but to those of us who haven’t been investing for long, this is an important question to ask. This post may not be for those who are still learning the in’s and out’s of credit cards or those needing credit cards guide. However, the odds are that if you are being responsible with your finances, you are wondering what is the best use of your money. I have asked this same question time and time again. In fact, this is one of the reasons I started this personal finance blog. I wanted to help people answer these types of questions.
Why Investing For the First Time Is So Daunting
This is a question that everyone asks at one point. Well, everyone that is planning for their future, at least. I remember when I was in middle school when I was asking my dad what stocks were. I remember him trying to explain the intricacies of the stock market and how it works. It seemed like a great mystery.
In fact, not knowing where to begin is half of the struggle. There is not only an entire set of vocabulary that is associated with possible investments like stocks, dividends, premiums, return rate, but also tons of acronyms that many experienced investors don’t remember what they stand for: 401(k), 403(b), IRA, etc.
If you find yourself overwhelmed by the many choices ahead of you, I certainly understand your position. It is a tough place. It is particularly hard because you are afraid that everything out there that is encouraging you to do something is a scam or ploy to steal money from you.
My First Investment Choice
When it comes to investing, my advice would be to start with the retirement plan offered by your employer. Most employers offer a 401(k) or 403(b). For all practical purposes, these are very similar, and which one your employer offers will depend on whether or not it is a for profit company or a non-profit. Both offer a pre-tax way of investing for retirement. This takes money out before you are taxed and puts it in an investment account.
The Benefits of Investing in 401k or 403b
There are many reason why this is my first choice in investing. It offers an easy way to start saving and not be overwhelmed by all of the options. Most likely, your employer will even offer an account that manages itself. You don’t have to worry about which stock is going to perform best or anything of the sort. It also offers other great benefits. You can automate your investments, so you don’t forget to invest money now.
Because this investment is pre-tax, it will also reduce your taxable income, thereby saving you even more money. You will have to pay taxes when you are using it as income in retirement, but most likely you will be living at a lower income tax bracket in retirement than most of your years when you are working. This means, it is saving you overall.
The Best Part!
While these benefits are all great, the best part about starting with your employer’s 401(k) or 403(b) is that they will often offer matching funds. What exactly does this mean? Well, it depends on your employer. Some employers are more generous than others, but it is not uncommon for employers to match up to $1000.
This means that you can put aside as much money as you want (as long as you stay within certain IRS limits) and if you invest at least $1000, you employer will contribute an EXTRA $1000 into your fund. As any experienced investor knows, that is FREE MONEY! With a generous matching policy, anyone can be successful. The easiest way to plan for retirement is to max out this fund.
Once you start investing with your employers retirement fund, then you can look to many other great options like a ROTH IRA or other great options. This will allow you to start saving now and not get overwhelmed by the many options available.
*featured image provide by: SMJJP via FlickrCC