What Should Your First Investment Be?

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.

First Investment
What Should Your First Investment Be?

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

26 Responses to What Should Your First Investment Be?

  1. Great post. My first investment was my employee pension at work as as well as a Canadian savings bond. When I was first starting out this worked. Since then I have branched off into index funds which seem to do well.

    I agree with you about the free money. If you can get an employer match, why wouldn’t you invest. This is extra money you can use in your retirement. Bonus!!

  2. Definitely 401(k) first, up to the match. A number of companies also do an Employee Stock Purchase Plan which comes with a nice built in discount – also toss into that.

    After that it gets fuzzy, but probably a Roth IRA for most (US Based) people.

  3. 401(k) first, I would probably go above the match and max it out at 15% with compounded interest in your 20’s you are looking at a nice retirement. Our match is 100% to the first 3% so it is nice to get that “free money” of course you have to watch your vesting schedule to make sure it will be your money when you leave the company.

  4. I would definitely say to start with the 401k or other managed plan. Sometimes the best way to learn is to just jump in and ask questions. And the plan sponsor should be able to answer a lot of the questions you have.

  5. Haha — when I was in middle school, I was explaining to my dad what the stock market is! He’s an immigrant who didn’t grow up knowing much about the US economy other than “things are good over there.” In middle school, our teacher — a Catholic nun — delivered weekly stock-picking lessons, and I’d come home and impart these to my parents. It inspired them to buy their first batch of funds.

    I’m self-employed, so no “free money” for me. I guess I’ll just have to try to earn more!

    • That’s quite the reversal! That is one of the down sides to self-employment. While I am considering it, I am hesitant for that reason and others.

  6. Don’t know that a 401K matching offer from an employer is all that common. Perhaps with large companies, but some mid-size and small companies don’t even offer a 401K plan, let alone a match.

    How about just starting with laddered CD’s?

  7. My first and only investment is in 401K. Sadly, but my employer doesn’t match anything. That’s all we can afford now. Our main focus is on paying off debt and then, hopefully, moving out of condo and into a house. I considered a CD before, but our money all tight up in bills. 🙁

  8. My first investment was 401k too. It is an instant 100% return on investment that a lot of people leave on table. The problem is what investments should go IN the 401k, that is what I think trips a lot of new graduates taking up the job.

  9. My first investment was by an uncle when I was 5 or 6. I followed it. Later, the first thing I put some real money in was a mutual fund. I bought it at the highest point it had that year, then droped 15%. I was bummed, but over a few years, it came back…

    Once I started working at a decent company, I instantly signed up for the company 401k. So I agree, a 401k rocks (so far…) 🙂

  10. I absolutely agree with investing in 401K as your first investment. That’s what I did and continue to do so still… After your 401K is maxed out, then you can try investing in stocks or even mutual funds. You made a very good advice in this post!

  11. Good post. To it I would add that if you are young, focus on stock funds inside your 401k. No asset class beats stocks over the long run. Diversification is important and people have a right to be nervous, especially after what happened to the markets in 2008, but if you look at the stats, including the 2000, 2008 and even the 1929 bear markets, stocks have returned an average of roughly 11% per year; almost double what bonds return. If you are nearing retirement age, please ignore this advice. 🙂

  12. This is a good point. Although if you are planning to shift employers, it may be a bit more complicated. A 401k can definitely be helpful in the long run. Just know what you need to do first.

  13. […] Best First Investment – 20’s Finances – 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). […]