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How To Start Investing

You’ve decided you want to start investing. Now what? Read on for our investing basics guide on how you can start investing! We address your account options, vehicle options, budgeting for investing, affirmations, and drop a ton of helpful resources for you.

How to start investing

You’ve decided you want to invest….Now what? In our latest episode with Dr. Hans, The Investing Tutor, he gave us his three pillars of financial security: saving for emergencies, investing, and paying off debt. Typically, we think of these streams of our finances as separate. But pillars only work when they are happening in tandem, meaning: you can be learning how to save, how to pay off debt, and how to start investing all at the same time.

Here is what you need to know to get a base-level understanding of how to start investing, aka one of Dr. Hans’ pillars and the main tool we see as your path towards generational wealth.

Investing Account Options

You have a handful of options in terms of which type of account you can open. Everything about finance is personal, including investing. As you think through how to start investing, you should choose the account that best fits your situation, including your needs, goals, income level, and employment status.

Roth vs Traditional

This is an adjective; you can’t have a “Roth Account” or a “Traditional Account,” but you can have a “Roth IRA Account” or a “Roth 401(k) Account.”

Roth, at its most basic term, simply means that the money you contribute to your account is post-tax. This means that, upon withdrawal, you will not be taxed on any gains and money withdrawn.

Traditional means the opposite. The money you contribute is tax-deferred, meaning you can get a tax cut today and count your contributions against your taxable income. However, since you have not paid taxes on this money , you will have to pay taxes on the money contributed and earned through capital gains as you withdraw from your account.

Some things to consider when choosing between the two:

  • What tax bracket are you currently in?
  • Do you expect to be in a lower or higher tax bracket at retirement? AKA would you benefit from a tax-break now or later?
  • What is your income level? (high-income earners, for example, don’t qualify for a Roth IRA)

Tax-Advantaged Accounts

These are accounts that are either tax-exempt, tax-deferred, or offer some other form of tax incentive.

401(k)

You’ve probably heard about these accounts at some point in your life. They are more widely-known because they can typically be opened through your employer. These are employer-sponsored retirement accounts, so you will elect a certain percentage per paycheck to go into your 401(k). Here are some basics:

  • Some employers will offer a match on a certain percentage of your total salary (aka free money!)
  • Your investment options are pre-selected by your employer
  • If you leave your employer, you have options to move your account and contributions

Read our blog piece, Everything You Need To Know About 401(k)s to receive more in-depth information on this investment account.

IRA

IRA stands for Individual Retirement Accounts; anyone with a W-2 source of income can open one of these accounts! For some people, an IRA is a more accessible account because you are not restricted to your employer. Maybe your employer doesn’t offer a 401(k), or maybe you don’t think the investment vehicle options offered by your employer are good. An IRA, either Roth or Traditional:

  • Offers a diversity of investment vehicles
  • Has set contribution limits
  • Is restricted to contributions coming from earned income (if you are on a payroll, you have earned income)
  • Can start withdrawing at 59 1/2

Read our blog piece, Everything You Need To Know About IRAs, to receive more information on an IRA, including what the contribution limits are, the types of IRAs, and how to open an IRA.

Taxable Accounts

The following is an account that does not have the same tax-benefits as either of the prior two have.

Private Brokerage Account

You open this account at any major financial brokerage. Your options for investment vehicles are unlimited; you generally have access to any kind of investment vehicle, dependent on your brokerage and your status as an investor (ex: riskier forms of investment might not always be open as you start off).

These accounts are not tax-efficient because you are paying taxes on the amount you contribute plus taxes on the capital gains you realize, meaning you have sold assets or withdrawn.

Where Do I Open My Account?

What you’re looking for is a brokerage, which is what connects a buyer (you) and sellers (the New York Stock Exchange). The brokerage that you choose depends on the investment product that you are looking for.

Be sure to check out discount brokerages like Fidelity, Charles Schwab, and Vanguard, which are some of the top brokerages out there. You can also use newer investing apps like Public!

Investment Vehicles

Contributing money into your accounts is not investing! It is part one of investing, but if that is all you do, you will be disappointed in a few years as you check back in with your account. When thinking through how to start investing, remember the following steps:

  1. Open an investing account
  2. Contribute money
  3. Purchase securities, or investment vehicle

There are different levels of difficulty and expertise to these options. So as you think through how to start investing, consider this ladder:

Beginner

  • Index funds
  • Mutual funds
  • ETFs

Read our piece on how to decide between index funds or ETFs.

Intermediate

  • Individual stocks
  • IPOs
  • REITs

Advanced

  • Options
  • Futures
  • Day trading
  • Crypto
  • Buy & trade on margin

If you are reading this, you are most likely a beginner! Focus on learning more about that initial block of the ladder.

Read our piece on how to research individual stocks.

Identify Your Investing Budget

Now that you’ve learned about your account and vehicle options, you have to decide on the most important thing: how much you can feasibly contribute per month.

One of our tips for how to build wealth in 2021 was to pay off high-interest debt. This is called toxic debt. Returning to Dr. Hans’ pillars of financial security, here are three things you can consider placing in your budget:

  1. Creating an emergency fund
  2. Paying off toxic debt
  3. Investing

You have a handful of options when it comes to choosing a budgeting method. If you try one method and don’t experience success, that’s okay, you got plenty of other options.

And if you’re working on financial goals alongside a partner, check out Episode 69 with Gay Husbands on FI/RE and our blog piece on how to budget as a couple.

Once you nail down a budget, you will get a better idea of what a sustainable investing strategy can look like for you. Maybe at first you start off with random lump-sum contributions; that’s okay! The goal, however, is to develop a strategy around it.

Affirmations

As first-generation woman of color wealth-builders and investors, sometimes one of our biggest roadblocks can be mindset. We’ve never done this before, and chances are, we haven’t seen anyone else do it. Repeat this to yourself until you believe them.

You are worthy of wealth

You deserve a life of abundance and safety.

Resources

You know we invite some AMAZING people on the podcast. Check out these episodes for some amazing overviews on how to start investing:

And check out our list of the top personal finance books to get your money right in 2021.

Stay building wealth, stay poderosa.

Check out these Yo Quiero Dinero affiliates to accelerate your investing goals:

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