How to start investing

Maybe you just landed your first full-time job. Or maybe you’re finally ready to cross it off your to-do list. Whatever your reason, here’s how to get started.

Tags: Investing, Investments, How to
Published: March 23, 2021

Investing isn’t a one-size-fits-all activity, so there are a few things to consider before you invest, as well as a few investing questions to ask (such as financial goals and feelings toward risk) that can help guide your overall strategy.

Once you’re ready, here are three ways to start investing.

 

1. Make the most of an employer match

A simple way to start investing, if it’s available to you, is through an employer-sponsored retirement savings plan, such as a 401(k), 403(b) or IRA.

Employer-sponsored retirement savings plans have three advantages:

  • Contributions are directly withdrawn from your paycheck, typically with pre-tax dollars. So not only are you investing, you’re also lowering your taxable income.
  • Many employers match contributions, up to a certain amount.
  • Earnings grow tax-deferred, so you won’t pay annual taxes on any capital gains or dividends.

You’ll be asked to select your asset allocation, or the mix of investments you’d like to invest in. These types of plans often include a selection of mutual funds. Mutual funds are large, professionally managed investment funds that offer a broad exposure to different stocks and bonds.

While you can choose your own investments, the easiest way to begin is to select a target date fund. A target date fund is a mix of broadly diversified investments based on your anticipated retirement age and automatically rebalances as your targeted retirement year approaches.

Employer-sponsored retirement accounts come with annual contribution limits. There is also a 10 percent tax penalty if you withdraw money before age 59 ½ (certain exceptions apply). 

 

2. Open an IRA

If you don’t have access to an employer-sponsored retirement plan or are looking for tax diversification, you may want to consider an individual retirement account, or IRA.

An IRA is a tax-advantaged retirement account in which your earnings grows tax-deferred or tax-free, depending on the account type. There are several types of IRAs, including traditional IRAs, Roth IRAs, and even IRAs specifically for self-employed or small business owners.

Most people are eligible to open and contribute to a traditional or Roth IRA, and you’ll have thousands of investment options to choose from. One easy way to open an IRA is through a robo-advisor. You select your financial goal, timeline and risk tolerance level, and the robo-advisor selects, monitors and adjusts (as needed) your investments for you.

Many robo-advisors invest in low-cost exchange-traded funds (ETFs). ETFs are similar to mutual funds, but instead of investing directly into a fund, you can buy shares of the fund on a public exchange, similar to a stock. ETFs are often built to track specific things, like an index or a basket of assets (such as stocks, bonds, real estate, or commodities).

IRAs also come with annual contribution limits, as well as a tax penalty for withdrawals before age 59 ½ (certain exceptions apply). Read more about IRAs and 401(k)s.

Learn about your investing choices.

Take our quiz

Offered by U.S. Bancorp Investments

3. Consider non-retirement investing options

If you’ve maxed out contributions to your retirement account/s or have other goals you want to work toward, you may want to consider one of these additional investing options:

  • Health Savings Account (HSA). HSAs  are funded with pre-tax dollars and earnings grow tax-free. Withdrawals are also tax-free if used to pay for qualified medical expenses.
  • 529 education plan. 529 plans are funded with after-tax dollars and earnings grow tax-deferred. Withdrawals are tax-free if used to pay for certain qualifying education expenses.
  • Brokerage account. You can buy and sell taxable investments, such as stocks, bonds, mutual funds and ETFs through a licensed broker or using an online, self-directed brokerage account. Brokerage accounts provide a bit more flexibility when it comes to how and when you access your money. While any earnings are subject to capital gains tax, these types of accounts don’t have any restrictions on when you can make withdrawals.

Continue calibrating your mix

Once you start investing, you may want to factor in other criteria that will help you finetune your investment selections, such as your financial goals, risk tolerance and time horizon (the number of years you have until retirement).

A financial professional can help make sure your investment choices are aligned with your age, goals and tolerance for risk. Keep in mind not every investment decision fits into a flow chart, and you don’t have to choose a single path. After all, you may have multiple objectives, and your goals could – and should—change as you age.

 

Read more about investment strategies by age.

 

Investing in mutual funds involves risk and principal loss is possible. Certain funds involve special risks, such as those related to investments in small and mid-capitalization stocks, foreign, debt and high-yield securities and funds that focus their investments in a particular industry. Exchange-traded funds (ETFs) are baskets of securities that are traded on an exchange like individual stocks at negotiated prices and are not individually redeemable. ETFs are designed to generally track a market index and shares may trade at a premium or a discount to the net asset value of the underlying securities.