How to Start Investing
and Build Real Wealth

Ready to learn how to start investing and build the financial future of your dreams?

For most of us that work at least 8 hours per day every day, life can feel like an endless cycle of trading our time for a paycheck.

I don’t know about you, but this is not the way I want to spend the rest of my life!

FIRE Investing

Since we each only have 24 hours in a day, why not put your money to work for you so that you can take back some of that time for yourself?

Investing is the best way to grow your money and even develop a passive income source that could potentially replace your paycheck and allow you to quit your job someday.   

The money you invest will likely keep growing and pay constant dividends even after you stop investing.

Building a successful portfolio is similar to starting a campfire.  It may take some time and effort to get it started, but afterwards it will keep you and your loved ones warm throughout the night with little maintenance. 

Whether you have a lot or a little to invest, the key is to get started.

The earlier you start investing, the more time your money has to compound and grow into real wealth.

What kind of investment account should I open?


Before we learn how to start investing and buy our first stock, we need to determine the purpose of our investing account.  

Do you intend to save for retirement, or are you investing for the short to medium term?

Do you need the ability to access this money quickly, or do you plant to just let it do its thing?

Is this “play money” you intend to grow, or will you be taking a slow and steady approach?

These are some of the questions you should ask yourself when deciding which kind of account to open. Now, let’s discuss the main types of accounts so that you can decide which one is best for you.

Standard Brokerage Accounts

How to start investing for the first time?

A basic brokerage account is your easiest and quickest option to start investing in almost all stocks, bonds, mutual funds, and many other investment vehicles you can think of.  This is also the most flexible account when it comes to how much you can invest (as much as you want), and when you can pull your money out (whenever you want).

Keep in mind that any dividends and capital gains you earn are taxed appropriately.  However, there are special accounts that will help you to avoid paying a portion of your earnings to the government in taxes.

If your goal is to save for retirement, and you’re willing to leave the money alone for years so that it can grow, then you might want to consider opening an account specifically designed for retirement savers.  These accounts will grant you special tax advantages that could help you grow your money even faster.

>> Learn More: The Best Online Brokerage Accounts


Retirement Accounts

How to start investing for retirement? 

Consider an account that comes with special tax-related benefits to help you reach your goals. Be aware that since they are intended for retirement, they also come with additional restrictions as to how much money you can contribute each year, and when you can access the money. 

Here are some of the most common retirement accounts, along with their benefits and restrictions:

Traditional IRA

The Traditional IRA (Individual Investment Account) allows you to invest in basically whatever you like, but caps your maximum contributions to $6,000 per year ($7,000 if you are age 50 or older) in 2020. Money you contribute can be deducted from your gross income during tax time, lowering your total tax burden. 

For example, if you made $50,000 and contribute $5,000 towards your traditional IRA, you will only have to pay tax on $45,000.  This is an excellent way to minimize the amount you have to pay in taxes each year.

Money is not taxed until withdrawn during retirement.  Since your money is not taxed going in, your accounts will grow much quicker and potentially have decades to compound.

As a designated retirement account, try to avoid pulling out this money until you are at least 59 ½.  Otherwise you might have to pay tax on the amount you withdraw plus a 10% penalty.

Roth IRA

The Roth IRA is very similar to the Traditional IRA with one major difference: money is taxed on the way in, and not taxed when you pull it out.

With a Traditional IRA, you do not know for certain what rate the government is going to charge you when you make your withdrawals in retirement. With a Roth, you pay the tax up front, and don’t have to pay a dime on any dividends or capital gains.

This is especially important when you consider the uncertain nature of income tax rates.  If you feel that your income tax rate might be higher when you retire than it is now, it makes sense to pay tax on these contributions today for a tax-free retirement.  With the way the U.S. Government is taking on more debt than ever these days, it is not hard to see rates rising to cover these additional costs.

Maximum contributions for a Roth are also $6,000 per year ($7,000 if you are age 50 or older) in 2020.

Since you already paid tax on the money you contributed, you can withdraw this money at any time. Any capital gains and dividends cannot be withdrawn until you are at least 59 ½ without potentially incurring a 10% penalty.

401(k)

The 401(k) is probably the most common type of retirement account out there as many of our employers offer them as part of their retirement benefits.  While this is typically not an account you can open on your own, let’s discuss some of its features since so many of us have these types of accounts.

Traditional 401(k)s operate in the same manner as Traditional IRAs with money going in untaxed, and then taxed on the way out.  Some 401(k)s also offer a Roth option that allows you to contribute after-tax money for tax-free withdrawals in retirement.

One major difference between a 401(k) and an IRA is the amount you can contribute each year. In 2020 you can contribute a maximum of $19,500. This allows you to put away much more cash towards retirement than you would in an IRA if you are able to max it out.

Also, many companies offer matching 401(k) contributions to their employees. This a benefit that you should definitely take advantage of if offered because you are literally getting free money!


Education Accounts

Financial Education

How to start investing for an education?

A 529 plan is a type of investment account that allows you to invest for educational expenses while minimizing your tax burden.

Similar to a Roth IRA, money is taxed going in and comes out tax free.

However, contribution limits are much higher. They can range from the low $200,000s to over $500,000.

Anyone can open a 529 plan, and they can select for whom the money is intended. So whether you’re planning to go back to school or want to get a head start against those rising tuition costs for your kids, the 529 is worth looking in to.


Custodial Accounts for Kids

How to start investing for your kids?

A custodial account allows you to gift money to your kids, save money for their future, and it can be a great way to teach your kids how to start investing. 

Once opened, you are responsible for managing the assets in the account. However, the child immediately owns the assets and will gain control over managing them once he or she turns 18 or 21 (depending on the state).

Keep in mind that the first $1,050 of dividends and capital gains in this account is untaxed, but any excess will be taxed as income.

What do I need to open an investment account?


Remember:

If you are opening an account for someone else (such as college fund for your kids), you will also need to provide their information (ID, social security number, etc.) as well.

In addition to your basic information like your name, address, phone number, etc., you will also need the following in order to open an investment account:

  • Social security number
  • State issued I.D. such as a drivers license or passport
  • Bank routing number and account number

The government requires brokerages / wealth management companies to collect your social security number for tax purposes.  No, they are not trying to steal your identity.  Any capital gains or dividends in a regular brokerage account, along with contributions to your retirement accounts are reported to the IRS.  

Your state issued I.D. is used to verify that you are the person behind the social security number opening the account. And of course, your banking information is needed in order to send money to and from your new account.

Once your application is approved, fund the account to begin investing. 

Don’t feel pressured to invest a whole bunch of money at once.  Just the fact that you opened and funded the account is further than most people get. Invest whatever amount makes you feel comfortable. 

Arguably more important than how much you invest is how often you invest. If you make it a habit of depositing some cash into your account on a regular basis, you have a good chance of growing your money over time and meeting your goals.

What kind of investor are you?


The next step in learning how to start investing is to understand yourself. 

Are you looking to grow the money you invested or develop a passive income stream?

Do you have a lot of time to research and monitor your investments, or do you prefer a more hands-off approach as you learn how to start investing?

Do you want to protect your wealth by limiting risk and slowly grow it over time, or do you plan on being more aggressive and swing for the fences?

To help you understand what type of investor you are, consider your…

  • …investment goals and objectives
  • …age
  • …years until retirement
  • …risk tolerance
  • …time and availability

What are my investment options?


Now it’s time to decide where you’d like to put your money. Here are some of the most common options on how to start investing:

Stocks

A stock represents a share of ownership in a company. 

Typically, if the company performs well, your shares will increase in value.  However, if your company doesn’t meet expectations… they will likely drop.

Bonds

A bond is basically a loan to the government or a company that pays you back in a certain number of years and pays you interest along the way.

These are generally less risky than stocks because you know when you will get paid back plus how much you will make.  However, since the returns on bonds are much lower than stocks, they should only represent a moderate amount of your portfolio if you are looking for long term growth.

Mutual Funds and ETFs 

Mutual funds and ETFs (Exchange Traded Funds) gather money from a bunch of investors and spread it across different stocks and bonds.

This is ideal if you want to build a diversified portfolio and take a hands-off approach to investing.

Options

According to Investopedia, “an option is a contract giving the buyer the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) the underlying asset at a specific price on or before a certain date.” 

This can be useful if you think the price of a stock will be going up or down, as you can buy them for a much lower price or sell them for a higher price in the future. Remember, if you do not exercise your option to buy/sell the assets or sell the contract itself before it expires, it becomes worthless. 

Options are speculative in nature and can involve substantial risk.  Only invest in options if you understand what you are investing in, and its money you can afford to lose.

Cash

You already know what this one is. Yep, it’s the green bills in your wallet.

Holding a good amount of cash on hand is a great strategy that will allow you to take advantage of investment opportunities (price drops) that will undoubtedly come your way.

How should I invest?


As our disclaimer states below, we are not certified financial advisors and do not claim to be.  You should do your own research and fully understand where you are putting your money before you start investing.

That being said, here are some investing strategies you could consider as you learn how to start investing and progress in your investing career:

Investing Strategies

Beginner

Beginners should consider investing in mutual funds, ETFs and bonds while they continue learning how to start investing. This will help to build the knowledge needed for future success, and at the same time help them to build a diversified portfolio that can weather the ups and downs of the market.

Intermediate

Once you have saved your first couple thousand in mutual funds and have a good familiarity of how to evaluate the value of a stock, you should consider investing in individual equities.  This can bring bigger gains, but also involves more risk, so be sure to fully understand how to start investing in stocks.

Advanced

Only once you have mastered the basics and have a solid amount of experience in the market, should you consider investing in options and other advanced investment vehicles. These can sometimes involve significant risk, but also carry a huge upside.

Have any tips to share on how to start investing?


I hope this page helped you learn a little bit about how to start investing.

We all have to start somehow, and chances are there are lots of other people that will read this page after you looking for the same information.

Do you have any success stories to share?

Or how about any things to look out for?

We’d love to hear about your strategies on how to start investing in the comment box below!


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