Many investors are more than a bit intimidated when it comes to getting started.
They mistakenly assume that investing needs to be complicated in order to be successful.
That belief may even cause them to delay investing, or even to never get on board at all. In truth however, investing can be incredibly simple – it’s often more a matter of pointing yourself in the right direction.
Investing is actually a multi-step process. The best course of action is to start with the simplest types of investments, especially those that will set you up for more advanced investing later on. If you’re a beginner, you should start with these three investments before going any further.
Once you get these going, you’ll eventually have more experience – and more money – for more complicated investments later on.
1. “Invest” in Paying Off Debt
Investors often can’t see paying off debt as a form of investing, but that’s exactly what it is. Though it may not be the type of investment that provides you with an income, it does lower your outgo, and that’s an investment by any definition.
Whether you invest your money in something that pays you 10% per year, or one that will save you 10% per year, it’s still an investment and the return is equivalent in either direction. But paying off debt has other advantages that you won’t find in more traditional investments:
- A tax free investment – When you earn dividends or capital gains on investments, a tax liability is created. When you payoff debt, your return (the interest you no longer have to pay) generates no tax liability at all.
- The return is guaranteed – If you payoff a debt that carries a 10% rate of interest, you’ll have effectively locked in a guaranteed 10% rate of return on the money that you paid off the debt with. That’s a feature that equity investments cannot match.
- It lowers your cost of living – This frees up your budget to have more money to save and invest in other areas.
- Lowering your overall financial risk – Virtually all debt adds risk to your life; risk that you won’t be able to service the debt, particularly if your income is disrupted. By paying off debt you remove that risk from your life.
- Eliminating mental clutter – Debt has a way of weighing on your mind and your emotions. By paying it off, you free your mind to concentrate on more productive activities.
2. Get Into Your Employer’s 401(k) or 403(b) Plan
This is perhaps the simplest way to begin actual investing. This is because it’s more about creating a savings pattern than it is about the technical details of investing. You typically have a fairly limited number of investment options, which you choose when you set up your plan, and then your only responsibility is funding the plan.
There are several reasons why you should want to participate in your employer retirement plan as soon as possible, even if you don’t feel that your financial situation is quite ready.
Consider the following reasons:
- Contributions are virtually invisible – You set up payroll deductions with your employer and the money comes automatically out of each pay period.
- You can invest as much or as little as you choose – Just for the purpose of getting started, you can choose an income percentage that you’ll hardly notice, like 3% or 4%. Later, you can increase your contributions as your finances allow.
- The government subsidizes your investment – Because contributions to a 401(k) or 403(b) plan are tax-deductible, at least part of the money you’re contributing comes from lower income taxes, minimizing the impact on your budget.
- The company match – Many employers offer a match on your contribution. This is typically something on the order of 50% of your contribution, up 6% – which translates to a 3% match. If your company offers this, then you should make the maximum contribution that will produce the highest company match. It’s virtually found money.
- Investments grow on a tax-deferred basis – This means that any interest, dividends, or capital gains will not be taxable until you begin to withdraw the money. This will provide you with far greater investment returns than you can get with taxable investments.
- There’s often a borrowing provision – The IRS will permit you to take loans against your 401(k) plan of up to 50% of the value of the plan, up to $50,000. This will give you the ability to access at least some of the money if you need it before retirement.
If you have a 401(k) or 403(b) plan at work, start making contributions now, even if it is a very small amount. You can always increase it later as your finances improve.
3. Buying a House – An Investment You Can Use, Complete With Tax Breaks
If you can afford to do so, you should give serious consideration to buying a house as soon as possible. This is especially important in areas where housing is relatively affordable, and may be less expensive than renting an equivalent space. Though it may be more difficult to qualify for a mortgage than it was a few years ago, property values in many markets have declined considerably, which largely offsets the tighter mortgage restrictions.
There are also compelling reasons why owning your own home should be one of your first investment steps:
- An investment that you can live in – Even if a house does not rise in value, it’s providing shelter for you and your family – which gives it a value beyond that of any other investment.
- A silent equity builder – As you live in a house and make your mortgage payments, your mortgage balance gradually declines. Eventually, it will be paid off completely (here’s how to do it faster) if you do nothing more than simply make the scheduled monthly payments. Once the house is paid for, you’re looking at 100% equity. This will be one of the best investments you can make.
- Long-term price appreciation – Though property prices fell sharply a few years ago, and continue to struggle in many markets, the long-term trend with housing is up. Inflation virtually guarantees that this trend will continue in the future. The combination of mortgage amortization and real estate appreciation is a tough investment combination to match anywhere.
- A good place to start a business – At some point in the future, you may decide to start a business. If you do, a house will afford you many more options than an apartment or rental house will.
Much like a 401(k) or 403(b) plan, owning your own home is a passive equity builder. You live in it, make the payments, and over time your equity grows. It’s a long-term process, typically taking 15 to 30 years, but once your mortgage is paid and you own the house free and clear, you’ll have all kinds of options that are unimaginable right now.
If you’re having trouble getting out of the investment starting gate, maybe you’re reaching too high. Start with the most basic investments – paying off debt, contributing to your 401(k) or 403(b) plan, and owning your own home.
If you never do anything more than those three steps, then the investment deck will still be stacked in your favor for the rest of your life.
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