Personal Finance and Investing

I’ve spent a lot of time lately reading about how to get started as a first time investor. For me, an avowed spender, the concept of risking money and hoping that it grows for use in the future is very foreign. The closest I had been to “investing” until recently was the blackjack tables in Vegas — or so I thought. But it turns out that things I have been doing for years are actually forms of investment and I just didn’t realize it.

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Investing For Beginners: Basic Steps To Start Investing

Now that I know I’m on my way to becoming my own investing expert (move over, Suze Orman!), here are my tips for others who are just getting started:

• Get the 4-1-1 on your 401(k). OK, so it’s a little less glamorous and exciting than the idea of day trading, but don’t overlook the obvious. If your employer offers any sort of match for 401(k) contributions, try your best to take full advantage of that benefit before looking to other investment options. To not do so is to let money slip away. Plus, because 401(k) contributions are made from pre-tax earnings, you reduce your taxable income by the amount you contribute. Would you rather invest your money for your future, or hand it over to Uncle Sam so that it can fund more swank parties at AIG?

Tip: If you decide to leave your employer, think of moving your 401(k) money to a rollover IRA, where you’ll have more control over your funds. Where to start? Check our list of best online brokers with reasonable commission rates and great resources for investment learning.

• Don’t forget the tax benefits of a good old IRA. You can further reduce your taxable income by putting your money into an IRA. The maximum IRA contribution for 2010 is $5,000 for people age 49 and younger and $6,000 for people age 50 and older.
• Invest in your child’s future with a 529 account. Setting up and regularly contributing to a 529 college savings plan for your kids as quickly as they can be legally counted on a census will not only help to buffer the pain of tuition costs for you when they hit college age, but will also allow them to avoid at least some college debt, giving them a nice head start into a financially secure adulthood.
• Buy a house. Do you own your home? If yes, you’re a real estate investor. Your home is a valuable asset and is subject to all sorts of market risk, as the hundreds of thousands of Americans currently facing foreclosure can attest. If you’re not already a homeowner, now is a great time to snap up a wonderful home at a price below its market value (well, unless you live in a major metropolitan area where real estate prices are still beyond reach). Live in your home for as long as you can, make improvements as needed, and don’t touch any equity that you build (Repeat after me: My home is not an ATM machine.). When retirement rolls around, you should be able to sell your little slice of paradise and buy a new slice of paradise in a tropical location for cash. Theoretically, of course.

Presuming that you’ve got money left over, here are a few more tips:

• Determine how much “extra” you have to invest. Do you have a little extra in your online bank account or credit union? Do you have more money than you really need to keep on hand to cover emergencies? Take the excess and make an initial lump sum investment with an online discount broker. Then, determine how much you can invest out of every paycheck. Even if it’s only $25 or $50 every couple of weeks, starting now will help you to get in the habit of putting money away regularly. As your income grows, increase the amount that you regularly sock away.
• Decide where you’re going to put the money. Hint: KISS (as the saying goes: keep it simple and stupid). If you consider yourself a small investor (most of us do) who does their investing on the side, then there’s no point in spending hours upon hours hand-picking stocks and bonds to build your portfolio. Instead, determine your needs and find a mutual fund, or set of funds, that fits those needs. Key points to look for: low fees, consistent performance, and a management company that is strong on service. I personally like Vanguard, but I’ve got a friend that swears by T. Rowe Price. You can also find index funds available through an online broker.

There are dozens of options for investment houses out there, and some even offer sign-up bonuses for new customers (check these online stock trading promotions for more information — and no, you need not be an active trader to receive a bonus). There’s nothing better than free money! Except, perhaps, knowing that you will be OK in your golden years, with or without Social Security.

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