Getting started with investments
Every day, we hear about the importance of saving and investing money. Yet, there is relatively little simple, definite information about how exactly to save money and how to invest it.
Let’s outline one good option of getting started on the path to wealth.
To save money efficiently and consistently, I advocate the “pay yourself first” method. To use this technique, you set up automatic contributions into your savings account. One example of this is having automatic monthly or quarterly sums sent from your checking account to your savings account. The first thing to do in this manner is to accumulate an emergency “cash stash.” Ideally, you accumulate enough money to live on for 6 months or so. This means you should have the amount equal to your monthly income after taxes times six.
If you can afford to start putting money into your investment fund at the same time as you accumulate your emergency cash stash, you should do so. If not, you may want to wait to invest until your emergency cash stash is complete.
If you have an employer-sponsored plan, such as 401k, you should take advantage of that first, especially if the employer is throwing in matching contributions (that’s free money for you).
Then, you should begin to put money into tax-advantaged IRAs. IRAs are Individual Retirement Arrangements; two most common types are Traditional and Roth IRAs. IRS maintains a comprehensive information source on IRAs here (html) or here (PDF). In my opinion, Roth IRA is a better plan; however, you can see for yourself - IRS gives an excellent comparison table of the Traditional and Roth IRAs at the bottom of this page. You can use the above IRS documents to check your eligibility for these IRAs as well. More detail on where to keep your IRA money in future articles.
Then, after you’ve maxed out your IRA contributions and have taken advantage of the tax benefits Uncle Sam has to offer, you can start putting money into your taxable investment account. More detail on taxable investment accounts in future articles.