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How to Start Investing: A Step-by-Step Guide

Getting started with investing can feel daunting, especially if you aren’t sure how it works. The good news is that it doesn’t have to be complicated. It begins with clarifying your goals and getting familiar with different investment accounts. From there, you can choose your investments and hit the ground running. Here are five steps to start investing.

1. Know Your Goals

Begin by getting clear on why you’re investing in the first place. Some financial goals may be years away, while others are more immediate. No matter your timeline, it’s possible to use investing to supercharge your savings and get you there faster. Your goals might include:

• Saving for retirement
• Buying a home
• Growing your family
• Launching a business
• Saving for college
• Traveling

2. Understand Different Types of Investment Accounts

All investment accounts are not created the same, and each type of account can help you reach different goals.

Retirement Accounts

401(k): A 401(k) is an employer-sponsored investment account designed specifically for retirement. You’ll get a tax deduction on your contributions, and your employer might fund your account too. You won’t owe taxes until you withdraw funds in retirement. Early withdrawal penalties may apply, and required minimum distributions (RMDs) begin at age 73.

Traditional IRA: You can open an individual retirement account (IRA) on your own. A traditional IRA allows for tax-deductible contributions. Like a 401(k), you’ll enjoy tax-deferred growth. The same early withdrawal penalties and RMD requirements for a 401(k) apply. A main difference is that annual contribution limits for IRAs are much lower than 401(k)s.

Roth IRA: You fund a Roth IRA with money you’ve already paid taxes on. That means you won’t be taxed on retirement withdrawals. You can tap your contributions whenever you like without paying taxes or a penalty, but the rules are different for investment earnings.

Brokerage Accounts

A brokerage account is an investment account you open and fund yourself. They’re different from retirement accounts in that:

• There are no tax benefits, and you’ll likely be taxed on investment gains during the year they’re realized.
• There are no contribution limits or early withdrawal penalties.
• RMDs do not apply.

Brokerage accounts are flexible and can be a good way to invest for non-retirement goals. As with any investment account, regular market volatility could cause your balance to go up and down. If you’re saving for a short-term goal, you might consider low-risk investments like certificates of deposit (CDs).

Education Savings Accounts

529 savings plan: This is an investment account that can be used to pay for college, graduate school, or K-12 tuition. Money in a 529 plan grows tax-free, and federal income taxes won’t apply if funds are used for qualified education expenses. That includes tuition and fees, room and board, course materials, and more. You might also get a state tax deduction or credit on your contributions.

Coverdell education savings account (ESA): Like 529 savings plans, Coverdell ESAs allow your money to grow tax-free, and withdrawals that are used for qualified education expenses are exempt from federal income taxes. Coverdell ESAs typically have a wider set of investment options, but contribution limits and income rules apply.

3. Open Your Investment Accounts

Below is a brief explainer on how to open different investment accounts:

401(k)s: This type of account is offered as an employee benefit. Some companies automatically enroll new employees, while others may require you to opt in. You can contact your employer to learn more about your plan administrator and investment options.

IRAs: You can open an IRA through an online broker, robo-advisor, bank, or credit union. This can usually be done online (just have your basic personal information and Social Security number ready).

Brokerage accounts: Opening a brokerage account starts with choosing a brokerage. You might opt for a stockbroker who offers personalized advice, or a robo-advisor that puts things on autopilot. Robo-advisors use an algorithm to make investment choices for you based on factors like your age and risk tolerance. Whatever you choose, you can likely open and fund your account online.

529 plans: These accounts are offered through state programs. You can open a 529 plan through a broker or directly with the state sponsor or program manager.

Coverdell ESAs: You can open a Coverdell ESA with any bank, credit union, or brokerage firm that offers them.

4. Choose Your Investments

Once your accounts are open, you can explore the following assets and start investing. The right ones for you will depend on your risk tolerance, financial goals, and retirement timeline.

Low-Risk Investments

Investing in lower-risk investments means you’re less likely to lose money, but your returns will probably take a hit. These investments include:

• CDs
• Bonds
• Money market accounts
• High-yield savings accounts

High-Risk Investments

High-risk investments usually offer better potential returns than low-risk assets, but you may be more likely to lose money. These include:

• Stocks
• Real estate
• Cryptocurrency
• Hedge funds
• Initial public offerings (IPOs)

Mutual funds and exchange-traded funds (ETFs) generally offer a safer way to invest in stocks. They pool money from investors to purchase a mix of stocks, bonds, and other securities. That can help spread out investment risk and provide built-in diversification.

5. Stay Diversified

When you start investing, it’s wise to hold a variety of assets in your portfolio. That includes a mix of high- and low-risk securities across different asset classes. If you experience losses in one part of your portfolio, gains in another could help soften the blow. The right asset allocation for you will depend on your age, investment goals, and appetite for risk. Periodically rebalancing your portfolio can help you maintain your desired asset allocation.

The Bottom Line

If you’re wondering how to start investing, first check with your employer to see if a 401(k) is on the table. You can also use an IRA to help shore up your nest egg. Meanwhile, brokerage accounts and education savings accounts can allow you to invest for other financial goals. What matters most is staying diversified and sticking to your investment plan, even during periods of market volatility.

Regardless of your investment portfolio, it’s always wise to maintain strong credit health. Experian makes that part easy. You can check your credit score and credit report for free at any time.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals with the best mortgage solutions.

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