When I began to save up significant monies (after paying off all my debt), I also began wanting to invest that money. The advantage of investing is obvious; your money has the potential to make you even more money while you do nothing. But as I made my initial discoveries on the topic I also learned about the disadvantages of not investing. If you have a lot of money doing nothing but sitting in a savings account, then the interest you receive is negligible, and the value of that account will depreciate due to inflation. In this situation, time works against you. I was in that situation, and wanted my savings to work for me instead of idly depreciating. Here are the steps that I took, and the steps that I recommend to others who are just beginning to accumulate the foundation of their retirement, in order to best take advantage of the time left between now and retirement.
Step 1: RESEARCH
So keeping a lot of money in a savings account is bad. What are our other options? I would argue that the first thing a novice investor should do is research the different types of accounts you can open, how each is taxed, when (and how much) you can deposit or withdraw, and other advantages/disadvantages of each account type. I understand that this sounds boring as hell, but YOU WILL NEED TO KNOW THESE THINGS EVENTUALLY and the sooner you sit your ass down and read about it, the more time you have ahead of you for your assets to grow. I guarantee that no matter when you learn about these things, you will regret not having learned about them sooner, because taking advantage of this knowledge = free money.
You already know about checking accounts and savings accounts. Your investment research homework assignment is to look up these other common account types:
- Traditional 401(k)
- Roth 401(k)
- Traditional IRA
- Roth IRA
And answer these questions for each account type as you do your research:
- How would I open one? Through an employer? A bank?
- How do I make deposits? Are my contributions pre-tax or post-tax? Is there an employer match? Is there an annual limit on how much I can contribute?
- How do I make withdrawals? Are they taxed or penalized depending on timing? Are there other fees?
- How do I choose how the money in this account is invested? What are my investment options? (More on this below)
Part of the reason I’m encouraging you to do this research on your own is that I’m not an expert, just an enthusiast. Your situation, your employer, and your goals may all be different than mine and by doing this research yourself you can put together a plan suited specifically for you.
Step 2: INVEST
Open up one or more of the above account types and choose how the contents of that account are invested. I especially recommend opening up a Roth IRA and contributing the max of $5k a year, then using that to buy VTSMX. I like mutual funds managed by Vanguard because Vanguard is owned by the funds themselves (and consequently owned by each and every investor in these funds). VTSMX is a stock market index fund which means that it is already diversified (so you’re not putting all of your eggs in one basket). The stock market always goes up in the long term (look at any ten-year period, even those containing depressions/recessions, and you’ll find that this is true) so an index fund like this is a safe, solid way for your money to do better than it would in a savings account.
But hey, maybe you like a little more risk. Do the research and have fun investing. Have a long-term mentality and watch your assets grow. Use the time you have; the more the better. And don’t panic 🙂