How to Start Investing to Build Wealth and Save for Retirement

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The days of storing your savings under a mattress are over. Cash under your mattress can’t even keep up with inflation, let alone grow enough for retirement. 

Today, financial experts agree the best way to build wealth and plan for retirement is through investing

But, according to the Pew Research Center, only 52% of U.S. families participate in the stock market by way of an investment retirement account.

If you’re in the other 48% or are an inexperienced beginner, here’s how you can get started.

Set Yourself Up For Success: Prep Work

To set yourself up for success, build a process that lets you contribute a portion of your paycheck regularly each month. To free up the funds, I recommend you have a minimum of three months’ worth of emergency funds saved up (three times your monthly expenses), your debt is stabilized (no interest-based charges), and you are following a budget plan.  

Robo-Advisor Route 

A robo-advisor is an algorithm-driven investment platform that uses client financial data to offer digital investment advice. Essentially, the robo-advisor will automate your portfolio management. You will answer upfront questions on your finances and investing goals, and the robo-advisor will make real-time decisions with your investments. 

Some examples of robo-advisors are: Fidelity, WealthSimple, WealthFront, Betterment, and Ellevest and can sometimes be less expensive than hiring a financial advisor. 

In my experience, the robo-advisor route is a great way to start investing as a beginner. It’s cheaper than hiring a professional financial advisor. To manage a robo-advisor account is low-maintenance because it runs on auto-pilot.  

Do It Yourself (DIY) Route

If you’re interested in managing your portfolio and investments yourself, you can go with the DIY route. 

Here are the DIY steps:

1. How do you want to invest? 

Index funds are a type of mutual fund or exchange-traded fund (ETF). Index funds mimic the top companies in the financial market, such as the Standard & Poor’s 500 Index (S&P 500), and are considered a safe investment.

Sector funds are mutual funds and ETFs focused on sectors of industries such as technology, healthcare, agriculture, and manufacturing.

2. Choose a brokerage service:

A brokerage account is where you deposit and store funds for investing. Vanguard, Fidelity, Charles Schwab, Public, and WeBull are a few examples of brokerage service accounts. You can link your bank account to fund your brokerage account on a regular cadence.   

3. Choose an account type:  

Taxable account: A taxable account is a brokerage account. It’s used to store and save funds for investing but has fewer deposit and withdrawal restrictions compared to an IRA or 401(k). But it lacks tax benefits- meaning the income you earn through investing using a brokerage account is taxable when you choose to withdraw it. 

Tax-efficient account: Most experts recommend utilizing a tax-efficient investment vehicle especially as a beginner. That means using a Roth IRA or Roth 401(k) account. 

A Roth IRA is tax-efficient because your investments will be exempt from income tax when it’s time to withdraw for retirement. That is because you pay taxes before you invest, not when you withdraw. A Roth IRA account is the most commonly available to everyone with income below $140,000 (per 2021 IRS rules).

Check with your employer to see if they offer a tax-efficient retirement account. Then see if you can max out your yearly Roth IRA contributions. You can contribute up to $6,000 per account per year. If you plan to invest more than $6k per year, you’ll need to open another investment account. 

4. Make a deposit and set up automatic contributions. 

A solid starting point is a $500 investment followed by $100 contributions per paycheck. However, if you cannot afford $100 per paycheck, start with what you can contribute. The important lesson is doing it regularly and committing to it. You can set up automatic contributions through a bank account. From there, you can adjust as your income level, lifestyle, and money goals change. 

5. Diversify your portfolio.

To limit the risk of a volatile stock performance, the safest route is to spread out your investment choices. As an example, 25% could go into a sector healthcare ETF, 70% into various S&P 500 index funds, and 5% into bonds. If you spread out your investments, you have less exposure to its potential failure and your mitigating overall risk. 

6. Patience is a virtue.

The best advice I can give an investing newcomer is not to obsess over short-term trends. When you invest, some grow anxious watching your money go up and down. The secret is, don’t look every week or every day. Keep investing each paycheck and focus on the long-term trend. 

Interest Compounded

When you invest in the stock market, you will benefit from compounded interest. This is earning interest on your balance and earning interest on your interest. The earlier you start investing, the more your balance and interest compounds. The power of compound interest can be demonstrated using this compound interest calculator provided by the U.S. Securities and Exchange Commission.  

Comfortable? Double Down

Over time you’ll get the hang of it. 

After you start feeling more comfortable with the process of investing, start increasing your automatic deposit amount every year. A good rule of thumb: increase your contribution percentage even further as you earn more income. 

The purpose of most investing is to help you save for your retirement. The more you save, the earlier you can retire. To better understand what goals to strive for, you can set your savings goals based on your age. As a guide, you can use savings benchmarks and match that to age milestones. 

Once you get the hang of it or your account balance significantly grows, you may want to consider hiring a professional financial advisor to keep a closer eye on your nest egg.

Personally, investing helped fuel my wealth-building. With sound investing strategies and low-risk diversification, I was able to purchase a home. 

Remember the Money Mantras

Investing requires a strong and patient stomach. It’s essential to be okay with your money going up and down over time as you continue to invest your committed monthly amount. So as a beginner, and even for the experienced, here are some money mantras that can help get you through the highs and lows. 

  • The best time to start investing is now.
  • Time in the market is better than timing the market.
  • There’s no gain or loss until you sell. 
  • Just like inflation, taxes will go up, and so will the stock market. 
  • Stay committed and focused. Keep it slow and steady. 

We’d like to hear if you found this process helpful. If you have any questions or feedback, please email me at hello@firstmilli.com