Investing beginners that are new to investing understanding some basics can help get you started in the right direction even if you don’t feel ready yet.

For many investing beginners, investing comes secondary to home buying, so understanding the basics of investing doesn’t get investigated until they there is excess money to invest.  So if you are investing beginner, learning about investing and the process of it prior to you having enough funds to invest is the smart way to go, since there isn’t a minimum dollar amount requirement needed to start with when investing, and taking advantage of any method to build your wealth is important.  So here’s some simple concepts to help someone new to the process get started.

Investing Beginners and Building Wealth

For those investing beginners new to investing wealth is built in two simple ways, by earning or acquiring more money or assets of worth, or by spending less money than you bring in.  Spending less money than you bring is more important than earning more money.  It’s more important because we have far greater control over how much we spend versus how much money we are able earn.  As an example, you can choose to live with a less expensive pair of jeans easily versus being able to get your boss to give you a raise.  Budgeting and sticking to it is a necessary process for you being able to retire.  

Investing beginners

When you start budgeting include all of your expenses, but the most important expense line item that you can’t forget is to pay yourself first.  This sounds hard at first, but if you set it up as an automatic payment that comes out of your paycheck or bank you will discover that you will not miss it.  Most company sponsored 401k plans, payroll providers, and most banks will do this for you.  If you don’t know it’s there it’s a lot simpler to not miss, and you’ll learn to work with what you have.  Start with five or ten percent of your take home and see how it goes. 

Investing beginners new to investing remember to first establish your emergency fund of four plus months of living expenses first just in case you lose your job or something unexpected occurs.  Then once that savings is established then you need to start adding funds to an investment account, and there are some basic investment accounts everyone should know about and start with.

Investment Account Basics

The very first investment account investing beginners that are new to investing should access is their company’s retirement plan usually called a 401k.  Start since many companies will match the funds you deposit up to a certain percentage or they will add funds to your 401k account.  If you don’t participate in the company plan you don’t get the matching money.  Most company 401k plans allow their participants to invest those funds into a choice of few funds that are of different investment classes, but usually on the simpler side which is good, since investing doesn’t need to be complicated to be successful. 

Saving for Retirement with IRA
Saving for retirement with IRA

If you ever leave the company you are working for you can roll over (or transfer) your 401k to a discount brokerage account such as Charles Schwab or Fidelity Investments very easily, and you’ll have a larger choice of investments to work with and greater control over the account.  Upon the transfer of the 401k the account will become an IRA (Individual Retirement Account) account at the brokerage.  IRA’s are the next great investment step in investing or building wealth, and an account that every person should have in their wealth building bag.

Individual Retirement Accounts (IRA’s) are important accounts for investing beginners.  There are few different types of IRA accounts such as Simple, Roth, or SEP, but I am only going to discuss the Simple IRA here.  These accounts are tax deferred accounts approved by the IRS.  More information on these types of accounts is available at IRS.gov under IRAs.  The IRS allows investments within these accounts to grow tax deferred until you remove the funds after 59 ½ years old or when required minimum distributions (RMDs) have to occur at age 70 ½ or greater per regulations of the IRS.   

IRA Investing

Years later when you remove your funds from these accounts the IRS taxes you on the withdrawals at your ordinary income rates.  The idea is that when you’re 70 or older you most likely will be in a lower income tax bracket.  In your younger years as the account is growing you won’t be faced with any yearly taxes on the gains.  The IRS has stipulations such as they will penalize you to remove the funds prior to 59 ½ which is a fair trade off for earning profits without having to pay taxes on the earned profits until you take the money out later in life.  

Another great benefit of the IRA is that the account holder may contribute up to $6,000 per year or $7,000 for those over 50 and receive a tax deduction on their taxable income.  If you earn $50K in a year and contribute $6,000 in that same year to your IRA you may deduct the $6,000 IRA contribution off of your earned income.  As an example, if you were in the 25% tax bracket this means it could save you $1,500 off of your tax bill for that year.  If you are married your spouse could qualify as well and the savings could be greater. 

There are caveats to this deduction for the IRA account such as if you are participating in a company sponsored retirement account (such as a 401k) you will have a limit of taxable deductions, so if you max out your company 401k plan you most likely won’t be allowed the taxable deduction on your IRA.  You still are allowed to contribute to your IRA, so you can capture the tax deferred growth aspect even if you are getting your tax benefit from the company plan and not the IRA.

Investing Beginners 7 Steps to Start

  1. Put together a written budget you can follow.
  2. Pay yourself first.
  3. Create an emergency savings account with a minimum of 4 months of living expenses.
  4. Sign up for your company’s 401k plan.
  5. Read the basics about an IRA account at IRS.gov.
  6. Sign up for an IRA account.
  7. Contribute annually to your IRA account.

For investing beginners new to investing this all can be a lot to absorb, but the sooner you learn about these wealth building tools the sooner you will get to retirement.  Planning, budgeting, and investing properly is a skill.  You have to learn how to do it.  Even if you start small don’t wait, so you can put it on auto pilot.  Smart investing beginners take advantage of tax deductions and tax deferred benefits as one key aspect to building wealth.  

Start early with your investing so you can retire right.

Remember if you are an investing beginner new to investing building wealth comprises a lot of components.  Getting more money is one of those components, but managing expenses and capturing tax benefits and tax deferred growth are other aspects to growing money.  Always focus on finding ways to make your money work for you rather than you working for your money. Check out our Over 50 Smart Posts for more ways to move from an investing beginner to a investing pro.