Investing can sometimes be confusing can’t it? Heck, even the title of this post can have some people scrambling to get out of dodge. The majority of people do not understand investment terms and would rather not take the initial step toward investing because they simply don’t know what to do, and they don’t want to make any big mistakes. I know it can be quite intimidating, but by knowing the simple facts, you can do quite well with your investments.
First Invest in Your Company-Matched 401k
Does your company match your 401k contributions? I believe that many companies still do, and if this is the case for you, then you should invest up to the amount that is matched. In other words, if your company will match 100% of your contributions up to 3%, this means that if you put 3% of your paycheck into your 401k, then you company will put the exact same amount into your 401k as well. This is an amazing benefit and should be maximized.
So what funds should you choose for your investment? For the beginner, I keep this very simple. First, look at the historical returns of each fund. If they have consistently earned 10% or more in each year over the last 10+ years, then they are doing quite well – choose them to put a portion of your funds. Second, choose only those funds that have a low expense percent (preferably under 0.3%). By choosing funds with low expenses, you will ensure that you will keep more of your money in the long-run. Finally, be sure to divide your money among five or more different funds to stay diversified.
Second, Invest in Your HSA Fund
You might think that you should next invest your money into a Roth IRA, but it actually makes more sense to put your funds into an HSA fund. For those of you that have not heard of this term, it is actually a health savings account for individuals that are on a high-deductible insurance plan. Since this fund will roll your money over each year, is completely tax free, and allows you to invest within it, it is actually a much better deal than investing in your Roth IRA. Put the maximum amount into your HSA account each year and let the funds grow. Either you will use this money on medical expenses and pay no tax, or you can remove it without penalty after the age of 65.
Third, Invest in Your Roth IRA
A Roth IRA is an excellent investment, don’t get me wrong. It just so happens that a company-matched 401k and an HSA fund will earn you more in the long run (due to the contributions and lower taxes). But, if you put in enough money to get the full match from your employer and to max out your HSA account, then you should begin investing in a Roth IRA.
The Roth IRA is an amazing investment option because of its tax advantages. Your contributions will be made with after-tax money before they are put into the fund, but the beautiful part is that this money will never be taxed again, even when you take it out of the fund at your retirement. So, you simply pay the tax early, allow your investment to grow for years and years, and then you never pay the tax on that stack of money when you take it out. It is a wonderful thing and should be taken advantage of.
So what do you think? Are you ready to invest?