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It’s not always easy to get started on a new goal. It’s even more difficult when that goal can have long-term effects on your finances—like investing for retirement.
Most people have questions about when and how to invest their money. With so many investing philosophies out there, it can be hard to sift through the information. Remember—investing is personal. And a financial advisor can help you create a retirement plan that’s right for you.
Any successful investment strategy relies on a firm financial foundation, so it’s important to lay the groundwork for financial success by working through the Baby Steps. I want you to get out of debt and have a fully funded emergency fund before you start investing. Once you’ve reached that point, you’re ready to get serious about retirement.
Here’s my investing philosophy:
- Invest 15% of your income in tax-favored retirement accounts.
- Invest in good growth stock mutual funds.
- Keep a long-term perspective.
- Work with a financial advisor.
Your income is your most powerful wealth-building tool. As long as it’s tied up in monthly debt payments, you can’t build wealth. And if you begin investing before you’ve built up your emergency fund, you could end up tapping your retirement investments when an emergency comes along.
Understand & Own Your Investing FutureGet Started
If you haven’t paid off all your debt or saved up six months of expenses, postpone investing for now. After all, avoiding a financial crisis with a fully funded emergency fund and paying off debt are fantastic investments!
How to Start Investing in Three Steps
1. Start Investing in a 401(k)
Taking control of your finances is more about behavior than math. No matter your age, the point is that you make investing a habit—one you won’t want to give up! Consistency over time is the key to building a healthy nest egg.
If your company offers a matching contribution, start with their 401(k) plan. A 401(k) is an employer-sponsored savings plan that allows workers to contribute a portion of their income into a retirement savings account. I suggest contributing up to the employer’s match. For instance, if your company matches contributions up to 4% of your salary, save that amount to take full advantage of the match.
Contributions to a 401(k) are made through automatic payroll deductions—which makes saving easy! And 401(k) plans also come with tax benefits. Traditional 401(k) contributions are made with pre-tax dollars, meaning you won’t pay taxes on the money until you withdraw the funds at retirement.
However, some companies now offer Roth 401(k) plans. With a Roth 401(k), your contributions are made with after-tax dollars. That means you won’t pay taxes when you withdraw funds in retirement. I recommend saving through a Roth 401(k) over a traditional 401(k) if it’s available to you. But if a traditional 401(k) plan is all that’s offered, it’s still a great way to start investing.
2. Contribute to a Roth IRA
Remember, the goal of Baby Step 4 is to invest 15% of your household income for retirement. You might not get to the full 15% with a 401(k) alone. That’s why we recommend maxing out a Roth IRA once you’re contributing to a 401(k) up to your employer’s match.
A Roth IRA (Individual Retirement Arrangement) is similar to a Roth 401(k) but isn’t offered by your employer. It’s a retirement savings account that also allows you to pay taxes on the money before you invest it.
These after-tax contributions have two big advantages. First, the money you invest in your Roth IRA grows tax-free. Second, you won’t owe taxes when you withdraw your money in retirement. So, if your account grows by hundreds of thousands of dollars over time, you won’t owe taxes when it’s time to use that money in your golden years! Talk about a win!
For 2018, the total amount you can contribute to either a Roth IRA or a traditional IRA is $5,500—or $6,500 if you’re age 50 or older. A financial advisor can help you sort out all the details to make sure you understand your options.
If you invest directly through a financial advisor or investing firm, you can automate your monthly contributions to your Roth IRA. This will require an extra step in paperwork, but it’s worth your time to make sure you’re putting money away consistently. Slow and steady wins the race.
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3. Find a Financial Advisor Who Can Help You Start Investing
You’ll have questions when you start investing—it’s normal. You might be asking yourself, Which are the best funds to choose? How do I manage my 401(k)? How do I set up a Roth IRA? That’s why it’s important to reach out to a financial advisor. An experienced professional can show you how to start investing and help you make the best decisions possible for your retirement savings.
The right financial advisor will:
- Educate you on investment choices so you stay in the driver’s seat.
- Help you make the right choices with the investing options they provide.
- Offer a client-first approach.
- Commit to a long-term approach to investing.
If I’ve said it once, I’ve said it a hundred times: Never invest in anything you don’t understand. No one cares about your future as much as you do, so it’s in your best interest to take charge of your own investing.
"No one cares about your future as much as you do, so it’s in your best interest to take charge of your own investing." —Chris Hogan
But sometimes you need a little help with translation. And that’s where an investing expert comes in handy.
A good investing professional can help you sort through the lingo and determine whether the mutual funds you think line up with your objectives really do line up. Be clear about your goals up front so you and your pro are on the same page before you make selections.
Start Investing With a Financial Advisor
Remember to take your time and interview several investing pros before you make a decision. You want someone who’s been through both boom and bust periods in the stock market so they can give you reliable advice in any situation.
If you don’t have a financial advisor, go ahead and reach out to a SmartVestor Pro today! SmartVestor Pros are a group of professionals who want to serve their clients well. They’re committed to empowering you to create a confident plan for your retirement. Find your Pro today!
About Chris Hogan
Chris Hogan is the #1 national best-selling author of Retire Inspired: It’s Not an Age; It’s a Financial Number and host of the Retire Inspired Podcast. A popular and dynamic speaker on the topics of personal finance, retirement and leadership, Hogan helps people across the country develop successful strategies to manage their money in both their personal lives and businesses. You can follow Hogan on Twitter and Instagram at @ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360.