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Investing can seem daunting, but there are investment opportunities that offer a low-risk entry point into building wealth. As an added benefit, each of these options require little cash to get started, so you can learn and grow your money as you go.
Ready to start investing? Here are six easy ways to start.
1. Enroll in a 401(k)
One of the easiest and most effective ways to get started investing is to make contributions from your paycheck to an employer-sponsored 401(k).
Investing in a 401(k) can help you meet your investing goals faster because the money you contribute is deposited on a pretax basis and grows tax-deferred. Contributions are automatic, so you won't be tempted to spend your savings, making it easier to stay on track. Some employers also offer to match your contributions up to a certain percent of your compensation. If your workplace offers a match, prioritize contributing at least enough to exhaust it. This adds up to free money toward your retirement. Beyond that, you can fund your 401(k) up to the limit.
Not sure if your workplace offers a 401(k)? Ask your workplace's human resources department about your options.
2. Open an Individual Retirement Account (IRA)
IRAs are another excellent option for investing funds toward retirement, especially if you don't have access to a 401(k) through your job. You can open an IRA quickly and easily on your own through many credit unions, banks and brokerages to start investing now.
- Traditional IRA: Traditional IRAs are funded with pretax dollars, reducing your taxable income on your income taxes for the year. Your money grows tax-deferred: When you withdraw your funds in retirement, you'll pay taxes on your funds as income.
- Roth IRA: Contributions to a Roth IRA are made with post-tax dollars, meaning you can't deduct your contributions from the year's taxable income. Because you fund a Roth IRA with post-tax dollars, you won't owe any taxes when you withdraw those funds in retirement. The returns your Roth IRA earns aren't subject to taxation, now or in retirement. As a result, you won't owe the IRS any income tax on distributions you take from your Roth IRA in retirement—as long as you're at least 59½ when you begin withdrawing your money.
If you expect to have a lower income in retirement, which is the case for many earners, a traditional IRA's deferred taxes may offer you more financial benefit than a Roth IRA would. If you're not sure which option is best for you, work with a financial planner to come up with a plan.
3. Use a High-Yield Savings Account
A high-yield savings account is simply a savings account that offers a slightly higher interest rate. You likely won't see returns as high as what you might expect from a riskier investment vehicle, but you're also protected from losing money in a high-yield savings account as long as the financial institution is guaranteed by the Federal Deposit Insurance Corporation. This makes them a good place to park money you'll need soon for a short-term savings goal, or to house your emergency fund.
The major risk involved with a high-yield savings account is the risk that your spending power will erode with time due to inflation. Especially during times of high inflation, it's unlikely the relatively modest returns a high-yield savings account offers will keep pace. That's why high-yield savings accounts aren't a great option for large, long-term goals, like retirement.
For safekeeping money you may need at the drop of a dime, a high-yield savings account might offer just what you need: no exposure to risk, access to your cash and above-average interest rates.
4. Invest in Diversified Funds
Making broad and diverse investments is essential for building wealth while mitigating risk. But buying many individual assets isn't always practical, especially if you're new to investing. Luckily, three main types of diversified funds—index funds, mutual funds and exchange-traded funds—allow you to make smart investments without requiring a huge investment.
- Mutual funds: Mutual funds allow you to invest in a pool of diverse securities such as stocks and bonds by combining the capital of many investors across a range of assets. Mutual funds that are actively managed by a fund manager often charge management fees that can eat into returns. They're not as liquid as other options since they can only be traded once per day when the market is open.
- Exchange-traded funds (ETFs): Like mutual funds, ETFs pool together investors' funds across a diverse basket of securities. Exchange-traded funds can be traded throughout the day like stocks, and often have lower fees than mutual funds.
- Index funds: Index funds are a type of mutual fund or ETF that invest passively by tracking the performance of a market index, such as the S&P 500. They offer low fees because they're passively managed, and they historically offer returns as high as actively managed funds, according to the SEC.
5. Buy Series I Savings Bonds
While technically a savings vehicle rather than an investment, Series I bonds have a lot to offer investors who seek predictable interest returns with limited risk.
Series I savings bonds, sometimes called inflation-linked bonds, are a U.S. Treasury bond that pays interest on both a fixed and inflation-adjusted rate. Series I bonds offer guaranteed returns of 7.12% until April 2022, at which point the U.S. Department of the Treasury will adjust the rate to keep up with inflation.
Because your capital investment is guaranteed and insured by the full faith of the Treasury, Series I bonds are as close as you can get to a risk-free investment. The interest they earn is also exempt from state and local taxes.
Their major downside is that you'll have to leave your money tied up for five years to avoid forfeiting some interest gains. You can learn more about Treasury bond restrictions and purchase bonds through TreasuryDirect.gov.
6. Try Real Estate Investing With REITs
Investing in real estate can be lucrative, and may be a viable way to branch out into asset classes other than stocks and bonds for a more diversified portfolio.
But real estate investing requires large amounts of capital and extensive knowledge of the market to pull off, and buying, selling and renting out property also presents substantial risk. It's wise to play it safe and avoid sinking large amounts of money into individual properties until you've gained considerable market knowledge, access to lending and adequate liquid funds.
Luckily, you can get into real estate investing without buying any properties yourself. Real estate investment trusts (REITs) are companies that own and operate real estate. Like a mutual fund for real estate properties, publicly traded REITs allow investors to own a small share in the profits of an extensive portfolio of commercial real estate properties—all without ever having to buy, own, flip or rent out any properties themselves.
Take Investing Slow and Steady
With many investment options well-suited for beginners, you can start growing your money, building wealth and saving toward future goals like retirement now. However, remember to be cautious about investing in anything you don't fully understand, especially when it comes to risky assets like stocks or cryptocurrency.
For beginners with limited time, managed portfolios like those available to you through a 401(k) or IRA tend to be the safest and most approachable option with the best returns.
For personalized advice on getting started investing, reach out to a financial planner. They'll assess your financial situation and goals to help you create an individualized strategy for how to use your money.