How to Start Investing

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Getting started with investing can feel daunting, especially if you aren't sure of how it works. The good news is that it doesn't have to be complicated. It begins with clarifying your goals and getting familiar with different investment accounts. From there, you can choose your investments and hit the ground running. (Pretty simple, right?) Here are five steps to start investing.

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1. Know Your Goals

Begin by getting clear on why you're investing in the first place. Some financial goals may be years away—and others more immediate. No matter your timeline, it's possible to use investing to supercharge your savings and get you there faster. Your goals might include:

2. Understand Different Types of Investment Accounts

All investment accounts are not created the same, and each type of account can help you reach different goals.

Retirement Accounts

Brokerage Accounts

A brokerage account is an investment account you open and fund yourself. They're different from retirement accounts in that:

  • There are no tax benefits, and you'll likely be taxed on investment gains during the year they're realized.
  • There are no contribution limits or early withdrawal penalties.
  • RMDs do not apply.

Brokerage accounts are flexible and can be a good way to invest for non-retirement goals. As with any investment account, regular market volatility could cause your balance to go up and down. If you're saving for a short-term goal, you might consider low-risk investments like certificates of deposit (CDs).

Education Savings Accounts

  • 529 savings plan: This is an investment account that can be used to pay for college, graduate school or K-12 tuition. Money in a 529 plan grows tax-free—and federal income taxes won't apply if funds are used for qualified education expenses. That includes tuition and fees, room and board, course materials and more. You might also get a state tax deduction or credit on your contributions.
  • Coverdell education savings account (ESA): Like 529 savings plans, Coverdell ESAs allow your money to grow tax-free, and withdrawals that are used for qualified education expenses are exempt from federal income taxes. Coverdell ESAs typically have a wider set of investment options, but contribution limits and income rules apply.

3. Open Your Investment Accounts

Below is a brief explainer on how to open different investment accounts:

  • 401(k)s: This type of account is offered as an employee benefit. Some companies automatically enroll new employees—others may require you to opt in. You can contact your employer to learn more about your plan administrator and investment options.
  • IRAs: You can open an IRA through an online broker, robo-advisor, bank or credit union. This can usually be done online (just have your basic personal information and Social Security number ready).
  • Brokerage accounts: Opening a brokerage account starts with choosing a brokerage. You might opt for a stockbroker who offers personalized advice, or a robo-advisor that puts things on autopilot. Robo-advisors use an algorithm to make investment choices for you based on factors like your age and risk tolerance. Whatever you choose, you can likely open and fund your account online.
  • 529 plans: These accounts are offered through state programs. You can open a 529 plan through a broker or directly with the state sponsor or program manager.
  • Coverdell ESAs: You can open a Coverdell ESA with any bank, credit union or brokerage firm that offers them.

4. Choose Your Investments

Once your accounts are open, you can explore the following assets and start investing. The right ones for you will depend on your risk tolerance, financial goals and retirement timeline.

Low-Risk Investments

Investing in lower-risk investments means you're less likely to lose money, but your returns will probably take a hit. These investments include:

High-Risk Investments

High-risk investments usually offer better potential returns than low-risk assets, but you may be more likely to lose money. These include:

Mutual funds and exchange-traded funds (ETFs) generally offer a safer way to invest in stocks. They pool money from investors to purchase a mix of stocks, bonds and other securities. That can help spread out investment risk and provide built-in diversification.

5. Stay Diversified

When you start investing, it's wise to hold a variety of assets in your portfolio. That includes a mix of high- and low-risk securities across different asset classes. If you experience losses in one part of your portfolio, gains in another could help soften the blow. The right asset allocation for you will depend on your age, investment goals and appetite for risk. Periodically rebalancing your portfolio can help you maintain your desired asset allocation.

The Bottom Line

If you're wondering how to start investing, first check with your employer to see if a 401(k) is on the table. You can also use an IRA to help shore up your nest egg. Meanwhile, brokerage accounts and education savings accounts can allow you to invest for other financial goals. What matters most is staying diversified and sticking to your investment plan, even during periods of market volatility.

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