Investing used to be a privilege reserved for Ivy League Wall Street dudes, but with technology advancements, anyone can and should invest. Smartphones have made it easier than ever to download a brokerage app and quickly set up an account.
A brokerage account… maybe I just lost some people but stay with me. As a beginner, many financial terms can be confusing, and the process may seem daunting. You may hear words like 401(k) or Roth IRA and feel overwhelmed.
Growing up in a family with financial backgrounds, I found discussions about finance to be dry and uninteresting. It wasn’t until my early thirties when I realized that I needed to start planning for my retirement. I didn’t want to work well into my seventies because I didn’t save enough in my younger years. I thought that merely saving my money and not spending beyond my means would be enough to secure a healthy retirement. However, I soon learned that inflation would erode my savings and make it difficult to maintain my purchasing power.
For example, thirty years ago, you would have needed to save about $2,030 to match the purchasing power of $1,000 today. At an inflation rate of 2.5 percent, that same $1,000 would be worth less than half of its value in thirty years.
So how do you beat inflation?
If you’re a full-time employee, your employer may offer a 401(k). Many employers match their employees’ contributions, and you should take advantage of this opportunity even if you can only contribute a small percentage. The average annual contribution to a 401(k) is 7.4% and increasing this amount by just 1% could mean tens of thousands of dollars more in retirement.
My biggest mistake was not taking advantage of a 401(k) in my twenties. The concept seemed too complicated, and I was never educated on the importance of having one. Luckily, I’ve been able to make up for lost time by contributing more and finding other ways to invest.
Investing in a 401(k) or IRA
It’s never too late to start investing, and those over fifty who feel they haven’t invested enough throughout the years can contribute more to an IRA. An IRA, or Individual Retirement Account, comes in many forms, but the most common are the Roth IRA and the Traditional IRA. If your employer doesn’t offer a 401(k) match, you may want to opt for an IRA first, as there are more investment choices available. The chart below shows the contribution limits for 2024.
You can open an IRA with a broker like Fidelity, Charles Schwab, or Merrill Lynch. It usually takes about fifteen minutes, requiring basic information and a bank account number. There are generally zero fees and zero minimums to open an account with the major brokers, but it’s wise to do your research first.
Once you’ve opened your account, you can begin investing in individual stocks, ETFs, and bonds, among others. Stocks and ETFs tend to be the riskiest options, so be cautious when investing your retirement savings. A separate brokerage account may be a good idea if you want to try your hand at individual stocks.
I learned everything about investing by watching YouTube videos and reading articles on the subject. If you want to maximize your retirement savings, challenge yourself to spend one weekend learning about investing. Trust me, your seventy-year-old self will thank you for it.