How To Invest
A step by step guide
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Tyler Green |Publish date: September 18, 2020
If you don’t invest, you won’t have earnings, but if you invest incorrectly, you could lose it all. It sounds like a no-win situation, right? Believe it or not, investing is fun, and simple especially when you know what to do.
Savings accounts don’t touch the returns the market offers. Even during a recession, like we experienced in 2008, investors earned a 5.6% 10-year rate of return on investments held from 1998 – 2008. No savings account will touch that – which means everyone must take some risk and invest.
Check out our fun step-by-step investing guide below.
Step 1- Take your Employers Match
Employers usually offer one of two match options – partial match or dollar-for-dollar match.
A partial match may look like 50% of your contributions up to 5% of your salary. If you make $75,000, your employer will match your contributions up to $3,750, contributing 50% or $1,875.
A dollar-for-dollar match is an equal match. Let’s say your employer offers a dollar-for-dollar match up to 5% of your salary and you make $75,000. You’d receive up to $3,750 in contributions in matching contributions.
Taking your match is very simple but it's so important to remind people. The last thing when we want to do is learn how to invest while leaving free money on the table
Most employers offer two 401K options, each of which has different tax advantages:
Standard 401K – You contribute pre-tax funds, which lowers your current tax liability. Your funds grow tax-deferred and you pay taxes when you withdraw the funds, based on your tax bracket at that time. Since most people are in a lower tax bracket when they retire, you save money on taxes.
Roth 401K – You contribute after-tax funds, which leaves your tax liability the same now. However, your funds and earnings grow tax-free. You withdraw the funds during retirement without paying taxes.
No matter how much your employer contributes, you may contribute up to $19,500 in your 401K in 2020.
Step 2- How to Set Up A Roth IRA and why it’s your next step
Once you max out your 401K, the next logical step is a Roth IRA. While you don’t get a tax benefit today, you get it when withdrawing your funds tax-free. Taking the tax advantage when you retire helps maximize your retirement earnings without worrying about taxes.
Make sure you’re eligible – Individuals who make $124,000 or less and couples making $193,000 or less are eligible
Choose a brokerage – Most brokerages offer Roth IRA accounts. If you don’t have a brokerage, M1 Finance offers flexible portfolio options, intelligent auto automation, and commission-free trades. They automatically rebalance your portfolio and offer fractional shares, which means less cash drag and more earnings. Other great brokerage options include Personal Capital and Vanguard. They don’t offer commission-free trades, but they have low-cost ETF options and a large selection of investments.
Invest your funds and choose your investments – With M1 Finance you can choose a prebuilt portfolio or customize one. You may set up automatic transfers and M1 handles the rest for you, rebalancing your portfolio as needed. Make sure you diversify your investments, choosing a variety of stocks, ETFs, mutual funds, and bonds.
Step 3- What is an HSA and why should you max it out next?
An HSA account is available either through your employer or on your own. To qualify, you must have a high deductible insurance plan, which the IRS classifies as a deductible of at least $1,400 for individuals and $2,800 for families in 2020.
An HSA or Healthcare Savings Plan is a tax-free savings account you may contribute to and use for medical expenses. In 2020, you may contribute up to $3,550 for individuals or $7,100 for families.
You contribute the funds before taxes and all interest earned is tax-free too. The funds roll over each year, you never lose them.
Open an HSA account using these steps:
Look for an HSA provider if your employer doesn’t offer one
Understand the fees charged
Ask about managing your account online
Ask about a debit card to pay for medical expenses
Find out how to withdraw funds for a claim
Banks, credit unions, insurance companies, and financial brokers are the most common places to find HSA accounts. You can usually sign up online or over the phone. After signing up you’ll choose your funding method. HSA providers may deduct from your paycheck, automatically transfer funds from your bank account, or you can send in a check each month.
Make sure if you don’t open an account through your employer that you deduct your contributions on your tax returns. If you aren’t sure how talk to your tax advisor.
Step 4 Open a taxable account
Once you max out your tax-advantaged accounts based on the IRS maximum contributions, move onto a taxable account.
If you don't have any extra money at this point don't be afraid to check out this article on how to make some extra cash!
While you won’t get the same tax advantages, your money will grow and if you do it right, you may optimize your tax liabilities with tax-loss harvesting (a method that sells certain assets at a loss to offset the capital gains on other investments). You may also benefit from long-term capital gains tax brackets versus short-term gains (which are taxed as ordinary income).
You can open a taxable account at many brokerages, including M1 Finance, Vanguard, and Personal Capital.
Step 5 Different ways to invest in Real estate
Once you’ve exhausted all investment options above, it’s time to run with the big payers. Real estate investors are often very successful and even become millionaires. After you max out all tax-advantaged options, you can either skip Step 4 or invest in real estate alongside your taxable accounts.
You can invest in real estate in a few ways
1. Investing with platforms like CrowdStreet
If investing directly in real estate makes you too nervous, use a platform like CrowdStreet to passively invest in real estate.
CrowdStreet is a commercial real estate platform that allows you to invest in a property’s equity. You choose the investments, just like you’d choose stocks or bonds. You invest alongside hundreds or even thousands of others. The fund manager pools the funds together to invest in the property and each investor receives a prorated amount of the property’s profits.
CrowdStreet is a great way to dip your toe into real estate investing without flat out owning properties (and taking a risk).
2. Single-Family Rentals
If investing in a property directly is more suitable, consider single-family rentals. They are the most popular option for real estate investors, but like any investment has pros and cons.
Lenders have fewer underwriting requirements on single-family rentals
Tenants may take better care of a single-family unit because they have a sense of ownership versus a condo
Single-family homes often have longer tenant leases
Single-family homes have a higher resale value
Single-family homes can require a lot of attention
There may be HOA fees/restrictions
Single-family homes may have vacancies
3. Vacation Rentals
Vacation rentals have a nice ROI, but they come with much higher risks. While you can purchase vacation rentals in beautiful areas of the country, understand its pros and cons.
During busy times, you’ll earn extra income and may charge more
You don’t have to manage regular tenants
The home may appreciate
Vacation homes are harder to secure financing because they are a higher risk
Situations like COVID could leave you with vacancies for several months
Tenants often don’t treat vacation rentals as well as they’d treat a rental they reside in
4. House flips
House flipping is a popular real estate investment because you don’t have to hold onto the property. You buy a property for much less than it’s worth, fix it up, and sell it for a profit.
It sounds great and it can be, but house flipping has its risks. It’s important to do the legwork and know the numbers. One bad investment can wipe out your portfolio and life savings.
Work closely with an appraiser, reputable contractors, a real estate agent, and tax advisor before flipping houses.
The 80/20 Investing Rule
No matter how you choose to invest, always mind the 80/20 investing rule otherwise known as a moderately aggressive portfolio.
Create a portfolio that’s 80% stocks and 20% bonds. The 20% in bonds help offset the risk stocks create. Expect stocks to drop, sometimes drastically. But knowing that you have 20% invested in ‘safe’ investments that typically hold their value, you know that you haven’t ‘lost it all.’
Diversification is key, as is a buy-and-hold strategy. Since the S&P 500’s beginning, it averages a 10 – 11% rate of return over 10 years. Avoid emotional decisions and pulling out because you’re scared and you’ll have a better chance of mimicking the S&P 500’s returns too.
If you aren’t sure how to diversify your stocks or you want it done for you, consider mutual fund investments. Mutual funds are already diversified for you and managed by a mutual fund manager – all you do is invest and watch your earnings grow.
Wrapping up a simple path of how to invest
Investing is the only way to become financially independent. Whether you invest to mimic the S&P 500’s rate of return or you invest riskier and see greater returns – you must take a risk.
No matter what you invest in, diversification is the key as is starting early. Even if you start investing just a few dollars, every dollar you invest today will be worth a lot more than the dollars you invest tomorrow.
Don’t think you’re too broke, don’t know enough, or don’t know where to start. Start with your employer’s 401K and work your way up. Diversifying your funds and maximizing in areas with the greatest impact will leave you with the best returns and the most financially free retirement, which is everyone’s goal at some point!
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