Step 1: Open up a brokerage account
A brokerage account allows you to buy and sell different investments like stocks, bonds, mutual funds and ETFs. You’ll want to pick a brokerage account that has commission-free trading. This allows you to keep more of your money! Below are the top brokerage accounts to chose from.
- Fidelity: https://www.fidelity.com/
- Vanguard: https://investor.vanguard.com/home
- Charles Schwab: https://www.schwab.com/
If you’re unsure which brokerage account to pick, go with Vanguard. They offer $0 trading commissions, a simple user interface, and good investment choices.
Step 2: Make plan for where to allocate investments.
There’s different investment vehicles you can use as a place to invest your money, and some have great tax advantages. Examples include Roth 401K, Traditional Roth IRA, Traditional IRA and HSA just to name a few. It can get overwhelming, so I’m going to give you a hierarchy of where to invest your money. This is not highly applicable to everyone because there are other factors like how much income you have and time until retirement, but this is a good route to follow for the vast majority of people.
1. Roth/Traditional 401K Employer Match
If your employer offers a 401K match, this should be the first investment vehicle you take advantage of. Note this might be through the separate brokerage account you opened up in step 1, since you’re employer chooses the provider. Still, this is a good vehicle to take advantage of. Why? This is free money from your employer. How a 401K employer match works is that your employer will match up to a certain percentage of the money you contribute to your own 401K. For example, if your employer match is 3%, and your salary is $100,000 a year, if you contribute $3000 (3%) to your 401K for the year, your employer will give you an additional $3000 for your 401K. If you contribute $4000, you’re employer would still only give you the 3% match of your salary ($3000).
What’s the difference between a Roth 401K and a Traditional 401K? Contributions to a Roth 401K are made after tax, whereas contributions to a Traditional 401K are made pre tax. When deciding which one to contribute to, take into account how much money you’d like to pull out in retirement. Say your looking to pull out around $70,000 in retirement per year and currently make $50,000 per year. Then pick the Roth 401K since you’re tax burden is likely less than it’ll be in retirement.
2. Max out Roth IRA/Traditional IRA
After meeting the employer match, the next vehicle to invest through is an IRA. Like the logic above, based on your income, you can choose between contributing to a Roth or Traditional IRA. Unlike a 401K through your employer, with an IRA, you have more investment options and have control over which brokerage account you use which is why it’s suggested to max out an IRA as the second step. The current limit for your IRA in 2024 is $7000 for those under age 50, and $8000 for those age 50 or older.
3. Max out 401K
You’ve already met the employer match for your 401K, now it’s time to max it out. The tax advantages of a 401K make it so that’s it’s extremely beneficial. You can either do a traditional 401K and your money will grow tax deferred or you can pick a Roth 401K and not have to pay taxes when you take money out of it. As of 2024, the 401K limit for the year is $23,000.
4. Health Savings Account (HSA) *if eligible
A HSA is for money you would put for future health related expenses. The beauty of the HSA is that it has great tax benefits. Your contributions are tax deductible, your money grows tax deferred and you can withdraw money tax free as long as it’s used to pay for qualified medical expenses. To be eligible for an HSA, you must be covered under a qualified high deductible health plan. You can check this by talking to your health insurance agent. As of 2024, current contributions limits are $4,150 for self only coverage and $8300 for family coverage. If your situation requires better coverage than a high deductible health care plan, then get better coverage! That is more important and will likely be more economical since you’d pay less towards meeting your deductible.
5. Taxable Investment Account
If you have extra money to invest and have already maxed options 1 through 4, then you can put money in a regular taxable investment account through the brokerage account you made in step 1. Note this doesn’t have tax advantages. You pay tax on the money you put in the account, and when you take the money out, you pay taxes on the money gained through investing. Still, it’s the best option once the other tax investments are made.
Step 3: Decide what to invest in
It’s tempting to become a day trader. Picking stocks that are going to give you 1000% returns! I’m here to tell you that it’s extremely tough to beat the market. It requires you investing a lot of time into learning how to pick stocks, and more so, a lot of luck. Even then, studies show that professionals whose job it is to manage money and multiply their client’s portfolio’s, FAIL to beat the market the majority of the time. So what do you invest in if you can’t beat the market? Well, invest in the market!
When I say the market, I refer to the US Stock Market. See below an example of a stock that follows the market, the S&P 500. This is a collection of the 500 largest companies listed on the stock exchanges in the United States. You can see the long term growth as a whole, with dips in certain years occasionally, but long term the stock value grows. This is how you build wealth long term, beat inflation and grow your money, passively.
You can’t directly invest in the S&P 500 since it’s just a measure of the stocks it contains performance, but the brokerage accounts I listed have their own ways to invest that track the performance of something like the S&P 500. These can be mutual funds, exchange traded funds or index funds. In this guide, I’m going to stress ETFs (exchange traded funds) as the primary investment for retirement. In the context of a Vanguard brokerage account there’s so many choices of what to invest in. Since this is QuikSkool, I’ll keep it simple:
Invest most of your money in VTI
VTI tracks the whole US stock market, thus diversifying your portfolio all in one investment vehicle, while still maintaining about a 10% annual rate of return. I’m not saying VTI should be the only investment you carry, as there’s other great stocks and ETFs like VUG (tracks growth stocks so great if you’re younger and want higher risk higher return), but VTI should be a core part of your investment portfolio if you want consistent returns over the long term until retirement.
Step 4: Decide how much to invest
We get it, everyone is at different stages financially, and some have more money to invest than others. Don’t adhere to the mind set that just because you only have a little bit of money, it means you have to wait to invest. The general rule out there is saving 20% of your income, but just saving any amount you can is beneficial. Now go get started on investing for your future!
Quik Tip: Compound Interest
“Compound interest is the eight wonder of the world” – Albert Einstein
Think of this hypothetical situation. Anna is 25 years old when she starts investing. Mike is 35 years old when he starts and Jen is 45 years old when she starts. For all of them, their goal is to retire at 65 years old. Anna puts in $500 a month for 40 years. To catch up on retirement, Mike puts $666.67 a month for 30 years and Jen puts in $1000 a month for 20 years. This means, that by the time they’re 65, they all would have contributed $240,000 to their retirement. Let’s also say that they all invest in an ETF that tracks the US stock market, which has historically given a 10% rate of return per year. Look at the table below to see what their retirement portfolio looks like when they’re 65.
| Anna | $2,775,174.07 |
| Mike | $1,375,235.75 |
| Jen | $718,259.23 |
Mind blowing right?! All put the same money towards retirement, Anna just started earlier. The lesson is, money invested in your 20s is so much more powerful because of compound interest. Of course, it’s hard to invest money if you’re struggling to pay expenses in general, but try and at least contribute something to your retirement every month. Future you will thank you!
With that being said, even if you’re past 25 and haven’t invested, don’t fret! Mike and Jen still have a decent sized portfolio even though they contributed later. “The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb
It’s important to know the difference between saving and investing though. Saving is for shorter term goals like paying for a wedding, saving for a down payment on a house; 1-5 year goals. Saving eats away at the value of your money because of inflation every year. To combat that, you turn to investing for longer term goals that are 5+ years. Things like investing for retirement or investing to pay for your young child’s college tuition.
Rehash
- Open a brokerage account with Vanguard
- Invest in your employer match through 401K
- Invest in VTI through Roth IRA
- Max out 401K
- Invest in VTI and other ETFs in taxable account through Vanguard
