Last week I shared 3 simple ways to consistently increase wealth.
Today we want to focus on one of those ways: investing consistently.
Investing consistently is essential for creating wealth, but with so many options and suggestions of where to invest, how to invest, and what to invest, investing can quickly become overwhelming.
Oftentimes the most difficult part of investing is getting started. Today we’ll help by sharing 8 ways to start investing.
1) 401k Retirement Account
A 401k is typically the best way to start investing. A 401k’s have a number of benefits, including:
- Employer match – Many employees match employee contributions to a 401k up to a certain amount. If your employer offers this and you are currently not contributing to a 401k, you are leaving free money on the table.
- Tax Advantages – Contributions to a 401k are taken pre-tax, meaning it lowers your taxable income for the current year. Something to keep in mind is that when you start withdrawing funds at retirement you will have to report those withdrawals as taxable income.
Of course, not every employer offers a 401k. Some nonprofit employers will offer a 403b, which is similar to a 401k. There is also the “self-employed 401k” option for those who work for themselves full-time.
If your employer does not offer a 401k, no worries; there are a number of other options for you to get started investing.
2) IRA Retirement Account
IRA retirement accounts are another great option for people who are looking to start investing, especially if an employer does not offer a 401k retirement plan.
There are two types of IRAs: Roth and Traditional. Traditional IRAs are similar to 401ks in the sense that they are pre-tax. Roth IRAs are attractive to investors because they are after-tax accounts. Withdrawals are not taxed, meaning all the gains made throughout the life of a Roth IRA are tax free.
3) Health Savings Account (HSA)
I constantly promote Health Savings Accounts on this blog because a majority of people are unaware of the huge benefits they offer. As I mention in both 8 Reasons to Contribute to an HSA and What is the HSA Triple Tax Advantage?, the tax benefits of HSAs are huge.
Think of HSAs as Traditional IRAs, except better. They offer the additional advantage of allowing withdrawal of funds at any time for qualified medical expenses.
Contributing to a 401k plan up to an employer match amount should be your first investing priority; your second should definitely be maxing out the allowable annual contributions to an HSA account.
4) Individual Investment Account
While 401ks, IRAs, and HSAs are all great ways to start investing, none of them provide the same freedom that an individual investment account offers. If you’re looking to invest in individual companies, ETFs, or mutual funds, consider setting up an account with one of the following stock brokers:
- TradeKing – TradeKing boasts one of the lowest costs per trade in the industry. They charge just $4.95 to execute a stock trade.
- Scottrade – Scottrade offers $7 trades. Additionally Scottrade has many local offices where investors can meet in-person with an investment consultant.
All 3 of these brokerages are good options. While TradeKing clearly has the cheapest fees, both Scottrade and E*Trade are good options for investors.
Consider setting a goal of depositing a specific amount in your brokerage account each month. It’s pretty incredible how quickly funds can accumulate once you get in the pattern of consistently having some of your income allocated to an individual investment account.
5) Peer-to-Peer Lending
Peer-to-Peer (P2P) Lending is a relatively new form of investing where individuals apply for loans and individual investors buy a stake in their loan. The interest rate on the loan directly correlates to the credit score of the individual applying for the loan. Therefore someone with a poor credit score will be required to pay a higher interest rate to compensate the investor(s) for taking on additional risk.
A couple of P2P lending companies are:
- Lending Club – Lending Club grades their loans from A to G, with A being the least riskiest loans and G being the riskiest. Check out their website for more information on what returns you can expect and how to get started.
- Prosper – Prosper is another P2P lending company that also provides loans with a range of risk levels for investors to choose from.
The loans are typically “unsecured” loans, meaning there is no asset to back up the loan. An example of a secured loan is a mortgage or auto loan, where the loan is directly tied to the asset and the lender has the right to pursue the asset if the loan goes into default.
6) Motif Investing
While I could have grouped Motif Investing with the other companies offering individual stock investing options, I call them out separately in this post because they offer a service no other stock brokerages offer: the ability to invest in up to 30 companies for only $9.95.
Motif Investing allows investors to create different “motifs” that consist of up to 30 stocks. Each stock can be weighed equally, by market cap, or however the motif creator wants. Investors can also invest in hundreds of other motifs that people have created.
To find out more about Motif Investing read my post How Motif Investing Works.
7) Real Estate
A number of people think that your home should not be viewed as an investment, but instead simply as a “home.” I disagree and think that people should always think of their home as an investment. When making improvements to a home, the homeowner should always take into consideration what a future buyer would think of the improvement.
An investor’s home isn’t the only way to invest in real estate. Purchasing a rental unit or rental home is another way to gain exposure to the real estate market. Investing in real estate investment trusts (REITs) or companies that are exposed to the real estate market is another way.
Because people typically end up buying a home at some point in their life, I think it’s better for investors to focus on building up their retirement accounts and other investment accounts instead of taking on additional exposure to the real estate market. After all, a home is a huge investment for most people, so it’s important to limit that exposure by investing in companies that are exposed to other markets.
8) Small Business
A final way to start investing is by investing in a small business. Investing in a small business can be much easier than most people think; you don’t have to buy a McDonald’s franchise to invest in a small business. A small business can be as simple as someone selling things they make on Etsy.
With more and more people having “side hustles” (businesses/freelance work they do on top of their full-time job) it becomes important to think about how small business investments factor into an overall investment strategy.
As an example I can “invest” in this website by hiring more writers, having a programmer develop a new tool for me to share with readers, or pay someone to spend more time on social media. The difficult question is whether or not it makes sense to invest in my small business or to invest in some of the other things I’ve listed in this post? There’s no simple answer.
Check out Erin’s post 4 Ways To Further Invest In Your Side Business if you are looking for ideas of how to invest in a side business.
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Now that you have 8 ways to start investing, it’s time for the fun part: choosing which to invest in first. As I said earlier, I strongly believe that investing in a 401k account up to the employer match amount should be the first priority. Second should be maxing out an HSA account. IRAs are next on the list followed by everything else.
How did you first start investing? If you haven’t started, what will be the first thing you invest in (401k, individual brokerage account, P2P loans, etc.)?
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Ideally you’d want to start with some form of retirement investing, whether that is through your employer or not. We started with #4 simply because we weren’t focused on retirement at 22 when we first got married. We were doing retirement investing by 30 though and I’m glad we did. They have sure paid off.
I started investing with a ROTH IRA. I’m only eligible to contribute to my 401k when doing work through the union which is inconsistent and unpredictable. Having an IRA helps me make sure I’m getting my retirement funded regardless of employment status.
We have all kinds of investments (401K, SEP IRA, ROTH IRA, HSA, real estate), but we have never done peer-to-peer lending. The last time I checked, people in Indiana weren’t legally able to invest in the primary peer-to-peer market. I’m not sure if that has changed.
All great options DC and would definitely agree that a 401k should be the first route to look at especially if it offers a match. I started that way and it was a great way to get my feet wet. Nebraska doesn’t allow P2P, though I’d like to give it a try but don’t see them changing that anytime soon.
This is a great summary of what’s out there. All I’ve ever done is a Roth 401K. All the others are calling my name but I need to get some extra cash first!
Brian @ Luke1428 You’re right, and that’s why I listed the retirement options first. It really pays off to start retirement investing early on.
brokeandbeau That’s interesting that you can only contribute when you are actively doing work. With that in mind I definitely think you are smart for regularly contributing to your Roth IRA.
Holly at ClubThrifty Yeah it’s always interesting how laws and regulations vary by state. Peer-to-peer lending is getting bigger and bigger and I know people who have benefited both from a lender and lendee standpoint.
FrugalRules Holly mentioned that P2P is not allowed in Indiana, either. It’s interesting that some States aren’t on board, though I’m sure lobbying is involved from those who have an interest in P2P not being allowed. I’ve checked out P2P quite a bit and it seems like a great way to both invest as well as consolidate high interest debt – seems like a win-win for everyone involved.
Its great that you included “small business” as an investment option. I think people too quickly dismiss this as a viable investment. For young people who have extra time, energy and risk tolerance I think a side business is a great investment. The ROI can be much higher than other investment options and there’s the opportunity to make it into something much larger.
So wise to contribute to a 401K, especially if your employer matches! Mr. FW and I contribute the federal max to our respective 401Ks and, in addition to the other benefits, it’s an awesome way to lower our taxable income. Great advice here!
Mark@BareBudgetGuy I’ve recently dabbled in a few things besides 401K and my HSA, but like you I really need some additional capital before I can fully dive into the other options. I’m particularly interested in P2P lending as I know others who have had great (long-term) results from it.
Thomas at ineedmoneyASAP I agree, Thomas. I think people are scared of the fact that you could lose every dollar you put into a small business (which is certainly possible). It has a higher risk but also a much higher reward than most of the other more conservative options.
Mrs. Frugalwoods I think if you aren’t contributing to a 401k up to an employer match you are leaving part of your compensation on the table. I think there are other avenues such as an HSA that I think are better to max out first, but it can’t hurt to max out a 401k as well.
I first started investing through the 401k at my company 14 years ago, and unfortunately for the longest time, I didn’t invest outside of that account. Now I like investing in my retirement and my brokerage account. I have realized that money does not have to be in a tax protected account for you to still invest it and actually there are many tax benefits to investing outside of retirement accounts.
blonde_finance Thanks for sharing your feedback, Shannon! A goal of mine (and I’m sure many others) is to venture outside of my traditional retirement account contributions.
Great tips, DC. I think the 401k advice is particularly good because people forget that contributing to a 401k is in fact investing. It’s a good way to start investing until you get confident enough to do more.
theFinancegirl Thanks! Another benefit of a 401k is that once you automatically have money coming out of your paycheck you don’t “miss” it because you get used to the lower paycheck.
I definitely agree that getting started is usually the hardest thing for many people, so it’s great to see you list so many good options. I’m a big fan of getting started with your own account with a small amount of money, just so you can learn some basics, and then really understand what all that money going into your retirement account is actually doing! Otherwise it can feel like it’s being put into a ‘black box’ that will hopefully decide to repay you a decent amount of money when you do retire.
But even though I haven’t experienced it yet, Motif investing seems like another fantastic way to get started, where you can pick a ‘theme’ you actually understand.
Jason@Islands of Investing I think it’s great if people put a small amount in an individual account before retirement investing, but I worry that if they put off their retirement account for too long they will lose $ from company match. It’s just so easy to put off getting started.
Wow, that was a comprehensive list! We went the mutual fund route many, many years ago. At some point we needed the money and took it out, but apparently never closed the account. A few years ago I saw a story about Unclaimed Funds and went online to check it out. It was exciting to find out that account had never closed. Visions of $$ signs danced in our heads. But alas, it was about $250. Ah well. Anyway, I’m going to go over this with Jay. You made it extremely easy to understand, DC. Thanks! :)
kay ~ lifestylevoices.com Haha well $250 is better than nothing! It’s funny how when you invest you always eventually find a use for the funds ;) Thanks for the kind words about the post, I definitely put a lot of effort into it.
We do the equivalent of 401k and the Roth IRA. Once you set up an automatic payment, you don’t have to do much. Although I like playing with ETF’s and choosing my own funds. But at least if I get lazy about it the money keeps going in every two weeks.
mrselfreliance It’s a great strategy. I also like to play around with my investments from time-to-time, but for the most part I leave them alone.
I’m so glad my company offers a 401k match. People should definitely take advantage of this. I’ve been pretty interested in P2P loans lately, but I’m still not sure if I’ll start investing with them. I’ll have to do a little more research first
Anum The 401k match is key! You are leaving money on the table if you don’t take full advantage of it. P2P is definitely an interesting trend, looking forward to see where it goes in the future.