No matter how old you are, it is never too early to start investing. Whether you are in high school, college or just finished school now is the time to start putting money toward securing your financial future. The good news is that it is easy to start investing no matter how much you have to invest, what your risk tolerance is or what your goals may be.
How Do You Start Investing?
The first step to becoming an investor is to find a broker to trade with. Most brokers allow you to make your own trades online in a matter of seconds. They will also have access to charts, analysis and news to help you make informed trading decisions.
Some brokers also offer training courses that help new investors learn the basics of investing as well as how to use the charts and tools that they offer. The broker that you choose depends partially on how much help that you want or need making investment decisions as well as how much that you have to invest at the moment.
How Much Do You Need to Start Investing?
Some brokers such as Charles Schwab will allow you to start investing with no minimum balance. Therefore, you can start contributing to an index fund with as little as $1 if that is all you had to invest or all that you wanted to put in for now.
Newer brokers such as Betterment or Motif require anywhere from $100 to $300 to get started whereas some mobile investing apps have no limits. If you invest in Fidelity, Vanguard, or similar brokers, expect to need at least $1,000 to gain access to their stock or mutual fund offerings.
Why Should I Start Investing Today?
Compound interest is one of the most exciting concepts that you will ever learn. It is also the reason why you need to start putting money into the market today no matter how much or how little you have to get started with.
Let’s say that you bought stock worth $100 at age 30 and earned the historical average return of 11 percent per year. When you were 60, that $100 would be worth $2,289. However, if you put that $100 into the market when you were 20, you would have $6,500 by age 60 assuming an average 11 percent return.
What Should I Know About Broker Fees and Capital Gains Taxes?
It is important that you account for taxes and fees whenever you make an investment decision. When you first start investing, you will likely look to buy and hold a stock or index fund for many years. This is because most brokers charge a fee of $5 to $8 for each trade that you make. If you only have $100 in an account, that $8 may represent your return for an entire year.
When it comes to taxes, it is important to note that you only pay tax on the profit that is made on a given investment. Your profit is any gains above your cost basis, which is the price of the security plus any fees paid to buy or sell it. Therefore, if you bought a stock for $10 and paid $5 to buy it, your cost basis is $15. If you sold the stock for $20, you would pay capital gains taxes on $5.
If you are in the 10 percent tax bracket, you pay nothing in federal capital gains taxes. However, you may be required to pay state taxes on all capital gains. If the money is held in a traditional IRA, you don’t pay capital gains taxes while securities are in your account. Instead, you pay ordinary income taxes on any money that you withdraw when the withdrawal takes place.
Should I Open a Roth IRA or 401k Instead of a Traditional?
When you invest in a traditional IRA or 401k, you get a tax deduction in the year that the contribution is made. However, if you choose to open a Roth account, you use after-tax dollars to contribute to your account.
The benefit is that the money in your account grows free from capital gains taxes. Furthermore, it is not subject to income taxes when it is withdrawn because the money was already taxed.
Ideally, a person will invest in both a traditional and Roth IRA or 401k to reduce their tax burden both today and in the future. As a Roth IRA is subject to income limits, it may be best to contribute to a Roth 401k as there are no income limits and contribution limits are higher. A 401k is a retirement account provided by an employer, and those who are self-employed may open one on their own.
If you are serious about reaching financial independence, you should start investing as soon as you have a few extra dollars to do so. Those who aren’t sure what their financial goals or timelines are may benefit from speaking with a financial adviser. This person may be able to help you create short and long-term goals as well as different investment strategies to make it easier to meet them.
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