What’s the best way to start investing beyond my 401(k)?
July 6, 2020

Dear Frost,

I’m in my early 30s but have yet to start any meaningful investing—other than my 401(k) and a rollover IRA that just sits there. I don’t know exactly what I’d be investing for outside of retirement, but I still feel very behind and embarrassed to ask for help. Am I even making enough money to be investing? Is maxing out my 401(k) more important than starting a separate investment account? — Novice Investor

Four piggy banks each with a label representing a different form of investment set on a field of question marks

Dear Novice Investor,

You’re investing in your future, so you should feel really good about that! Many people your age still have their heads in the sand about planning for retirement. And because you’re asking about maxing out that 401(k), I can tell you’ve got a good head on your shoulders. Now, let’s get into the details.

Cover the Basics First

If you’ve read any of my other columns, you know that I’m going to advise you to first check off the financial principles list: Is your income stable and reliable? Do you have extra money at the end of most pay periods? Do you have a healthy emergency fund and retirement account? Especially if your employer offers a matching 401(k), they’ll be assisting you in building up that account balance. It’s like free money working for you toward those long-term benefits, accumulation and return. And you’ll always have it; even if you leave this job, you can either roll it over to an IRA or your next employer account.

Once you’re feeling good about those basics, take a close look at your budget and decide how much you have to put into an investment to start. Maybe you’ll decide to save for a few months and start with a larger lump sum.

Set Your Goals

People invest to grow their money, whether you are saving for retirement or saving to start a new business. By investing in the market, you have the potential to earn higher returns on your money. Your financial goals may be short-term, like buying a car or planning a vacation. Or your goal may be long-term, like buying a home or putting a child through college. Depending on what you want to accomplish, there are investments that can help you reach your goal.

Setting a goal will help you accurately answer questions about risk tolerance, timelines and how much you want to invest.

Start Small. Get Smart.

As a novice, it likely makes sense for you to start with some education offered by almost all online investment firms. The online options are especially good for beginners because most allow you to start by investing a pretty small amount. Then, once you’ve been at it a while and the concept is solidified, you can add more money as you’re comfortable.

Now, don’t waste your time looking for (or getting fooled by) an investment opportunity that’s without fees. Everything is going to have fees, including online brokerages and robo-advisors, but if you’re not working with a personal advisor, it will be cheaper. Especially when you’re starting out, you absolutely should be fee-sensitive, so shop around. You’ll find lower fees from the larger, more reputable firms like TD Ameritrade, Fidelity and Charles Schwab. They’ll have whole libraries of resources so you can keep learning as you grow. And even though you won’t technically have a personal advisor, most of those larger firms will have a number you can call to get some basic advice and get questions answered one-on-one.

In short: Max out your savings. Set a goal for your new investments. Go online and get educated, then put small amounts of money in those new accounts. Let them grow until you’re ready to work with a professional. And when you’re ready, we’ll be here.

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