Simple Investing for the not-so-simple
Some things in life are better when they’re harder. Others, not so much. Good investing doesn’t have to be hard or harder, and it doesn’t have to be expensive. Simple investing is good investing, as you’ll see with our 10 steps to simple investing. Get our fancy guide to investing here. For now, let’s simply get you started with these simple investing tips.
1. Open an account online
You can open an Individual Retirement Account (IRA) or brokerage account online as easily as you joined Facebook. Simple investing is so simple, we’ve set up online accounts during lunch while stuffing our pie holes.
Grab your Social Security Number, home address (because not knowing where you live shouldn’t stop you from investing in the stock market) and banking information. Many online firms offer accounts with no minimum balance requirements and no fees (read the fine print).
With such ease and convenience, there’s no reason to not open an account. If you don’t because you’re afraid of investing, let our super simple investing guide help you. Get it here!
2. Set up direct deposits into your online account
Once you’ve opened your online accounts, fund them. Most employers offer direct deposit, which automatically puts some or all your pay into your accounts of choice.
If yours doesn’t (welcome to the 21st century!), set up electronic funds transfer (EFT) or automatic clearing house (ACH) transfers to move money from your bank account to your new accounts. Have your bank’s routing and account numbers.
All these options can be set up to happen automatically and to be recurring. They’re (Taylor) swift, safe options to simple investing to pay yourself first, which is important for financial success.
3. Buy low-cost Exchange Traded Funds (ETFs)
When you’re just starting out, you don’t need expensive financial advisors to invest your money. Buy low-cost ETFs, not to be confused with the EFTs above. ETFs, like mutual funds, are baskets of stocks or bonds that trade on stock exchanges. Unlike mutual funds, ETFs trade like stocks and have cheaper management fees.
To making buying ETFs cheaper, specifically buy index ETFs. Index ETFs simply track established market indices, like the S&P 500 Index for large company stocks and the Russell 2000 Index for small company stocks. Because these ETFs simply track the stock market, they require little maintenance, require low fees and are simple to track.
Click here to get our super simple guide to figure out how to figure out what investments you need. Look for ETFs with low annual operating expense ratios (AEOR) to keep more of your money working for you.
4. Diversify your investments
Diversify your investments with large cap, small cap, international and fixed income index ETFs and cash. This’ll reduce your risk and increase your reward.
If you want to keep your simple investing super-simple, buy one asset allocation ETF. Asset allocation ETFs are baskets of index ETFs rather than baskets of stocks. The exact mix of an asset allocation ETF is determined by how aggressive or conservative an investor you are. Click here for our guide to help you determine what kind of investor you are.
5. Start an employer-sponsored retirement account (401(k), 403(b), SEP or SIMPLE IRA)
These accounts let you contribute money from their paycheck into investments, usually mutual funds, before Uncle Sam gets his dirty mitts on it.
The benefits are threefold. First, if you contribute enough to get your full employer match, you get free money. Second, investing pre-tax dollars into a company-sponsored retirement account decreases your taxable income. Third, they let you invest money tax-deferred, meaning you won’t pay taxes on any growth until it’s withdrawn. If you don’t withdraw any money until you’re retired and at least 59 1/2, you’ll likely pay less in taxes because you likely won’t be in as high an income tax bracket.
Contributions in these accounts are automatic, and most employers match contributions dollar for dollar up to a certain amount. That’s free money, bitches!
6. Start a Health Savings Account (HSA)
Many employers offer Health Savings Accounts (HSA) as part of their healthcare plans when you have a high deductible for health care. Contributions into HSAs are also pre-grubby mitts and automatic. This reduces your taxable income and lets your money grow tax-deferred.
Withdrawals are tax-free at any time for qualified medical expenses. Many HSA plans let you invest in your HSA like an IRA with some restrictions. Get our easy guide to help you easily do that.
Most employers match contributions in HSAs up to a certain amount, too. More free money, bitches!
7. Select automatic annual contribution increases
Most employers that offer these accounts offer automatic annual contribution increases. This lets you set pre-determined annual increases and lets your contributions keep up with wage increases and reduce budget creep.
8. Open an emergency savings account
With these five steps, open an account at a bank or credit union with no bells or whistles. Don’t get a debit or credit card, decline bill pay and EFT capability. You want bare bones. This money should be easily forgotten about and hard to access.
Set up recurring direct deposits or one-way EFTs into this account. Continue this until you have three to six months’ worth of living expenses saved in this account. This’ll protect you in case anything unexpected happens.
9. Open a UTMA or UGMA
UGMA/UTMA accounts are custodial accounts that let a custodian (you) invest the money contributed into these accounts for a minor (beneficiary).
Contribution limits are $13,000 for individuals and couples who are married and file separately and $26,000 for couples who are married and file jointly. Capital gains from these accounts aren’t taxable or are taxed at the minor’s marginal income tax rate. Use this guide on your beneficiary’s behalf to invest this money according to your goals for them.
It isn’t necessary that the money only be used for college. David invested $1,000 in a UTMA account for his stepson before his stepson turned XX. Between day one and 18 years old, David bought him iPhones and iPads, took him to several concerts and sent him and his best friend on a New York City graduation adventure. This simple investing tip let David provide his stepson with great memories and a $5,000 booty for college.
10. Assign beneficiaries to all these accounts
Add beneficiaries and, as necessary, contingent beneficiaries on all your accounts, and confirm or update them annually. It’s important to note that beneficiary designations supersede wills. This technicality catches many by surprise.
If you leave your ex-partner or spouse as a beneficiary on any of your accounts, they have the legal rights to the assets in those accounts when you die. Your will designating your current partner or spouse as the heir doesn’t supersede beneficiary designations you assigned prior to your current relationship.
If you don’t assign beneficiaries, your money will flow to your next of kin. Egads! That could be scary for some of us.
Get started with simple investing with our super-simple investing guide below, then follow the 10 steps above. Even with just $25 or $50 a month, you’ll build up a balance and gain experience that’ll benefit you for years.