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Financing your future: Here’s how to start investing

As featured in the Finances FYI section of the the Seattle Times

By 1st Security Bank

Investing means putting money to work for you. That much is simple. How to get started investing is more complicated.

In a nutshell, when you use money to buy something that will grow in value or provide you with other benefits while you own it, that’s investing.

Most Americans invest in some fashion. Common investments include real estate, retirement accounts, stocks, and bonds. Two-thirds of Americans own a home, and 55% have some involvement in the stock market, mostly through retirement accounts (such as 401(k)s and IRAs) and mutual funds, although 14% directly own stock in individual companies.

The first question to ask about investing — when to start — is easy to answer: Now, or as soon as you can. More years of investing gives your money more opportunity to grow.

According to a MarketWatch report, if a person had started putting $1,000 a year in 1970 into a stock index fund tied to the S&P 500 and increased their annual investment by 3% each year to cover inflation, by the end of 2017, their account would have held nearly $1.9 million. That person would only have contributed about $104,000 of their own money over that 47-year period; the rest would be investment earnings.

First, make sure you can handle your living expenses like rent, food, and power bills; that any debts you have are manageable; and that you have at least a little money set aside in a government-insured account, like a savings account, that you can access quickly for emergencies. You don’t want to go into debt to invest, and you don’t want to tap your investments to pay bills.

Once you have your monthly budget figured out, you’re ready to start investing. Then, you have some choices to make.

Decide how much to invest.

How much money can you live without each month? Don’t overreach; you want a figure you can stick with over time. Start small and increase your contribution each time you get a raise. If you have a 401(k) retirement plan at work and the boss matches your contributions up to a certain percentage, try to match that percentage so you don’t lose out on “free money.”

Set an investment goal.

Decide what you’re investing for — like retirement, for example — and how much money you’ll need for your goal. Let’s say you’re age 25 and you want to have $1 million for retirement by age 65. At a 10% annual rate of return (the average gain for the S&P 500 stock index for several decades), you would need to invest $179 a month, moneyunder30.com estimates.

Open an account for your investments.

If you’re investing for retirement, a 401(k) plan at work or your own individual retirement account makes sense. Those accounts could save you from paying income tax on the money you invest until you retire, but you’ll pay a penalty if you withdraw money before age 59 1/2. For other, shorter-term investing goals, consider a brokerage account, ranging from a discount online brokerage to a full-service stockbroker. Some brokerage accounts require a minimum investment.

Financing your future: Here’s how to start investing

Decide how to invest.

Once you open an account, you’ll need to decide what to invest in: stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. Bonds generally are less risky than stocks, but you’ll earn less over time. Some stocks pay quarterly dividends to shareholders, providing income. Inexperienced investors will probably be better off putting money into a mutual fund mixing stocks and bonds rather than trying to pick stocks themselves. Compare mutual fund performances using widely available online rankings and performance data. Some mutual funds are index funds that simply follow market yardsticks, like the S&P 500. Consider ETFs, which bundle together various kinds of investments and are traded on exchanges like stocks.

Decide how much risk you can handle.

The general guideline is that riskier stock investments are better for younger people, and then investors should gradually move to safer holdings like bonds. The stock market performs well over time, but every few years, it tanks, so don’t buy risky stocks just before you plan to cash out. Managers of 401(k) plans offer a menu of mutual funds for people of various ages with varying degrees of risk.

A home is an investment, but …

For most people, a home — besides being a place to live — is the biggest investment they’ll make. In most (not all) areas, home values rise over time. Mortgage interest and property tax can be tax-deductible. But even if your home rises in value, factor in the cost of repairs, upgrades, utilities, insurance, tax and other expenses.

Avoid investment pitfalls.

Investing for most people is a long-haul game, so don’t count on a quick killing in the market. Keep an eye on fees and commissions that brokers and investment managers charge or that are attached to mutual funds (called “loads”). Beware brokers who trade too often to boost their commissions or get incentives. Gambling is not a reliable investment. Avoid the latest fad investments; what goes way up usually comes way down. And don’t put all your investment eggs in one basket; diversify your holdings.