As we all know, investments are one way for you to increase your wealth. However, one of the biggest misconceptions about investing is that only the rich can do it. That might have been true 10 years ago, but not anymore. Now, companies and services made it their mission to provide investment options that are available for everyone, even for beginners. Beginners are those who have just small amounts of money to invest. There are now dozens of types of investments that are available for beginners, so if you are one, there’s no excuse for you to skip out.
A 401(k) or other employer retirement plan
If you already have a 401(k) or any other retirement plan, it is advisable to place your money in it. Especially if your company matches a portion of what you have contributed, which means free money and it also guarantees a return on your investment.
This 2019, you can contribute up to $19,000 to a 401(k). If you are 50 years and older, you may have to contribute up to $25,000. Keep in mind that you are not obliged to contribute that much. The good thing about that 401(k) is that there is roughly no investment minimum.
It means that you can start with as little as 1% of your monthly paycheck. But it is better to contribute for at least as much as your employer match. For example, a common matching arrangement is 50% of the first 6% of the salary that you have contributed to. For you to capture the full match in this scenario, you have to contribute 6% of your salary each year. You can always work your way up to that over time.
When you have opted to contribute to a 401(k), the money can go directly from your paycheck into the account without the hassle of going to your bank. Most of the 401(k) contributions are made pretax. Today, some of the 401(k)s will place your funds by default in a target-date fund but there could be other options.
Target-date mutual funds
The target-date mutual funds are quite similar to the Robo-advisor of yore. They are still commonly used and incredibly popular especially in employer retirement plans. The target-date mutual funds are retirement investments that automatically invest based on your estimated year.
For people who do not know what a mutual fund is, it is essentially a basket of investments. The investors will purchase a share in the fund and upon doing so, they are already investing in all of the funds’ holdings with just one transaction. A professional manager usually chooses on how the fund will be invested. But there will be a general theme like how a U.S. equity mutual fund will invest in U.S. stocks that are also called equities.
On the other hand, a target-date mutual fund often holds a mix of bonds and stocks. For example, if you plan to retire in 30 years, you could choose a target-date fund with 2050 in the name. That fund will then hold mostly stocks since the retirement date is quite far. The stock’s return will tend to be higher over the long period. Over time, it will slowly shift some of your invested money towards bonds.
Index funds are like mutual funds but on autopilot. Instead of employing a professional manager to maintain and build a portfolio of investments, index funds will track a market index.
Since index funds take a passive approach to invest by tracking a market index rather than having professional portfolio management, they tend to have a lower expense ratio, which is a fee that is charged based on the amount that you have invested compared to the mutual funds. But similar to mutual funds, investors in index funds are buying a chunk of the market in one transaction.
Index funds have a minimum investment requirement but some of the brokerage firms, which includes Fidelity and Charles Schwab, offers a selection of index funds without a minimum. It means that you can invest in an index fund for $100 or less.
One of the investing apps that target beginner investors is Acorns. It rounds up your purchases on your linked credit or debit cards and invests the change in a diversified portfolio of ETFs. On that note, it works just like a Robo-advisor, which manages a portfolio for you. There is no minimum if you want to open an Acorn account. The service will start investing once you have accumulated at least $5 in round-ups. You can also make lump-sum deposits. However, Acorn charges $1 a month for the standard investment account and $2 a month for the individual retirement account.
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