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How To Start Investing: A Beginner’s Guide

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You’ve decided you want to start investing. Now what? Read on for our investing basics guide on how you can start investing! We address your account options, vehicle options, budgeting for investing, affirmations, and drop a ton of helpful resources for you.

How to start investing

You’ve decided you want to invest….Now what?

Here is what you need to know to get a base-level understanding of how to start investing, and start using one of the most accessible tools to build generational wealth, the stock market!

Types of Investment Accounts

You have several investment account options to choose from. Everything about finance is personal, including investing. As you think through how to start investing, you should choose the account(s) that make the most sense for your goals. Factors like your income level and employment status will play a favor into what accounts you have access to. So let’s take a look at your options.

There are two main types of investment accounts:

  1. Tax-advantaged accounts
  2. Taxable Accounts

Tax-Advantaged Accounts

These are accounts that are either tax-exempt, tax-deferred, or offer some other form of tax incentive.

Employer Sponsored Retirement Accounts: 401(k) / 403(b) / 457(b) / Thrift Savings Plan (TSP)

An employer-sponsored plan is a type of benefit plan offered to employees at no or relatively low cost. If you’re self employed, you have the option of opening a solo 401(k) through your business.

What type of employer-sponsored plan do you have access to?

  • 401(k)s are a type of tax-advantaged retirement option for corporate employees.
  • 403(b)s are offered to local and state public employees, such as teachers
  • 457(b)s are offered to local and state government employees, such as law enforcement officers
  • Thrift Savings Plans, known as TSPs, are offered to federal government employees

Key Features of Employer-Sponsored Retirement Accounts

The benefits of participating in employer-sponsored retirement accounts are many. Some employers will offer a match on a certain percentage of your total contribution, which amounts to free money in exchange for participating in the plan. The available assortment of investment options are pre-selected by your employer, and typically consist of index funds, target date funds, and company stock options (if applicable). Generally your investment options are more limited in an employer- sponsored retirement account, than in an IRA. These accounts have annual contribution limits, and are generally only accessible after reaching age 59 1/2. Early withdrawal penalties are assessed on withdrawals from these accounts, with a few exceptions. If you leave your employer, you can rollover your 401(k) into an IRA.

Read our blog piece, Everything You Need To Know About 401(k)s to receive more in-depth information on this type of employer-sponsored investment account.

What An An IRA?

IRA stands for Individual Retirement Arrangement, and these accounts are available to anyone with earned income. This means that you can open an IRA with W-2, 1099, or self-employment income. If your employer doesn’t offer a 401(k), you can use an IRA to save for retirement.

Key Features of an IRA

  • Available in pre-tax (Traditional) or post-tax (Roth) options for tax diversification
  • Offers a variety of investment choices, such as stocks, bonds, ETFs and Index Funds
  • Has an annual contribution limit of $6,000 in 2021 if you’re under age 50, and $7000 if you’re over age 50
  • You can withdraw Roth IRA contributions at any time, for any reason, without paying taxes or penalties.
  • If you withdraw Roth IRA earnings before age 59½, a 10% penalty usually applies.
  • Withdrawals before age 59½ from a traditional IRA trigger a 10% penalty tax, whether you withdraw contributions or earnings.
  • In certain IRS-approved situations, you may take early withdrawals from an IRA with no penalty.

Read our blog piece, Everything You Need To Know About IRAs, to receive more information on an IRA, including what the contribution limits are, the types of IRAs, and how to open an IRA.

Taxable Accounts

A taxable account, also known as a brokerage account, has no tax benefits, but fewer restrictions and more flexibility than IRAs and employer-sponsored accounts. You can withdraw your money at any time, for any reason, with no age restriction or early withdrawal penalty. You can open a taxable account at most major financial brokerages (see our list of recommendations below). Your investment options are unlimited; you generally have access to any kind of securities, such as stocks, bonds, ETFs, and index funds.

These accounts are not tax-efficient because you are paying taxes on the amount you contribute plus taxes on the capital gains you realize. Capital gains are the profits from the sale of an asset — shares of stock, a piece of land, a business — and generally are considered taxable income. How much these gains are taxed depends a lot on how long you held the asset before selling.

If you hold investments in the account for at least a year, you’ll pay the more favorable long-term capital gains rate: 0%, 15%, or 20%, depending on your tax bracket. If you hold an investment for less than a year, it will be subject to short-term capital gains, which equates to your ordinary income tax bracket.

Roth vs. Traditional

This is an adjective; you can’t have a “Roth Account” or a “Traditional Account,” but you can have a “Traditional IRA Account” or a “Roth 401(k) Account.”

Traditional means that the money you contribute is tax-deferred, meaning you can get a tax cut today and count your contributions against your taxable income. However, since you have not paid taxes on this money , you will have to pay taxes on the money contributed and earned through capital gains as you withdraw from your account.

Roth means that the money you contribute to your account is post-tax. This means that, upon withdrawal, you will not be taxed on any gains and money withdrawn.

You can have both types of accounts. Many employers offer a Roth 401(k) option, so check with your plan to see if that’s an option that you have available to you.

Some things to consider when deciding whether you should make Roth or Traditional contributions:

  • What tax bracket are you currently in?
  • Do you expect to be in a lower or higher tax bracket at retirement?
  • Would you benefit from a tax-break now or later?
  • What is your income level? (high-income earners, for example, don’t qualify for a Roth IRA)

Depending on your answers, you may want to focus on lowering your tax liability today by contributing pre-tax income into a Traditional account. This lowers your taxable income during the year you make the contribution. If you anticipate having higher income in retirement, making post-tax contributions via. Roth account may make more sense. Always consult with a licensed financial professional to determine your individual investing strategy, we recommend Dare To Dream Planning, a fee-only, virtual comprehensive financial planner for Women of Color. Anna is our CFP!

Where Do I Open An Investment Account?

What you’re looking for is a brokerage firm, which is a company that connects a buyer (you) and sellers (the New York Stock Exchange). The brokerage firm that you choose depends on the investment product that you are looking for.

Be sure to check out discount brokerages like Fidelity, Charles Schwab, and Vanguard, which are some of the most well known brokerages firms (there are many!) You can also use newer investing apps like, M1 Finance, Public or Ellevest.

Purchasing investments (securities)

Contributing money into your accounts is not investing! It is part one of investing, but if that is all you do, you will be disappointed in a few years as you check back in with your account. Until you invest your money buy buying securities , your money is held in a settlement fund, which is usually a money market account that’s earning less than 1% interest. These are the 3 steps to make sure you complete to ensure you’re investing and growing your wealth:

  1. Open an investing account
  2. Transfer money into the account.
  3. Purchase securities

There are different levels of difficulty and expertise to these options. So as you think through how to start investing, consider this ladder:

Beginner

  • Index funds
  • Mutual funds
  • ETFs

Read our piece on how to decide between index funds or ETFs to decide which one is right for you.

Intermediate

  • Individual stocks
  • IPOs
  • REITs

When you’re ready, check out our piece on how to research individual stocks.

Advanced

  • Options
  • Futures
  • Day trading
  • Crypto
  • Buy & trade on margin

Want to learn about day trading? We recommend Teri Ijeoma’s Trade & Travel program.

Determine Your Investing Budget

Now that you’ve learned about your account and vehicle options, you have to decide on the most important thing: how much you can feasibly contribute per month.

One of our tips for how to build wealth in 2021 is to pay off high-interest debt. This is called toxic debt. Returning to Dr. Hans’ pillars of financial security, here are three things you can consider placing in your budget:

  1. Creating an emergency fund
  2. Paying off toxic debt (high interest rate debt, like credit cards)
  3. Investing

You have a handful of options when it comes to choosing a budgeting method. If you try one method and don’t experience success, that’s okay, you got plenty of other options.

And if you’re working on financial goals alongside a partner, check out Episode 69 with Gay Husbands on FI/RE and our blog piece on how to budget as a couple.

Once you nail down a budget, you will get a better idea of what a sustainable investing strategy can look like for you. Maybe at first you start off with random lump-sum contributions; that’s okay! The goal, however, is to develop a strategy around it.

Wealth Building Affirmations

As a first-generation wealth-builder, sometimes one of our biggest roadblocks can be mindset. We’ve never done this before, and chances are, we haven’t seen anyone else do it. Repeat this to yourself until you believe them.

You are worthy of wealth.

You deserve a life of abundance.

Yo Quiero Dinero Podcast Episodes About Investing

You know we invite some AMAZING people on the podcast. Check out these episodes for some amazing overviews on how to start investing:

And check out our list of the top personal finance books to get your money right in 2021.

Stay building wealth, stay poderosa.

Want more in-depth investing knowledge? Check out our digital course, Master The Market 101: Investing For Beginners

Master The Market 101: Investing For Beginners

Learn more about these official Yo Quiero Dinero affiliates to accelerate your investing goals:

M1 Finance –  investing, borrowing, and cash management in one easy-to-use platform. Build a portfolio of stocks and ETFs for free!

Public – Join the investing social network and start trading with any amount of money, commission-free.

SoFi Invest – Fund an Active Investing account with $1,000 or more, and you’ll get $50 in free stock

Fundrise – Invest in REITs & earn passive real estate income! Have your advisory fees waived for 90 days.

The Motley Fool Stock Advisor is our favorite research tool for individual stock investors. Join now for ONLY $99 for one year – that’s just $1.90 a week

Ellevest helps women unleash their financial power with a customized, goals-based approach in one beautiful platform. created for women and designed by women.

Scholar Raise – Open a 529 College Savings Plan in minutes and start saving for your child’s future college education. No fees for account owners!

Roofstock is the #1 marketplace for buying and selling single-family rental homes, with listings in over 40 markets across the US. Own cash-flowing income properties and build wealth through real estate.

Stash is a personal finance app that combines banking, investing, and advice into one platform.

Free video training

Master The Market: 5 Day Investing Challenge

This 5 Day Investing Challenge will set you up for success as a new investor. Learn how to open your account, select investments, and the best tools to continue your educational journey!

Meet Jannese

Jannese Torres-Rodriguez is a award-winning Latina Money Expert, Educator, Speaker, Writer and Business Coach. She became an accidental entrepreneur after a job loss led her to create a successful Latin food blog, Delish D’Lites. Now, she helps her clients and listeners build successful online businesses that allow them to pursue financial independence and freedom.

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