How to start investing (in yourself)

Miguel Felix
Sep 9, 2018 · 5 min read

Most individuals don’t understand how to save and invest. Ever wondered “Are there any other ways for me to make more without trading my time in exchange for money?” How many times has this thought crossed your mind? More than you’re comfortable I’m sure, but never fear Uncle Sam is here! I know, I know, “The government just takes my money every paycheck!” Well, do you also know that there are ways to pay fewer taxes? I’m not going after some couch change you find and secretly stuff into that jingling pocket of yours. I mean real tangible ways for you set yourself up for success!

Stop doing this every year!

Lets first start off by introducing the classic 401(k). In this set up with your employer, both you and the company put money into the account. So the way it works is you sign up for benefits for many full-time employees. You can allocate a small percentage of your paycheck, towards the account pre-tax. Yes, you read correctly the government can’t take their cut at the end of the year.

Hands off buddy!

Now each company is different from how they operate the account; they will also match how much you put in, up to a certain amount. Let’s say they match five percent up to 3000 dollars per year. That’s free money for saving; It’s like they want you to be successful! They mostly add this at the end of the year (They want to see if you stick around before they invest in you). The real kicker here is that the amount in the account either from you or both you and your employer is also tax deductible at the end of the year, meaning you can lower your tax bracket for any given year depending on how much you set aside each year. That depends on how much you make. You’re allowed to deduct up to whopping $18,500 annually (in 2018).

Now I understand that some work part-time. Since 401(k) is typically for full-time employees, but there are other requirements to fulfill to receive that. Those being over the age of twenty-one and having one year of service. In order to accept employer contributions on top of your own, there may be a two-year service requirement. There are other options out there for you, both Roth IRA and IRA (Individual retirement accounts) are widely available to everyone regardless of working full time, part time, age, and service length. Let’s break it down.

Roth IRA

The Roth IRA allows people to put funds into the account after tax up to $5,500. This means it is still part of your AGI (Adjusted gross income). That said you can withdraw any amount up to the total you put in (your contribution). IRA’s can also be used to house some assets as well. Assets being cash, stocks, and bonds with a few other items but let’s keep it simple. Let’s say you want to invest in some stocks, and they go up in value. Unfortunately, if you tried to withdraw any amount over your contribution, you would pay a penalty fee of ten percent if you are under the age of fifty-nine and a half. Thus the name individual retirement account and any contribution you add isn’t able to be deducted from your taxes.

Traditional IRA

Let’s examine a traditional IRA account. These you can open up just like a Roth IRA and contribute money into it. A sizeable difference here is your contributions to the account are tax deductible up to $5,500 annually. Though if you decide to withdraw any amount, you will have to pay that ten percent early withdrawal fee under the age fifty-nine and a half. You might be thinking “what if I need that cash for an emergency?” maybe stick with a Roth IRA. There are exceptions for both traditional and Roth accounts.

https://www.irs.gov/taxtopics/tc557

For both types of accounts if you have assets that appreciate in value. That profit is tax differed meaning you get to hold onto 100% on the gain until you withdraw.

What are the limits?

You can either choose to have a 401K and both Roth and traditional IRA’s. If you decide to use the three tools actively, remember the limit for contributions to a 401K is $18,500. IRA’s, on the other hand, is more limited, if you have both, you can contribute up to $5,500 between both accounts.

Where to open an account?

Good question! It depends. There are many different places you can apply to open one. Each institution will give you various benefits and features. Many open an account with a brokerage and use their platform for trading money for assets. Do a basic search on where to open an IRA. There is no one size fits all model. Here is a beautiful article on different institutions. https://www.thesimpledollar.com/best-ira-accounts/

Make your money work for you

There are many ways to trade in cash for assets. For those who don’t know much about the market or how to pick stocks, you don’t need to. Warren Buffet, one of the worlds most successful investors and wealthiest individuals on the planet, has this to say.

When one of the worlds richest man speaks about financial gain you should stop and listen.

Get a low-cost index fund that follows the S&P 500 and hold onto it. Over time it will slowly gain value with dividends when there is a dip in the market buy more shares.

Talk is cheap

Now you have a basic understanding of some easy financial tools you can incorporate into your life. Now the big thing is acting on it. Make your contributions automatic, set something small like fifty dollars a week or even twenty-five. You can then trade that cash for assets, and start to gain your wealth. The article isn’t some get rich quick scheme, its a start for your financial foundation. Being able to learn and understand how to put aside money then purchase items that may be able to grow over time are just the beginning. Get into the habit of saving, then if there is a dip in the market you can take advantage of that and gain over the long term. Don’t just stop there keep searching for new ways to expand your current income and take advantage of any tax deductions you can, any smart business would and you should too.

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