Setting Up Your First Investment Account

If you have a retirement account such as a 401K, 403B, Roth or Traditional IRA, Congratulations! You’re already an investor. A lot of people don’t consider their retirement savings as investing. Saving for retirement is important and should (arguably) be your first investing priority because:

It helps lower your tax liability either today or in retirement (depending on the type of account)
You’re possibly getting free money from an employer (if there is a match program)
It can easily be automated, so building your nest egg becomes habitual
It can help you achieve financial independence and be able to walk away from the need to earn a paycheck

If you’re not yet saving for retirement, I urge you to start today. It is extremely beneficial to start saving for retirement early so that you can take advantage of compound interest.

Employer 401K

If your employer offers a 401K plan then you’re in luck and won’t have to do this yourself. However, do make sure you are saving up to the point where you get the employer match. An employer match is when an employer puts money in your retirement plan, matching your contribution up to a certain percentage. For example, your employer might have a contingency that they will match you 100 percent up to 4%. If you earn say, $40,000 - in order to get the full 4% match, you will have to contribute at least 4% of your salary into the 401K. That is, about $66 per biweekly paycheck (or $133 per month) and so does your employer. You would have saved roughly $1600 per year in your 401K and receive an additional $1600 from your employer making it a total of $3200 (half of this was free money).

The great thing about a 401K is that the money you save is automatically deposited into the plan before it’s taxed, so less of your income will be taxed now. Plus, the 401(k) allows your savings to grow tax-free until you withdraw the money at retirement. This feature means your money will compound at a faster rate. Only when you withdraw money will you pay taxes. Read more about the types Retirement Accounts here.

If you don’t have a retirement plan with your employer or are self employed, a retirement account is very easy to set up.

Here’s how to to Set up Your Own Retirement Account

Decide How Much You Want to Save
If you’re following the 50/30/20 rule, then you should already have in mind to put 20% of your income towards saving and investing. So, you may decide to put between 10-15% of this allocation towards investing to yield a respectable nest egg. Consider the example of a 30 year old taking home a $50,000 salary. If he/she gets a 3% salary bump on average each year, and her investments earn an average annual return of 7% during her working life, then saving 15% of her income would yield $1.7 million by the time she reaches age 65. That is the power of starting early and of compound interest.
Decide What Types of Investments You Want
If you’re not eligible for a retirement fund at work that gets you matching funds, you can sign up for a Roth IRA or Traditional IRA. A Roth IRA is funded with money out of your paycheck that has already been taxed (post tax dollars), but when you withdraw the money in retirement, it will be tax-free. While a Roth IRA won’t save you money on taxes this year, it’s a fantastic way to avoid paying taxes on your future investment earnings. A Traditional IRA on the other hand utilizes pre-tax dollars. This gives you the ability to lower your taxable liability today but you will be required to pay taxes on it in retirement.
If you’re self employed or the owner of a small business you have the option of setting up a SEP IRA, Solo 401k or SIMPLE IRA. You can get more information about those types of Retirement Accounts here.
The type of Investment will depend on your time horizon (how long you have to invest). For example, a younger person will have a longer time to invest. It is advisable that when starting out you stick to an all-in-one fund also known as a target date-fund. Target-date funds are a convenient way to save for retirement because it removes the overwhelming investment choices to put into your retirement account. In this fund, you select a year closest to when you feel you will retire. For example, If you are 30 years old and you want retire at age 65 then it will be Target Date Fund 2055. The fund’s managers will then automatically invest you in a primarily aggressive portfolio now and then rebalance it to be a more conservative portfolio by time you plan to retire.
Choose Where to Open Your Account
There are plenty of options when it comes to opening a retirement account. Brokerage firms, banks, and other financial institutions offer a myriad of options to hold investments (i.e stocks, mutual funds, bonds and cash, earmarked for retirement). Where you choose to open an account will depend on the type of investor you are, hands-on or hands-off. If you have a little experience with investing and would like to buy and sell, an online broker may be the most beneficial. Consider building a portfolio out of low-cost index funds and ETFs. This approach makes it easier to ensure adequate diversification in your portfolio (which lowers your investing risks) and helps minimize the fees you’ll pay. Look for a broker that has low or no account fees and small commissions; offers a wide selection of no-transaction-fee mutual funds and commission-free exchange-traded funds; and provides solid customer support and educational resources, especially if you’re a new investor. Some great options are Vanguard,Fidelity, ETrade, Charles Schwab, Edward Jones, and TDAmeritrade to name a few.
A hands-off approach is an automated way to manage your investments using a robo-advisor. A robo-advisor will choose low-cost funds and rebalance your portfolio, keeping it in line with your investing preferences and timeline for a fraction of the cost of hiring a human financial advisor. This option is usually better for those who agonize over investment decisions. Look for one with a low management fee, generally 0.40% or less, and services that meet your needs.
If you decide to use a robo-advisor for your IRA, you don’t actually need to choose your investments. Your robo-advisor will ask you for your goals and preferences and select investments that match up with them, and even adjust those investments over time. Some great robe-advisors are Robinhood, Betterment, Ally Invest, and Acorns to name a few.
Fund Your Account and Get Started
After you’ve figured out how much you want to invest, the type of account you want to invest in and where, all that’s left to do is fund your account and get started. Put your money in and automate it so that a set amount comes out of your bank account each month. That’s it, you’re done.

If you’re starting out as an investor there’s no better way to start than with a retirement account. Choose a broker or financial institution, fund your account, select a few investments (stocks, mutual funds, ETFs), automate it, and put your money to work. Your future self will thank you!

This is Part II of The Investing Series. Click here for Part I.

Over the next couple weeks I will be breaking down the topic of Investing and providing ways in which you can start investing right away. Sign up below to receive the Investing Series directly to your inbox: