Contrary to popular belief, investing is not only for the ultra-wealthy. In fact, there are plenty of ways to start investing for beginners on a variety of budgets and risk tolerances. For those who are just getting started with investing, here are some options to explore.
High-interest Savings Accounts
The right type of savings account can be a form of investment that carries very little risk. According to the FDIC, the average interest rate for U.S. savings accounts Off Site Link is only 0.05% APY. That means if you put $1,000 in a savings account at the beginning of the year and don’t add any more to it, you would only earn $0.50 in interest by the end of the year. However, there are some savings accounts that offer higher interest rates.
The first type of high-interest savings account is known as a high-yield savings account (also known as money market accounts at some institutions). The APY for a high-yield savings account fluctuates based on market conditions, so the interest you sign up with will not stay the same over time. Some financial institutions also offer tiered savings accounts that earn higher interest with higher balances. High-yield savings accounts are an excellent place to invest an emergency fund because they earn that higher interest rate while still giving you ready access to your cash.
Another type of high-interest account is a Certificate of Deposit (CD). A CD locks in an interest rate for a specified period (usually six months to five years) and earns higher interest than a regular savings account or a high-yield savings account.
Typically, you cannot withdraw money from a CD before the term expires without incurring penalty charges. However, a CD is the perfect opportunity for investing when you have a short-term or medium-term savings goal, such as a down payment. Unlike many other types of investment, your return with a CD is guaranteed.
401(k) Retirement Accounts
Beginners who want to invest for long-term goals like retirement should consider a 401(k). A 401(k) is an employer-sponsored retirement account that invests a percentage of an employee’s pre-tax salary from every paycheck. As of 2020, you can contribute up to $19,500 per year to a 401(k), or $26,000 if you’re 50 or older.
A benefit of 401(k)s is that many employers match employees’ contributions up to a certain percentage of the salary. For example, an employer might match 100% of your contributions up to 3% of your salary. So if you make $50,000, your employer could contribute up to an additional $1,500 to your 401(k).
Within a 401(k), you have a variety of investment choices. One recommendation is to choose a target date fund, which is based on your expected retirement date. The portfolio of assets within the target date fund shifts to reflect lower levels of risk as you approach retirement.
If you invest in a target date fund with expected retirement in 2065, you will likely see a higher percentage of stocks (which carry more risk) in your 401(k) in your 20s, but a higher percentage of bonds (which are more conservative) by the time you reach your 60s. Note, too, that like CDs, early withdrawal from your 401(k) will likely be penalized.
For beginner investors who don’t want to track the performance of individual stocks, an index fund is a great choice for investing beyond a retirement plan or high-interest savings account.
Index funds are low-cost investments based on a market index, such as the S&P 500. An S&P 500 index fund would purchase stocks from the 500 largest public companies in the U.S., thus diversifying your stock portfolio without you purchasing stocks in those individual companies.
One of the main advantages of an index fund is that it is passively managed, meaning that you aren’t paying the higher fees associated with a portfolio that is actively managed by a financial professional. It also aims to mirror the overall performance of the index and is generally lower risk than picking individual stocks and trying to beat the market.
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