When Should I Start Investing?
Before you think about investing, you should make sure your financial house is in order.
Here is a quick checklist for your building Financial House:
- You have paid off all your high interest loans (credit cards etc.)
- You have your emergency savings funded - I have a blog post explaining emergency funds: https://www.ryanjmarshall.com/blog/what-is-an-emergency-fund-and-why-do-you-need-one
- You have enough insurance coverage for life, health, and disability
- You are contributing AT LEAST your company’s match % in your employer retirement plan
- You are fully funding a ROTH IRA
Congratulations! You may be ready to open an investment account not tied to retirement savings.
As soon as your financial house is in order: start investing – the sooner the better. It’s all about your time in the market to take advantage of Compounding Interest.
So how do I get started investing once I’m ready?
The easiest way to get started with investing would be in your company’s offered retirement plan. Since this is typically funded through payroll deductions, it is a simple way to set up automatic investments. Also, some companies offer an investment match to what you are contributing. Here is an example –
You make $50,000/year and your company matches a 4% contribution. You should invest at a minimum 4% each year which is $2,000 [$167/month]. Your employer would then invest $2,000 on your behalf into the plan. Who wouldn’t want free money? If you invest $0, most plans don’t require the employer to invest at all, and you will be missing out on that match.
The next investment account you should consider is a ROTH IRA. This may provide you with much needed tax-free income in retirement. Remember, you pay federal ordinary income tax on income withdrawn from a traditional 401k plan. So, your $1 million 401k is probably only worth around $800,000 after taxes. However, your $1 million ROTH IRA is worth $1 million after taxes. It’s important to be aware of the type of investment account you have, and how it will coincide with your goals later in life.
The sooner you can start saving and investing - the better. This is especially true when you factor in compounding interest. Check out my blog post on compounding interest to learn more: https://www.ryanjmarshall.com/blog/how-powerful-is-compound-interest
Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.