How to Start Investing

If you're looking to build wealth, you probably already know that you should be investing. After all, investing regularly and consistently with a diversified portfolio can help your money compound and grow over time. And you don’t need to have much money to get started.

But it can be hard to know where to start—especially for beginners.

The good news? When it comes to investing, there are a number of different ways you can get started. (And there are people that can help.) Below, we take a quick look at what investing is and explore some of the most common ways that you can get started.

What is investing?

Investing is when you buy assets—like stocks, bonds, CDs, real estate, etc.—with the goal of earning a profit from them.

In some cases, you can earn income simply by holding the asset. This is the case with bonds, dividend stocks, CDs and certain forms of real estate that pay interest, dividends and rent respectively.

Profit can also come when you sell an asset that has increased in value. (When this happens, you realize a capital gain and you may owe capital gains taxes on your profit.)

There are other, more complex strategies to make a profit by investing, but the two discussed above are the most common and straightforward for beginners.

How to start investing

If you’re just getting started, here are some ways you can jump in.

Invest in a 401(k)

One of the most common ways that people start investing is through a 401(k) offered by their employer. If you qualify to contribute to a 401(k), this is a great way to get started.

A 401(k) is a specific type of account to help people save for retirement. It’s offered through your employer and carries a number of powerful tax benefits.

401(k)s come in two main varieties: Traditional and Roth. When you contribute to a traditional 401(k), you reduce your taxable income for the year in which you make the contributions, paying taxes only when you make withdrawals during retirement. When you contribute to a Roth 401(k), you pay income taxes up front—but then pay no income taxes in retirement.

Your 401(k) plan typically will offer a number of investment options, which usually include mutual funds, exchange-traded funds and even target-date funds (which you select based on when you plan to retire). The funds allow you to own a diversified basket of investments without having to make all the individual investment decisions yourself. This, in turn, makes it easier to manage the different types of risks that come with investing.

One note about 401(k)s to keep in mind: While they can be a powerful means of saving for retirement, they aren’t a great option if you’re investing for short- or mid-term goals. Why? Because if you withdraw money from your 401(k) before you are full retirement age, you may owe a hefty 10 percent penalty on top of regular income taxes. For those other goals, you might instead look to investing through a brokerage account (see below).

Invest in an IRA

An individual retirement account (IRA) is similar to a 401(k) in that both are used to save for retirement. The key difference, however, is that IRAs are not employer-sponsored. Anyone with earned income can open an IRA and invest through it, making it a great option for supplementing retirement savings.

Like 401(k)s, IRAs also come in traditional and Roth varieties. Traditional IRAs also have penalties if you try to use the money before you turn 59½. Earnings in Roth IRAs are subject to the same penalty unless an exception applies. It’s also worth noting that higher income earners may not be able to contribute directly to a Roth IRA.

Open a brokerage account

While 401(k)s and IRAs come with tax benefits, they’re also for a very specific purpose: retirement. If you have other financial goals—like buying a house or starting a business—you may want to open a taxable investment account, like a brokerage account.

A brokerage account is an account you can use to buy and sell different assets, including stocks and bonds and different types of funds that allow you to own a variety of investments through a single holding.

Any earnings on investments in these accounts may be taxed annually. Gains may be taxed at withdrawal, but you can use the money at any time for any reason.

There are many different types of funds that you can invest in, but some of the most common include:

• Exchange-traded funds (ETFs)

• Mutual Funds

• Index Funds

• Target Date Funds

While funds can be a great way to quickly diversify your portfolio, they do come with a downside. Investors must pay the fund’s management fees, which can reduce your overall investment return. Before investing in a fund, be sure to understand the fund’s fee structure and expense ratio. There are many funds with very low fees.

Other investing options to consider

Of course, the three investment accounts discussed above are just a few of the easy ways to start investing. There are many other options that could be better suited toward your goals and situation. Some of these other options include:

• 403(b) plans: These are retirement accounts offered by public schools, certain charities and other nonprofit organizations to their employees. They work in much the same way as 401(k)s.

• 457(b) plans: These are retirement accounts available to employees of state and local governments, including police officers, firefighters and other civil servants.

• SIMPLE 401(k)s and SIMPLE IRAs: These retirement accounts are made available for small businesses and their employees.

• SEP IRAs and Solo 401(k)s: These are options for self-employed individuals and business owners.

• 529 college savings plan: These accounts can be used to help you save for your child’s educational and college expenses.

Your financial plan is about more than just investing

Investing is a powerful tool to help grow your money, but ultimately, it is just one aspect of a well-designed financial plan. It’s also important to consider other pieces of your financial picture and how they’ll work together to help you meet all of your financial goals.

In addition to an investing strategy, your financial plan should include:

• A well-stocked emergency fund to see you through life’s unexpected challenges.

• Methods of protecting the money you’ve earned—through life insurance or disability insurance.

• A plan to manage any debt you may have, whether that be in the form of student loans, car loans, credit cards, a mortgage, etc.

Looking at your financial situation broadly may feel a bit overwhelming. And that’s OK. That’s where your Northwestern Mutual financial advisor can help. He or she can get to know you and your goals and then create a plan that’s tailored to you and what you want to achieve.

All investments carry some level of risk including the potential loss of all money invested. No investment strategy can guarantee a profit or protect against a loss. This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.