©Ramit Sethi
Ramit Sethi is an American author and podcaster, best known for his book and series “I Will Teach You To Be Rich.” He regularly shares personal finance tips with his social media audience and podcast listeners.
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In a recent post, Sethi shared the advice he gives to family and friends who are wondering how to start investing. Here are his three steps.
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1. Choose from Vanguard, Fidelity, or Schwab
The first step, Sethi said, is to choose whether you want to invest your money in Vanguard, Fidelity or Charles Schwab. These are three of the major investment management companies in the United States
These companies offer different types of investment funds in which you can put your money. Some funds group stocks by category, such as technology or healthcare companies, or by the degree of risk of the investment.
2. Select a target date fund
Once you choose an investment company, you need to find a target date fund that matches the year you plan to retire. For example, if you plan to retire at age 65 and will be 65 in 2050, look for the “Vanguard Target Retirement 2050 Fund.” Target-date funds are designed to adjust your investment mix as you approach retirement. Start with a more aggressive stock mix and gradually become more conservative by adding bonds and other stable investments.
“Target-date funds automatically become more conservative over time, and that’s what you want,” Sethi explained.
Generally, people become more eager to invest in riskier assets when they are younger. That’s because they still have many years to work with and may be able to recoup some of their failed investments. As you get older, the general advice is to focus on stable investments and avoid putting your eggs at too much risk.
Target-date funds adjust automatically, so you don’t have to worry about moving your investments into safer assets as you age. Also, your investments are automatically diversified. This means that even if some of the companies that make up the fund lose value, you are unlikely to lose all of your money.
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3. Set up automatic monthly investments
The final step is to start investing a certain amount each month. Sethi recommends setting up automatic transfers from your bank account to your investment account. This way, you can invest a portion of your paycheck on an ongoing basis without having to think about it every time.
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Regular monthly investments utilize a strategy called dollar-cost averaging. Instead of trying to time the market perfectly and buy at the perfect time, you simply buy at a set time each day, week, or month. Because you invest the same amount each time, you automatically end up buying more shares when prices are low and fewer shares when prices are high. This can lower your average cost per share over time.
“All you have to do is make sure your funds are transferred and invested automatically every month,” Sethi says. “That’s how real wealth is created.”
By starting to invest as early as possible and investing regularly, you can take advantage of the power of compound interest to grow your retirement savings.
Tips for getting the most out of target date funds
Use a tax-advantaged account
If you plan to invest your retirement funds and withdraw them before then, you should consider investing through a tax-advantaged account such as a 401(k) or an individual retirement account.
These accounts offer special tax benefits that can save you money in the long run. A 401(k) or traditional IRA allows you to invest pre-tax dollars, reducing your taxable income now. A Roth IRA uses funds that have already been taxed, but your investments grow tax-free. You don’t have to pay taxes when you withdraw your funds in retirement.
Take advantage of employer matching
If your employer offers a 401(k) plan with matching contributions, be sure to make the most of it. Employer matching means your company will provide additional funds to your 401(k) based on the amount you invest. For example, if your employer matches 50% of your contributions to 6% of your salary, and you make $50,000 a year, contributing 6% ($3,000) means your employer will match your contributions to 6% of your salary. means adding an additional $1,500 to your account.
Many employer 401(k) plans offer access to target date funds, so you should be able to follow Sethi’s advice while maximizing your employer contributions. Make sure to make the most of your donations so you don’t leave any money on the table.
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This article was originally published on GOBankingRates.com: 3 Easy Steps to Start Investing by Ramit Sethi
