3 Simple Steps To Start Investing, According to Ramit Sethi
©Ramit Sethi
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Ramit Sethi is an American author and podcaster, best known for his “I Will Teach You To Be Rich” book and franchise. He regularly shares personal finance tips with his social media audience and podcast listeners.
In a recent post, Sethi shared the advice he gives to family members and friends who aren’t sure how to start investing. Here are his three steps.
1. Choose Between Vanguard, Fidelity and Schwab
The first step, Sethi said, is to pick whom you want to invest your money with — Vanguard, Fidelity or Charles Schwab. These are three of the main investment management companies in the U.S.
These companies offer different types of investment funds that you can put your money into. Some funds group stocks by category — for example, technology or healthcare companies — or by how risky the investments might be.
2. Pick a Target-Date Fund
After choosing an investment company, you should find a target-date fund that matches the year you plan to retire. For example, if you plan to retire at 65 and will be 65 in 2050, look for the “Vanguard Target Retirement 2050 Fund.” Target-date funds are designed to adjust their investment mix as you get closer to retirement. They start with a more aggressive mix of stocks and gradually become more conservative by adding bonds and other stable investments.
“The target date fund will automatically get more conservative over time — that’s what you want,” Sethi explained.
Generally, people are more eager to invest in riskier assets when they’re younger since they still have many working years ahead of them, and it’s still possible to recover from a few bad investments. When you get older, the general advice is to focus on stable investments and not risk your nest egg too much.
Because a target-date fund automatically adjusts for you, you don’t have to worry about moving your investments to safer assets as you age. Also, your investments are automatically diversified. This means you’re less likely to lose all of your money if some of the companies that make up the fund lose their value.
3. Set Up Automatic Monthly Investments
The final step is to start investing a fixed amount of money every month. Sethi recommends setting up an automatic transfer from your bank account to your investment account. This way, you can consistently invest a portion of your paycheck without having to think about it each time.
Regular monthly investments take advantage of a strategy called dollar-cost averaging. Instead of trying to perfectly time the market to buy at the optimal time, you just buy at a set time each day, week or month. Since you invest the same amount of money each time, you automatically buy more shares when prices are low and fewer when prices are high. Doing this can help lower your average cost per share as time goes on.
“All you’ve got to do is make sure that the money is automatically being sent and invested every single month,” Sethi said. “That’s the way true 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 help your retirement fund grow.
Tips for Making the Most of Target-Date Funds
Use Tax-Advantaged Accounts
If you’re planning to invest your money for retirement and not withdraw it before that, then you should consider investing through a tax-advantaged account like a 401(k) or an individual retirement account.
These accounts offer you special tax benefits that can save you money in the long term. A 401(k) or traditional IRA allows you to invest pretax dollars, reducing your taxable income now. A Roth IRA uses money that’s already been taxed, but your investments grow tax-free — you won’t pay taxes when you withdraw the money in retirement.
Take Advantage of Employer Matching
If your employer offers a 401(k) plan with matching contributions, make sure you take full advantage of it. Employer matching means that your company will contribute extra money to your 401(k) based on how much you invest. For example, if your employer matches 50% of your contributions up to 6% of your salary and you earn $50,000 a year, contributing 6% ($3,000) means your employer adds another $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 taking full advantage of your employer’s contributions. Try to max out your contributions so that you’re not leaving any money on the table.