We all know we should invest and save for our future, but many of us don’t know how to start. Fortunately, getting started can be easier than you think.
Clark Howard’s Investment Guide for Beginners
Money expert Clark Howard has long championed the idea of making it easy to learn how to invest and save for retirement.
“Investing can seem so complicated that you might shut down and do nothing about it — or feel you need to hire someone to guide you,” Clark says. “However, it doesn’t need to be complex. You probably already have the opportunity to get started right where you work.”
In this article, I’ll take a look at the most common ways people start investing and building their nest eggs. I’ll guide you through the process of setting up your retirement plan, selecting your investments, making regular contributions and more.
Table of Contents
- Enroll With Your Employer’s Retirement Plan
- Select Your Investments
- Set Your Contribution Level
- Figure Out What to Do With Extra Money
1. Enroll With Your Employer’s Retirement Plan
For most people, learning how to start investing begins with signing up for your company’s 401(k) plan. This is the single easiest point of entry for most workers.
But don’t worry if you’re self-employed or don’t have a retirement plan at work. We’ll have specific guidance for you later in this article.
For everyone else, the process of signing up for your employer’s retirement plan is very simple, though it varies by workplace.
It starts with a conversation with someone in your human resources department to get instructions on how to enroll. Your HR representative should be able to answer any questions you have as you go through the process.
Once you’re signed up, you can arrange to make automatic contributions to the retirement plan each pay period. These contributions will come directly out of your paycheck before you ever see the money.
By automating this process, you make it “out of sight, out of mind.” The net result over time is that you start building up a retirement nest egg without having to think too much about it.
2. Select Your Investments
Now it’s time to select your investments. This part might seem complicated, but it doesn’t have to be!
Traditional 401(k) vs. Roth 401(k)
A lot of people now have the option of opening a Roth 401(k) at work alongside the traditional option of a regular 401(k). But there’s one big reason why Clark likes Roth 401(k)s more than traditional ones.
“Doing a Roth 401(k) is vastly superior to doing a traditional 401(k). With a Roth 401(k), you put in money that’s already been taxed into your 401(k) and it’s never taxed again,” Clark says. “If you don’t do a Roth 401(k) [and instead do a traditional 401(k)], then you’re just putting in pre-tax dollars. Everything your plan builds to over the years is all subject to tax down the road.”
That’s why Clark prefers the Roth 401(k). If not, a traditional 401(k) is still good, too.
We’ve got a complete explanation of the similarities and differences between a Roth 401(k) and traditional 401(k) — as well as an answer to the question of if you should do a Roth 401(k) — right here.
No matter whether you select a traditional 401(k) or its Roth counterpart, consider them like a house or a shell for your money. You’ve got to put some furniture in the house, right? That’s where the next part comes in.
Selecting the “furniture” you put in the house is perhaps the easiest choice of all. Clark is a big fan of target-date retirement funds, which he says are the “the best and easiest investment choice” for most people.
A target-date retirement fund is a simple investment portfolio. Typically, it’s made up of stocks and bonds in a specific ratio that changes as you age.
“All you have to do is pick the target-date fund closest to the year you expect to retire — say, 2045 or 2055 — and then contribute to that fund. That’s it!” Clark says.
The mix of stocks and bonds housed in the fund you select automatically adjust as you get closer to retirement. Basically, selecting a target-date fund lets you take a “set it and forget it” approach to investing.
For more about the mechanics of how target-date funds work, see our article here.
3. Set Your Contribution Level
Clark has one ironclad rule when it comes to setting your contribution level in your employer’s retirement plan: Always contribute at least the minimum necessary to pick up the full company match.
Many companies will match the money you put in at either at 50% or 100%, up to a certain contribution level. Check with your HR department for the specifics of your plan.
Let’s say, for example, you contribute 6% of your pay and there’s a 100% match up to 3% from your employer. That means your effective rate of contribution is 9%. You’re doing 6% and your employer is kicking in 3% for the full match.
“No matter how little or how much your company offers a match on, you’ve got to find a way to get it done,” Clark says. “Otherwise you’re leaving free money on the table.”
Once you’re picking up that full match, Clark recommends that you raise your contribution rate by 1% every six months. Do this until you hit the ceiling of what you’re allowed to contribute by law to a 401(k) or Roth 401(k).
(Editor’s note: In 2020, the max you can contribute to either plan is $19,500 per year or $26,000 if you’re over 50.)
4. Figure Out What to Do With Extra Money
Once you’ve maxed out your employer’s retirement plan, you need to find other places for additional contributions to go.
For most people, opening a Roth IRA makes the most sense. A Roth IRA is a tax-free account that lets you contribute up to $6,000 a year ($7,000 if you’re 50 or over).
But there are income limitations to qualify. You’re allowed to contribute the full amount to a Roth IRA only if your income is less than $124,000 as a single person or $196,000 as a couple. Beyond that, you may still be able to contribute but at a reduced amount.
We’ve got a full explanation of how to open a Roth IRA, along with the eligibility guidelines and complete income limitations, here.
Special Advice for the Self-Employed
A Roth IRA is also a good starting point if you don’t have access to an employer-sponsored retirement plan. Two other good options for the self-employed and entrepreneurs include:
- SEP (simplified employee pension) IRA
- Solo 401(k)
Many big retirement plan providers like Vanguard and Fidelity offer those plans. We’ve got a full write-up of what you need to know about opening a SEP IRA here.
Learning how to start investing doesn’t have to be complicated. It all begins with aiming to start saving enough to pick up your company’s full 401(k) match if one is available. From there, bump up your savings rate slowly over time.
Most employers want to make saving for retirement easy for you since so few of them offer pensions these days.
Be sure you take advantage of this low-hanging fruit in your life. If you don’t, you may have to work longer than you want to.
“When you get right down to it, you are the only one who can provide for your retirement — particularly if you’re under 40,” Clark says. “So, you can either start saving money now or face the fact that you may not get to retire.”
If you don’t have access to a retirement plan at work, make sure you do the research on opening a Roth IRA, SEP IRA or solo 401(k) at a place like Vanguard or Fidelity.
Finally, if you have additional investing questions, consider calling our Consumer Action Center.