This is a question we get a lot here at DWM – and it’s certainly a valid question.
For beginner investors, there is (generally) no one to tell you how much money you should be investing nor the type of account you should utilize. Maybe your parents are financially affluent and passed their ways on to you, or maybe you’ve spoken with a financial advisor, or maybe you’ve simply read a plethora of financial literature. That isn’t true for most.
Most beginner investors have no guidance whatsoever.
So, let’s cut to the chase:
Before You Begin Investing
Before you begin investing, you need to draw distinct differences between your money. I’ll touch on this idea again later, but investing is long-term. You do not want to invest money that you need this month to pay rent.
Investing is for building capital; thus, you want to invest money that you can put away for a long period of time.
If you have $100 in your pocket that you are going to use for groceries this week, that’s not capital.
So, make sure you understand the differences in your money.
How Much Do You Need to Begin Investing?
Despite the common misconceptions of new investors, you don’t need six zeros in your bank account before you can begin investing.
Really, you only need a dollar. One dollar.
It’s not a lot, but it’s a starting point.
Zak began his investing journey with only $25. You don’t need a ton of money to become an investor.
At Denver Wealth Management, we like to say:
Before you are a millionaire, you have to be a hundred-thousandaire.
Before you’re a hundred-thousandaire you have to be a ten-thousandaire.
Before you’re a ten-thousandaire, you have to be a thousandaire.
Before you’re a thousandaire, you have to be a hundredaire.
Whatever the amount, big or small, you can become an investor today. Do some research, read a book or two about investing, listen to the Mind of a Millionaire Podcast, and start your financial journey.
What Type of Account Should You Invest In?
As I touched on previously, when we think investing, we think long-term. We have said it before, but due to market volatility, assets for short-term goals do not belong in the market. No matter what anyone says, you can’t time the market consistently. Investing is for 10+ year goals.
Investing is generally used to increase capital. Capital is money used to build, not money for spending. Capital is not money that you use to pay your Netflix bill each month or leave in a savings account. Capital is for building wealth.
With that said, most investors are generally saving for their retirement. If this is your goal, we recommend a tax-deferred account. This would be a Roth IRA or a Traditional IRA.
In a Roth account, or a tax-deferred account, you as the investor put your money in after taxes have already been taken out. When you take out that retirement savings, it comes out tax free. For example, let’s say – hypothetically – you invest $1,000 and that turns into $10,000. When you want to take that money out, you won’t have to pay taxes.
The main difference between a Roth IRA and a Traditional IRA comes in the form of tax incentives. As discussed just prior, in a Roth IRA you would pay taxes before contributing, then take out your money tax-free once retired. With a Traditional IRA, however, contributions are tax deductible for the year you make the contribution. Withdrawals in retirement are taxed at regular income amounts.
The list of differences between Roth and Traditional IRA’s goes on and on. Check out more here. This is where you may want to sit down with a professional financial advisor and discuss your goals/situation to determine which option may best suit your needs.
On the other hand, maybe retirement isn’t your goal for investing. In that case, you may be looking at a taxable, non-retirement account. On an account like this, you’ll pay tax as the account grows.
The tax you pay varies, which is where you would want to speak with a financial advisor.
Make sure you understand and draw distinction between your money. Understand which money should be used for spending and which should be used to build capital. In other words, what money do you need for buying groceries every month and what money do you want to invest for retirement (or whatever your long-term financial goals may be)?
Once you understand those distinctions, determine your investing goals. Are you investing for retirement or are you investing for something else?
To begin your financial journey, you don’t need a million dollars – you need one. You can begin investing with a small amount and continue to grow as you earn more.
For more questions regarding your investing, don’t hesitate to reach out. We would be happy to answer any inquiries.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Roth IRA offers tax deferral on any earnings in the accounts. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may results in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.