Younger people who are in the early stages of their careers often ask us, “How should I start investing? What should I do first?” We love to hear this question because the key to building wealth is to start saving money early. Our philosophy for anyone of any age and any financial status is “Pay yourself first.” We love nothing more than seeing our clients take advantage of the “magic” of compound interest over time.
Although the world of investments can seem complex and intimidating to those just getting started, it is really pretty easy to get started. Here are four straightforward, simple ways to start investing. We call this list the “investing order of operations.”
1. Open a savings account
This might sound a bit boring, but it’s an easy and effective way to start growing your nest egg — open a savings account with one month of your take-home salary. Continue contributing more to that account, working up to six months, ideally, and maybe even 12.
This step is essential to make sure that all the other steps you take from an investing standpoint don’t come tumbling down when unexpected expenses come up. This is your “emergency fund.” It is critical to have liquid assets available when you have a vehicle that needs to be repaired or a furnace that needs to be replaced, or if you or your spouse is laid off unexpectedly.
2. Contribute to a qualified retirement plan
In addition to having cash savings in place, focus on maxing out your contributions to retirement plans, such as a 401(k) or 403(b), offered by an employer. This type of tax-advantaged retirement savings system in the United States is one of the most effective wealth-building programs in the world.
Contributing to an employer’s retirement plan is easy, convenient and efficient. Once you sign up for the plan and specify how much money (up to established limits) you want to set aside in that account, you don’t really have to do much else, and your savings will grow over time.
Another significant benefit of these plans is the “employer matching.” An employer match is when your employer contributes a certain amount to your retirement savings plan based on how much you contribute. Each company establishes its own criteria for the match, but a common approach is for a company to match your contribution dollar-for-dollar, up to a certain percentage of your salary. The limits typically increase each year. For example, an employee’s 401(k) contribution limit is $23,500 for 2025. in 2004, employees were allowed to contribute up to $23,000 to their 401(k) accounts, and the limit in 2023 was $22,500. These amounts do not include what the employer contributes to the account.
This is a valuable benefit that can boost your savings considerably. Not taking advantage of an employer match is like leaving free money on the table. To receive the employer match, you typically have to contribute a minimum amount. Make sure you are contributing at least enough of your income to qualify for the employer match! Not doing so is like leaving money on the table.
And then work toward contributing the maximum amount over time. Maybe increase your contribution by 1 percent each year on your birthday. Over time, it will give you great satisfaction to see your account growing. This account will likely become a major part of your retirement plan and goals.
Unfortunately, many full-time American workers lack access to an employer-provided retirement plan. Estimates of the share of workers who do not participate in such plans range from 44 to 67 percent, a difference of 22 million workers.
If you don’t work for a company that offers such a plan, then contribute to a SIMPLE (Savings Incentive Match Plan for Employees) IRA (individual retirement account) or a SEP (Simplified Employee Pension) IRA. Both are retirement savings plan for small businesses and their employees. They offer a simplified way to save for retirement that reduces your taxes.
3. Set up a Roth IRA
Of course we save money for retirement to grow our nest egg; however, we also want to save in a way that helps us manage our tax burden once we start taking money out of our retirement savings. A Roth IRA is an excellent tool for accomplishing this goal. A Roth IRA will give you a tax-free income stream in retirement so you can keep more of what you earn.
A Roth IRA is an individual retirement account that offers benefits you won’t get with a traditional IRA. Roth IRAs are tax-friendly. Although you can’t take a tax deduction on your Roth IRA contributions, the money you contribute in the account will grow tax-free, and your deductions will also be tax-free, as long as you follow the withdrawal rules.
A Roth IRA will give you tax-free withdrawals in retirement as long as you’re 59½ and have held the account for at least five years. The maximum Roth IRA contribution for both 2024 and 2025 is $7,000 for those under age 50 and $8,000 for those age 50 and older. For tax year 2024, single filers earning less than $146,000 and joint filers earning less than $230,000 can make a full Roth IRA contribution. For tax year 2025, single filers earning less than $150,000 and joint filers earning less than $236,000 can make a full Roth IRA contribution.
You can have, and contribute to, multiple types of IRAs in a single year, but your total contribution across all accounts cannot exceed the annual IRS limit. The deadline to make an IRA contribution is Tax Day.
Another major benefit of a Roth IRA is that you do not have to take required minimum distributions (RMDs). While the IRS requires holders of traditional IRAs to start taking RMDs by April 1 of the year after they reach age 73, there is no such requirement with a Roth IRA. This means your money has more time to grow tax-free.
4. Maintain a taxable investment account
After you have gotten those first three accounts in place, I recommend setting up a taxable investment account. This is a great way to start investing because no age limits are associated with it. You could take money out of this account at age 35 or age 50, for example; you don’t have to wait until age 59½, like you do with some types of accounts. Also, there are no restrictions on how much money you can keep in this type of account.
You can invest in a wide range of assets, including stocks and bonds, and you can invest after-tax dollars. This means you can leave your money in the market for longer periods. Also, you can open an account any time, and there are no restrictions on how much you can contribute.
You will, however, be taxed on any any interest, dividends or capital gains you earn, and you will pay taxes on your investment income each year.
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The key to building wealth is to start early and invest consistently. We are here to guide you and to serve as your accountability partner as you make the commitment to invest in your future. If you have any questions about these four types of accounts, or any other financial-planning or investing topic, please get in touch with us. My team and I are always here to help.
