For those who are new to Investors Column, it is intended for people who are not very knowledgeable about investing, and who are perhaps unsure of where to begin.  This month the review getting started as an investor.

401k and IRA  Accounts

For most people, the first encounter with investing is a 401k plan offered by the company where they work.

Should you participate?  What should you do?

The short answer is:  “Yes, definitely participate!”

Free Money

Typically, you should contribute at least six percent of each paycheck to your 401k account.  Most companies will match your contributions up to six percent.  Some will match 100%, some 50%, and some only 25%.  But whatever the amount, that is free money!  Take advantage of it.

Particularly when just starting out, “losing” six percent of each paycheck can seem too painful.  But putting it into a 401k is the cost of getting that free money.  Budget a bit more carefully, and make it work.  Making your life-style fit the smaller paycheck will give you a much better standard of living later on.  

The 401k is a means to build up the money you will be living on when you retire.  That may seem a long way in the future – 40 years or more, but it is important to start as early as possible.  Your savings must sustain you from the time you retire until you die; that can be 30 years or more.  

Investing Grows Your Savings

Your company’s 401k program is offered with the help of an investment brokerage firm.  Through periodic on-site visits by an agent and by emails, the brokerage will offer several mutual funds into which you would invest your 401k money in stocks.  Typically, you would pick a mixture of funds; some offer faster growth (but more risky) and some are more conservative (but less likely to lose money).  

The stock market has good years and bad years; some years you will lose money.  Don’t be discouraged; continue investing, especially during downturns – that is when your money buys more, which means your investments will grow faster during years of growth.  Typically, there are more years of growth than downturns.  

On the whole, your savings will grow at the rate you will need in order to make your retirement plans a success.

Increasing Your Investment

Legally, you can invest up to 15 percent of your income in your 401k, and that amount should be your goal.  Every time the company gives you a raise, increase your percent; every time you pay off a loan, increase your percent.  

How Much Is Enough?

How much is enough money when you retire?  Ideally, you want to have enough so that you can live on the amount your investments grow each year, and never touch the base amount.  

IRAs – Individual Retirement Accounts

An IRA is essentially the same as a 401k.  If the company you work for does not offer a 401k, start an IRA, by meeting with a financial analyst or an investment broker, such as Edward Jones, to set up an IRA.  Treat it just like a mortgage payment or any other bill:  each month, deposit a fixed amount of money into the IRA.  As with a 401k, the financial adviser will offer you mutual funds that range from faster growth to more conservative performance; choose a mixture, until you learn more about investing.

Learning How to Invest

401k and IRA accounts are “pre-tax”; you pay no income tax on that part of your income that is deposited into these accounts.  

Besides starting a 401k or IRA, open an “after-tax” account at a “discount brokerage”, with an initial deposit of $1,000 or so.  Deposit more whenever you can; e.g., money you get for birthdays or Christmas.  

Use this account to begin your education in buying and selling stocks, and gaining the experience and know-how you need to be successful at investing.  Watch the Investors Column each month for ideas, strategies, and tactics to make that happen.  Doing the research is key.

Some stocks you buy will make you money, and some stocks will be losers; you will lose money on some investments.  The object is to have more winner stocks than loser stocks, to keep learning, to keep gaining experience, to learn not to be a quitter (quitters are losers), to persevere, and to be a successful investor.

Scott Crosby
scott@scottschoice.com
www.scottschoice.com■