Your experience as an investor is likely to include three different avenues for investing.

The first and easiest is through your employer’s 401k plan.  The money that gets added from your account comes from two sources:  the amount you agree to have taken from your paycheck each month and your employer’s matching amount.

Your employer will match your own contributions – up to six percent of your total pay.  Some employers will match 100%, some will match 50%, and some will match only 25%.  Whichever is the case, unflinchingly deposit that six percent.  Their matching deposit, whatever the percentage, is literally free money – it is yours, if only you deposit that six percent.  

Six percent can seem like a lot when you are just starting out, with a tight budget and lots of new bills to pay.  When you retire, you will thank yourself for being determined to hold true to your course.  

Each time you pay off any loans – student loans, car loans, etc. – increase the amount you deposit in your 401k by that amount.  Keep increasing your amount until you reach the maximum legal percentage – 15 percent.  

Most 401k plans provide a set of conservative mutual funds from which you can select as to where your money can go.  Most people do not wish to become investors, and choose the most conservative funds.  Less conservative funds may perform better during economic growth, but lose value more readily in economic downturns.  Risk brings rewards, but also dangers.

When you change jobs, move your 401k money into an IRA account.  Learn how to invest that money and increase it by buying and selling stock.  Learn what it takes to become a good investor in your own right.  

You will make mistakes:  consider them to be tuition payments to the University of Hard Knocks – but learn why what you did was a mistake, and what you should have done instead.  Being an investor will always be a constant, never-ending learning process.

401k accounts and IRA accounts are “pre-tax” accounts.  You pay no taxes on money made through your investing in 401k and IRA accounts, but the IRS will not allow you to withdraw that money until you reach retirement age (at which time it will be taxed).

Your third avenue for investing is to open an after-tax account.  You should build up a certain amount of savings as you begin working and building your life.  That money can be held in a savings account at a bank, or you can open an after-tax account with the same broker you used for creating your IRA account.

With an after-tax account, you must pay taxes on any profits minus any losses.  If you hold stock for more than a year, you only pay a “capital gains tax”.  If you keep stock for less than a year before selling it, your profits minus any losses is considered “income”.  Taxes on income are higher than on capital gains, so whenever possible, buy stocks that you believe you will hold for more than a year.

Buying stocks that you expect to be good investments in the longer term is usually a good practice regardless of how much taxation is involved, and whether you purchase stocks in your IRA or your after-tax account.

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