If you’re a beginning investor looking for ways to make your money grow, you’re not alone. Going it alone when learning to invest is a tried-and-true path. But everyone has to start investing money somewhere.
Today, getting information about how to invest money online has increasingly become the norm than the exception. Looking here surfaces several exciting ideas worth considering when looking to build a diversified portfolio for beginner investors.
In other words, you’re never too young to learn about the best investments for beginners.
This article will discuss how to choose these investments and what they are. Some suitable investments for beginners include high yield savings accounts and checking accounts, stocks, bonds, index funds, and more.
Table of Contents
Featured Financial Products
Best Investments for Beginners
Many new investors might not know the best place to start or where to put their money first. When beginners think of investing, visions of stock market investing or cryptocurrency investing might come to mind.
However, before you start investing in the market, it’s a good idea to have some cash on hand in an emergency fund or checking account. Here are some options to consider.
1. Emergency Fund
Many Americans fail to set aside money in an emergency fund, leaving them exposed to financial risk.
If this is you, consider starting one today. That way, if something unexpected happens, such as losing your job or having to pay for car repairs, an emergency fund will help give you some financial stability until things are back on track. Additionally, having an emergency fund can help if you need to leave a toxic job, fly last minute to say goodbye to a grandparent, or have an unexpected medical issue.
Many financial experts recommend you establish an emergency fund first before investing money in the market. That way, unexpected events won’t derail your daily budget.
Lastly, emergency funds provide incredible peace of mind. Life is easier when unexpected repairs or doctor’s bills don’t cause financial stress. In other words, an emergency fund goes a long way to ease tension and worry in everyday life, and who doesn’t want that?
2. Checking Account
If you have cash on hand, it’s best to keep it in a checking account (and not under your mattress.) Much like the credit bureaus report how you handle credit, an organization called ChexSystems keeps track of how you handle checking accounts.
Thus, putting your money in a bank account is an excellent way to establish a history with the bank. Most checking accounts don’t provide competitive interest rates, but many credit unions and banks offer other benefits, like a debit card, access to loans, and financial education.
3. Savings Account
Most banks also offer savings accounts, which is an excellent place to put cash on hand you don’t want to spend (but aren’t quite ready to invest.) Like checking accounts, savings accounts likely won’t have competitive interest rates unless they are a designated high-yield savings account.
Savings account withdrawals used to be regulated. In the past, you could be penalized if you withdrew money from your savings account more than six times per month.
However, this changed during the pandemic. For this reason, it’s best to check with your bank if they charge fees for savings account withdrawals, so you’re informed.
4. High-Yield Savings Account
High-yield savings accounts are similar to checking accounts, but they offer a slightly higher interest rate. This means you can potentially earn more than your regular bank account, which is why it’s essential to compare the rates offered by different banks before opening a new one.
Banks compete over who can offer the best interest rates on high yield accounts. However, banks base their interest rates on several factors, including something called the prime rate. So, you might notice many banks offer interest rates that are very close to one another.
Unfortunately, just because a bank offers a specific interest rate when you sign up for an account doesn’t mean that you’re guaranteed that interest rate for the long term.
Interest rates change, so consider other factors, like how easy it is to transfer money in and out of your account when deciding on a bank.
Overall, high yield savings accounts are an excellent place to keep short-term savings or an emergency fund because they keep your money in a separate location and typically offer better interest rates.
5. Retirement Plans—401(k)
Once you have an emergency fund and a bank account with cash on hand, it’s time to consider investing in the market. The easiest way to get started is to take advantage of your employer’s retirement plan options (if they have them.)
The most common retirement plan employer’s offer is a 401(k). A 401(k) is a type of retirement plan that allows you to put away money before it gets taxed and invest it.
This can potentially save consumers thousands of dollars in taxes throughout the year. The catch is if you withdraw your money before age 59.5, there generally are penalties. A 401(k) is designed to grow your money until you’re at retirement age.
As of 2024, you will be able to save up to $23,000 per year (this limit increases by $7,500 if age 50 or older) in your 401(k). Your employer also has the option to match some of these contributions if they want.
If they do, that is essentially free money you can earn towards your retirement, so it’s absolutely worth it.
6. Retirement Plans—IRA
Another type of retirement plan is called an individual retirement account or IRA. An IRA is a type of retirement plan that lets you save up to $7,000 per year (or $8,000 if you are above age 50.)
You can invest in an IRA in addition to a 401k. They also have two types: Traditional IRA and Roth IRA, which will be explained further below.
Featured Financial Products
What is the Difference Between a Traditional vs. Roth Retirement Account?
With a Traditional IRA, you contribute pre-tax dollars to your account, and the money grows tax-deferred until withdrawal, which can begin at age 59 ½. Roth IRAs are after-tax accounts where your money grows tax-free until you can withdraw at age 59 ½ without penalty or taxes on interest earned. The main difference between these two types of accounts is how they affect your tax status at the time of contribution vs. when withdrawing funds later in life.
Let’s take a closer look at each type of investment tool so you can decide which best fits your lifestyle.
Traditional IRA
The benefit of a Traditional IRA is that you could get an immediate tax benefit when you contribute to it, depending on your adjusted gross income. Then, your investments grow tax-deferred, and this means you will pay taxes on your withdrawals.
In other words, you could benefit financially from contributing to a Traditional IRA now, but you will eventually have to pay taxes on withdrawals. If you expect to be in a much higher tax bracket at 59 ½, a Roth IRA might be a better fit for you.
Roth IRA
A Roth IRA works in the opposite way of a Traditional IRA. With a Roth IRA, you pay taxes on your income now and contribute after-tax dollars to your IRA account. Then, your investments grow tax-free. When it’s time to take a distribution at 59 ½, you will not pay taxes on it.
In other words, because you paid tax on your income upfront, you don’t have to pay it again when you withdraw.
Keep in mind that only people under a specific income limit can contribute to a Roth IRA. Ultimately, it’s up to you to decide which type of IRA retirement plan is best for you and your tax strategy both now and in retirement.
Learn more about the best investments for Roth IRA accounts.
7. Health Savings Account
A Health Savings Account (HSA) is a special savings and investment account with a triple tax benefit.
First, you can add money to the account pre-tax, and it also grows tax-free. Then, you can spend your funds tax-free on qualifying expenses.
According to the IRS, you are eligible to open an HSA account if you meet these criteria:
- You have a high deductible health care plan and no other health coverage.
- You are not enrolled in Medicare.
- You’re not someone else’s dependent.
HSAs are a good investment account for retirement planning because your health care costs could rise as you get older. Saving and investing now and letting those funds grow tax-free could help you considerably when you’re of retirement age.
You can invest in mutual funds or exchange-traded funds through your HSA. This grants you the option of investing in stocks and bonds, which can help your account balance compound with time.
Related: 6 HSA Money Mistakes to Avoid
8. Brokerage Account
A brokerage account is a bank account that you use to buy and sell investments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), etc.
You can easily open a brokerage account with online brokers offering stock trading apps and platforms.
There are traditional brokerage firms where you work with an individual broker who places trades on your behalf. They’ll typically charge you commissions and fees every time they handle a transaction for you (buying or selling), so it’s essential to pick one that has low trading costs.
You can save on transaction fees by using low-cost brokerage firm like E*Trade. This represents one of the best investment apps for beginners and offers access to low-cost funds with very low fees, which can save you thousands of dollars on fees during your lifetime.
There are also other micro-investing apps that enable you to buy investments. Again, be mindful of fees when using investing apps. Although many of them make it incredibly easy to invest, there is typically a cost to use them.
As an investor, it’s just as important to understand what you’re investing in as it is to understand the fees associated with your investments. That’s how you ensure you’re on the right track to build wealth in the future.
Related: Top Stock Trading App Options for Beginners
Featured Financial Products
Why Should You Start Investing?
Investing money in the stock market is one of the best ways to make it grow. Putting your hard-earned cash into investments, such as stocks and bonds, can be a great way to build wealth over time that you otherwise may not have an opportunity to access until later in life.
The great news is you don’t need much money to begin. Even investing small amounts consistently can pay off significantly over time, thanks to compound interest.
That’s because instead of just earning interest on your initial investment every year like an ordinary savings account would, with the power of compound interest, you also earn interest on your original principal and any accumulated returns.
Investing is not just for adults either. If you are a teen or young adult that has some extra cash to invest every month, it’s never too early to start planning for your future financial goals through investing.
There are plenty of other reasons why someone should start investing as early as possible, but ultimately it’s because of the power of compound interest and compounding returns over time. The earlier you start, the better.
