Investing: Smart Investing: Begin with the basics
BY KATHY KRISTOF Kiplinger News Service
Tuesday, October 09, 2012
When you're just starting your career, the most frustrating part of launching an investing program is likely to be that you've got a lot of goals but practically no money to address them. The good news is that all of your goals can be addressed over time -- as long as you take them one at a time. And, thanks to automation, you can choose from a growing number of inexpensive options that let you invest small amounts in either individual stocks or mutual funds.
Lets start with strategy. You'd be wise to address two goals first: your emergency account (which will keep you from having to move back in with Mom and Dad in case of a financial upset) and your retirement account.
Retirement, you say? Cant that wait? Not if you have access to a Roth IRA or an employer-provided 401(k) plan that offers matching contributions. Contributions to a 401(k) or similar plan are taken before taxes -- as if you never earned the money. Better yet, many employers match your contribution at a rate of 25 to 100 cents on the dollar (up to certain amounts), turbocharging your return. Contributions to Roth IRAs are not deductible, but the money is tax-free when its pulled out at retirement.
In addition, Roth IRAs allow penalty-free access to at least part of your savings, under the right circumstances, and you can usually borrow from your 401(k) plan and pay yourself back. That means you can use some of your long-term retirement savings to finance shorter-term goals, such as buying a house or financing college. In the meantime, you dont have to pay taxes on the investment earnings, so your money grows faster.
Once you have an emergency fund established, aim to set aside 10 percent of your income in a retirement plan. Then you can begin saving for other goals, such as travel, college tuition or buying a house.
Now for the practical side of the equation: Where can you invest small amounts without paying outsize fees?
If you want to buy individual stocks, your best bets are ShareBuilder and TD Ameritrade. With ShareBuilder, you can buy individual stocks and exchange-traded funds for as little as $4 per trade. The brokerage has no investment minimums. TD Ameritrade also has no investment minimums and charges $9.99 per trade.
If you want to buy a single mutual fund, consider Vanguard Star (symbol VGSTX). It owns a balanced portfolio of other Vanguard funds that invest in both U.S. and foreign stocks and bonds. Stars annual fee is a modest 0.34 percent, and its minimum investment is just $1,000.
Kathy Kristof is a contributing editor to Kiplingers Personal Finance magazine. To send her a question or comment, go to tulsaworld.com/kiplingerfeedback.