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More than half of U.S. households have some level of investment in the stock market, according to the Pew Research Center. While only a small segment of American families (14%) directly invest in individual stocks, Pew found that 52% participate in the market through their retirement accounts.
Investing can help you maximize the amount of money you can earn, so you can grow your wealth and have greater financial security when you head into your retirement years. If you aren't yet investing, however, there are some things you should know before dipping your toe into the stock market.
Below, CNBC Select shares three tips for any beginner investor just starting out.
Before taking on the risk of investing your money in the stock market, you should first have a plan and feel financially stable.
- Identify your financial goals: Most likely, you invest because you want to start putting money away for retirement. Whatever your goal may be, the first step is identifying it and then quantifying it, Boneparth argues. "When do you want to achieve them and how much will they cost?" Lastly, prioritize your goals in order of importance and urgency to you. Which goal do you want to work on first?
- Understand your cash flow: It's important to know how much money you have coming in every month and how much you have going out. This way, your savings — and, ultimately, your investing — is consistent, adds Boneparth.
- Have an emergency fund: Make sure you have a cash reserve that you can easily tap into before putting any money into the market. This is cash that you can fall back on if needed, such as if you lose your job or need to fund an unexpected expense. "The whole point of investing is to stay invested," Boneparth says "No one wants to sell prematurely because something popped up that would require you to bail on your strategy."
High-yield savings accounts that are FDIC-insured are a great vehicle for building an emergency fund. Because they are not subject to market fluctuations, they come with zero risk so you can count on your money always being there.
These accounts offer higher interest rates than traditional savings accounts so you earn more over time. Check out the Synchrony Bank High Yield Savings if you want to have easy access to your cash or the Discover Online Savings Account, if you'd prefer to do all your banking in one place.
There's a reason the majority of Americans participate in the market through their retirement accounts: It's low-hanging fruit when you're looking to invest.
"[Retirement accounts] will provide tax benefits as well as an easy way to contribute," says Shon Anderson, an Ohio-based CFP and chief wealth strategist at Anderson Financial Strategies. "In addition, the rules governing 401(k) plans require plan sponsors to provide at least decent investments at a relatively low cost."
If you have access to a workplace retirement plan, such as a 401(k), make sure a portion of your paycheck is automatically invested in the account each pay period. The ideal contribution amount is between 15% to 20% of your gross income, but do what works with your budget and income level. For those whose employers offer a 401(k) match, make sure you're contributing enough to meet the match. Otherwise, that's free money you're leaving behind.
With employer-sponsored plans, Anderson suggests seeing if the 401(k) offers target-date funds to get you started. With a target-date fund, you choose a fund based on the year you plan to retire. For example, if you plan to retire in 2050, you would pick a fund closest to 2050. As you approach your target retirement year, your fund will re-balance to lower the number of riskier investments.
While the easiest way to invest is through your employer's retirement plan, not everyone has access to one. If you're in that boat, consider opening either a traditional or Roth IRA account so you don't fall behind in saving for the future.
When you're looking to invest beyond your retirement accounts, there are plenty of investment vehicles out there that can help.
"You do not have to be a guru," says Lauryn Williams, a Texas-based CFP and founder of Worth Winning. "You need to find an investment vehicle and focus getting money into it."
If you don't know follow the market closely, consider putting money into a robo-advisor like Betterment and Wealthfront or a monthly membership service like Ellevest. These types of platforms and programs typically provide some advisory services, but you'll also want to make sure you know any app, membership or investing fees beforehand.
You can also seek some guidance from a professional. "Even if you're just starting out, some financial planners will charge by the hour or have a monthly retainer that might be within reach," adds Scott Schwalich, an Ohio-based CFP and wealth strategy advisor at Anderson Financial Strategies.