Getting started in the world of stock market investing can be overwhelming. There are so many options and so much advice out there. It can be beneficial to simplify the steps you need to take to start investing. This is the purpose of this investing checklist.
The checklist functions as an interactable Word document where you can check off each step of the investing process. It is also a fantastic printable to post on your wall and have a daily reminder of your progress.
This checklist covers the basic steps you need to unlock the wealth-building potential of the stock market. More advanced steps are available to optimize your progress, but the important thing is getting started. 20% gains may be twice as much as 10%, but 10% is infinitely more than 0%.
This post is meant to supplement the checklist. It will cover each of the steps in the checklist in more detail. If you are interested in learning more about why a particular step is important or how to perform a given step best, this post is for you.
1. Employer-Sponsored 401K
The best way to get started investing is an employer-sponsored 401K. The number one reason for this is the common match provided by the employer. What this means is that when you invest, say, 6% of your paycheck, your employer will contribute that same amount to your 401K.
These matches are immediate 100% returns on your investment. This far surpasses anything you could expect from any other form of investment.
For more information on what returns to expect from a 401K and how to set it up, read this post at eInvestingForBeginners.com.
Where can I open one?
To open an employer-sponsored 401K, you must speak to your Human Resources department. You will be restricted to their specified brokerage.
How much should I contribute?
When investing in a 401K, make sure to invest the match percentage at the very least. Usually, this number is 6%. Contact your company’s Human Resources if necessary to find out the exact percentage match. Regardless of what it is, meet it.
If possible, set up an annual increase to your contribution of at least to 1%. This increment helps to ensure you continue to save more as you earn more. Without this, it is very easy to forget that you can afford to save more since you got that raise.
All contributions to a 401K are pre-tax and grow tax-free, deferring tax payments until it is withdrawn during retirement. This is a potent combo, as pre-tax funds are higher than post-tax, and tax-free growth strengthens the compounding effect of your investments. Make sure not to withdraw until 50 ½ to avoid additional fees that hurt your returns.
What should I invest in?
When investing through a 401K, stick with the recommended target fund. Generally, this is based on your expected retirement age. This will automatically balance risk with stable returns depending on how far away you are from retirement. Plus, 401Ks are very limited when it comes to investment options.
What if my employer doesn’t offer a match?
Even though it is expected, there are still many companies out there that don’t offer a match. In these situations, 401Ks are still recommended, though less vital.
401Ks offer tax-free growth and tax deferral until you’re retired, lowering your current taxable income. You aren’t able to do this with another standard retirement account. This is powerful by itself, even without the match.
However, the match makes a 401K such a home run. Without the match, you can lower your contribution to 3% or 4% and put more into other, more flexible investment accounts. This will still give you the benefits of a 401K without putting away too much money that you can’t touch until retirement.
What if I’m self-employed?
Being self-employed is similar to when your employer doesn’t offer a match. You can open a pre-tax 401K yourself, but you won’t have access to any match. It is recommended to again put around 3% or 4% into this independent 401K and put the rest into the following accounts.
2. High-Yield Savings Account
When investing, it’s crucial to have an emergency fund of some kind. Though investing can be relatively safe and stable, it isn’t guaranteed. A worldwide pandemic could knock the market down by 20%.
In these emergencies, you need savings as a safety net. Traditionally, this would be cash or a traditional bank account. Though these are stable, they leave you at the mercy of inflation since you gain nothing or close to nothing. Over time, you will be losing money at the rate of inflation.
A fantastic alternative to these is a high-yield savings account. Think of this as a traditional savings account that is accessible rather quickly and is not exposed to the risks of investing. However, you earn a significantly higher yield than conventional banks. You can expect around 3.5% returns from these kinds of accounts.
For most years, this will be plenty to account for inflation. Plus, this return is guaranteed, so you don’t have to worry about a market drop or real estate bubble affecting your returns.
Where can I open one?
High-yield savings accounts are available on many sites. The one most recommended by My Money Marathon is SoFi due to its simplicity and solid returns. If you sign up using that link, you earn $25. SoFi does not sponsor us; they just offer a good product.
With SoFi and other popular high-yield savings accounts, set up direct deposit from your paycheck. If you use another service, read the fine print on the advertised return to check for restrictions. For example, SoFi only offers the full 4% return if you set up direct deposit.
To read more about high-yield savings accounts, read this post on the five best options out there.
Automation
As with most investment accounts, automation is critical. You don’t want to have to remember to deposit into this account, or else it very likely won’t happen. To avoid this, set up direct deposit from your paycheck so it is immediately deposited, and you never even see the funds in your bank account.
How much should I deposit?
A good target is to deposit 5-10% of your paycheck into a high-yield savings account. Remember, these funds are just as accessible as a traditional bank account. It’s not locked away until retirement like other accounts.
How much should I save?
A good rule of thumb is to aim for six months’ expenses. I would say treat this as a minimum, aiming for 12 months down the road.
Once you reach 12 months, you can slow down these deposits and focus on other avenues with higher returns. Since you are earning a noticeable return on your savings in this account, continuing to deposit is fine if you are more risk-averse.
If you need to dip into it for an emergency, just as it is there for, make sure to contribute towards refilling it. Never let the account stay too low for too long, or else you leave yourself vulnerable if another emergency occurs.
3. Roth IRA
A Roth IRA is the next best retirement-focused account behind a 401K. A Roth IRA is contributed to using after-tax funds but still grows tax-free, just like a 401K. This can provide greater peace of mind knowing that your total balance will be available to you with no taxes later.
The other massive advantage of a Roth IRA is that you can withdraw your contributions anytime. That is in stark contrast to a 401K which restricts you until retirement. Remember, though, that this only applies to the amount you have contributed, not any gains. Still, this freedom makes a Roth IRA like a second emergency fund.
Where can I open one?
Not all brokerages offer retirement accounts. There are many great brokerages (LINK brokerages), but Fidelity is the most recommended. They have been around for quite a while and support various accounts.
It can be an even greater benefit if you open multiple accounts with one brokerage. This simplifies the process of monitoring your investments.
How much should I contribute?
The Roth IRA is so powerful that there is a cap on how much you can contribute. The limit for 2023 is $6,500, up from $6,000 in 2022. Hopefully, this limit will continue to increase in the future.
If you can contribute the full $542/month to max out your Roth IRA, that is fantastic. If not, make that a long-term goal, and contribute as much as you can now, at least 5%. Contributing something is infinitely better than nothing.
What should I invest in?
It is a common misconception that simply depositing cash into a Roth IRA is investing, but this isn’t true. Depositing money into a Roth IRA sits there in an uninvested holding account. You won’t be earning hardly any returns with it in here.
Instead, you must choose a stock or fund to invest your money in. For most people, investing in an index fund is the best option. They are straightforward methods to track the overall market and get that expected 10% annual return.
The two best options for this are VOO and SPY. These funds track the S&P 500 index and stick very close to the market. The difference between them is minuscule, so choose whichever is available at your brokerage.
Roth IRAs are very flexible, so you can invest in individual stocks or other funds if you are interested. Just make sure you understand the basics of the market and do your research before going down this route.
4. Individual Taxable Investment Account
You can move on to an individual taxable investment account if you have completed all the above accounts. These accounts are the most flexible but offer the least advantages.
In short, you can invest any after-tax money in any stock you choose, but you will be taxed on any gains.
NOTE: You can use market losses to offset taxes. More on that from the IRS here.
Where can I open one?
Taxable accounts are available at most major brokerages. My Money Marathon recommends Robinhood due to its simplicity and ease of use. If you sign up for Robinhood through this link, you earn a free portion of a stock of your choice. But feel free to research your own brokerages.
How much should I contribute?
How much you contribute at this point is all up to how much you have left over after the above three steps. If you have completed those three steps or want to invest in riskier assets with more upside, only invest what you are willing to lose. Never invest more in a risky investment than you would be okay with disappearing tomorrow.
You can always invest in safer assets, such as index funds in a taxable account, like a Roth IRA. You just won’t get the same tax advantages over time as a Roth IRA or 401K.
What should I invest in?
When investing through an individual account, the world is your oyster. You can invest in anything you want. However, if you are a beginner, it is best to stick with the S&P 500 for its simplicity and lower volatility. If, as you become more comfortable after learning the basics of investing, you want to take more control, there are thousands of options.
To generate consistent returns outside of the S&P 500, large, reputable companies are your best option. Because of the current state of the world, these stocks tend to be technology stocks, such as Apple and Microsoft. Over time though, this could shift.
Another option to consider is dividend stocks. These stocks generate consistent income through dividends instead of traditional growth. Consider dividend stocks for diversification of income and continued returns through downturns.
Closing Thoughts
When starting in the market or wanting a refresher, follow this post and its referenced checklist to maximize your success. There are so many options to invest in, but these four steps will lead you to the most consistent, long-term success possible.
To learn more about the stock market and how it works behind the scenes, read the ultimate guide to the stock market.
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