So you know it's time start investing, but you're not sure where to get started. There's your retirement, of course, but there are a few different retirement investing options. Plus, what if you want to simply invest outside of retirement? In his book, I Will Teach You To Be Rich, Ramit Sethi breaks down five systematic steps to investing.
Sethi describes the "ladder of personal finance," outlining five rungs to investing. He explains:
Each step builds on the previous one, so when you finish the first, go on to the second. If you can't get to number 5, don't worry. You can still feel great, since most people never even get to the first step….remember opening these accounts and getting started is the most important step.
- Rung 1: Take full advantage of your employer's 401(k) match, if offered. It's free money.
- Rung 2: Pay off your credit card and other debt. Your APR is probably high, and getting rid of this burden is a "significant instant return," Sethi says.
- Rung 3: Open a Roth IRA and contribute as much as you can to it. Read our beginner's guide to IRAs for more info on Roths.
- Rung 4: If you've maxed out your IRA and still have money you want to invest, then invest more in the 401(k).
- Rung 5: Still have money to invest after maxing that out? Open a regular non-retirement account and invest it there.
Of course, your situation might vary. I don't have a 401(k), so Rung 1 and 4 don't apply to me. Even if they did, I still might skip to Rung 5 because I have medium term goals I'd like to save up for.
But it's a good guide to get you started and help you understand where it makes the most sense, in general, to invest. Most experts say to invest as much as you can in retirement accounts first, to take advantage of the tax breaks. For more info on those breaks, check out our post on how investing affects your taxes.
For more detail on Sethi's rungs of investment, check out the chapter "Get Ready to Invest" in his book.
I WIll Teach You To Be Rich | Ramit Sethi
Photo by Johan Hansson.
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