Most Important Investments

For the majority of people, investing in stocks and bonds is foreign, especially in a basic brokerage account. The only exposure to investments many people receive is that of a work retirement account, usually a 401(k). It's amazing, and a little bit sad, how many people that I have talked to, who do not know about IRAs and their eligibility for other retirement options.

If you are the typical employee that has a company sponsored retirement plan, you have a couple ways to invest for your future.
1-Contribute to your work 401(k).
2-Open and contribute to an outside retirement account, i.e. an IRA.
3-Open a brokerage account with a broker-dealer like E-trade, Fidelity, Morgan Stanley, Merrill Lynch etc...
4-Buy oil. (meant to be a joke but right about now that looks like a great investment)

In any fashion, I want to express how important it is to save for retirement and more importantly let you know how to go about doing so.

First off, the most important way to save, by far, is your company 401(k), if you have one. The reason for this is that, most of the time, the company matches a portion of your investment. This company match is FREE MONEY. Yes, free money. ALWAYS contribute enough to get the full company match. Always. Why would you not take advantage of free money? There is no excuse or reason. (Most of the time the company that you work for will match up to $x and then 1/2 of the next $x. Always contribute enough to get every penny from them.) The reason it is so important to take money out of each check and contribute to your retirement funds is obvious: so that you have money working for you to become financially independent later in life. Another reason is that having some money withheld and invested every paycheck allows you to continually invest and dollar-cost average (see previous post of dollar-cost averaging for benefits).

Secondly, you want to open an IRA. If you make below 100k/year and don't see yourself making above that for much of your work life, open a Roth IRA. If you make, or will soon make, above 100k, open a Traditional IRA. (I won't get into the details as to why in this post)

Now, there are many reasons for opening an IRA, but the most important is that you will be able to contribute an extra $5k/year if you are under 50, and $6k/year if you are over 50 to your retirement. This money will grow tax deferred, which means that there will not be any tax consequences when you purchase or sell securities, for a profit or loss. This is a huge advantage over a normal brokerage account in which you have tax consequences after each transaction.

Lastly, if you have extra money left after taking care of necessary expenses and fulfilling the above investments, I would suggest opening a basic brokerage account and depositing that extra money so that you have the freedom to invest it in stocks or other investments.

In summary, take advantage of the free money your employer is offering. Once you've done that, do all you can to save and invest for your retirement. Even if you only have an extra $50-100/month, save it. It will go a long way for your future.

Always remember: "A penny saved, is a penny earned." This is a priceless tidbit of information that pays off in the longterm.