When a person reaches their 30s, they’re usually well into their careers, and begin to realize it’s time to invest in their financial future. Some people may understand the importance of investing their money earlier in life, and other people learn it a little too late in life. The good news is someone starting in their 30’s often yields the best results, but there are a number of factors to consider and pitfalls to avoid. Success in this will all depend on developing the right approach to investing.
The Account Type
When someone decides to begin investing, they will first need to choose an account type. This could be a general taxable account or a tax-free retirement account, and with a tax-free retirement account, there is a chance limits will be placed on how much can be invested, and how the funds can be withdrawn. You will find taxable accounts provided by brokerage firms, they’re designed for an investor to pay a fee to buy and sell stocks, bonds, mutual funds and other securities.
A cash brokerage is one where an investor will be required to pay the full amount for any type of investment security they purchase. With this account, an investor is not permitted to borrow funds from their broker to fund any type of account transaction.
There is also a margin account, and with this account, a brokerage firm can lend funds to an investor for the purchase of certain types of securities. In this situation, the value of the account is used as collateral for the investment loan.
Right now is a good time in life to learn about investing in stocks, because this is a skill that can be developed if done correctly. The stock market may have a bad reputation with many people, and it’s important to know the downside of stocks, but also be aware of their upside. Since the 1920s, an investment portfolio consisting of a large percentage of stocks has not lost money within an investment cycle. During an investment cycle spanning 20 years or more, this type of investment has a given a return of ten percent a year.
To put it into perspective, with bonds, the return is only four percent a year during the same investment cycle. Success will require researching stocks and learning their investment trends as well as how world situations affect them. Until those skills are developed, it’s recommended a beginner only invest ten percent or less of the money they have designated for investing in stocks.
A Roth 401(k)
This is especially important for those in their 30s to start and continuously make contributions to. A Roth 401(k) enables a person to save their money after taxes, this makes it very different from a traditional 401(k) where you’re taxed upon withdrawal. A Roth 401(k) is a type of investment savings, as it’s designed so a person will not have to pay income tax if they make any amount of withdrawals in retirement. When a person retires, they are often in a much higher tax bracket than when they started putting money into a Roth 401(k), so it saves you money now, and when you retire. It has been estimated that over 40 percent of large employers provide their employees with this type of retirement option, and may have a contribution match program, so take full advantage.
Dividend Reinvestment Programs (DRIP)
A dividend is an amount of money paid to by a company to its shareholders, and the amount is taken from a company’s profits. Many experts recommend a person in their 30s interested in investing put money in a DRIP. This is a plan that is offered by many different corporations, and it permits investors to reinvest a cash dividend by buying additional shares of a company’s stock. A huge plus is that there are also no brokerage commission fees involved with a DRIP. A broker is not necessary to make this type of transaction, and they’re very flexible, as an investor can reinvest small or large amounts depending on what they want.
There are a wide variety of investments available. This includes mutual funds, stock and bonds, precious metals and more. An investor needs to have the right amount of assets in a variety of investments to be successful, this is called diversification. It’s also important to avoid making investing decisions based on emotion, and in order to succeed at investing, it requires a lot of discipline. An investor must be able to learn how to enjoy their investments during good times and endure the in bad times.
Article credit to Accuplan Benefits Services, experts in self-directed IRA, and 401K setup, investing, and account administration.