There’s no denying that investing can be confusing and even intimidating for beginners. But as the saying goes, the longest journey begins with a single step. The question many have is, what should that first step be?
Popular online financial personality Anthony O’Neal aims to answer that question by offering a series of five basic strategies on his website. While targeted at beginning investors, they can help anyone begin to build a financial foundation. Here’s a look at what O’Neal has to say and how his suggestions can help you.
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O’Neal sees retirement accounts as the foundation of any financial plan. Whether it’s an IRA, a 401(k) or some other type of retirement account, you’ll benefit in multiple ways from opening one.
For starters, you’ll get a tax deduction on most contributions to traditional retirement plans, and your money will grow tax-deferred. If you open a Roth account, you won’t get a tax deduction, but your distributions will be entirely tax-free.
A 401(k) plan provides the added benefits of higher contribution limits and employer matching contributions, which can rapidly boost your account value.
Retirement accounts are meant for long-term investing. The IRS imposes a 10% penalty on most withdrawals before age 59 ½, but that can actually work to your advantage. With less temptation to draw money out of the account, you’ll likely end up with a much higher retirement nest egg.
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Compound interest refers to the process of earning additional interest on money you’ve already earned. Over time, compound interest can do remarkable things, multiplying your account value beyond what you might imagine.
Imagine, for example, that you contribute $300 per month to a retirement account earning 8% annual interest, starting at age 25 and withdrawing the money in retirement at age 65.
Over those 40 years, the $144,000 you put into the account would be worth just over $1 million. But if you just earned simple interest on that money, instead of compounding it over time, you’d end up with just $373,920, or over $600,000 less than if you had let that money compound over time.
As far as actual investments go, O’Neal suggests beginners start with blue-chip stocks. Blue-chip stocks are leaders in their industries with long-term track records, consistent dividend payments and multi-billion-dollar market capitalizations. In other words, they aren’t speculative, fly-by-night companies that boom and bust.
