Getting Started with Investing

Financial Education for Beginners

In the past week, I have had several students stop by and ask me about how to get started investing while in college!

Today, we'll explore two topics to kickstart your wealth-building journey: the difference between Roth IRAs and Brokerage accounts, and we will go over providers that offer these services. Keep reading for the details.

I am not a financial advisor, so my role is to demystify the process and educate my students about the language and options to find more information. So, here is the disclaimer, this is not financial advice, seek a financial advisor for your personal needs.

Roth IRA or Brokerage?

You first have to decide between a Roth IRA or a Brokerage Account. Both have pros and cons depending on your personal situation. Here is a quick summary.

Roth IRAs (Individual Retirement Accounts):

A Roth IRA is a retirement account that offers unique advantages for young investors:

1. Tax-Free Growth: Perhaps the most significant benefit of a Roth IRA is that your investments grow tax-free. When you withdraw money in retirement, you won't owe a dime in federal taxes.

2. Contribution Limits: You can contribute up to $6,500 annually (for the tax year 2023, with potential adjustments in later years) as long as you have earned income. If you're over 50, you can make an additional "catch-up" contribution of $1,000.

3. Flexibility: Unlike traditional IRAs, you can withdraw your contributions (not earnings) at any time without penalties. This flexibility makes it a great option for both retirement and emergency savings.

4. Restrictions: There are income limits to qualify for Roth IRA contributions. While these won’t apply to college students, they might impact future contributions. To qualify for full contribution in 2023, a single tax-filer needs to make less than $153,000.

Brokerage Accounts:

A brokerage account is a versatile investment tool with fewer restrictions than retirement accounts:

1. No Contribution Limits: Unlike IRAs, brokerage accounts have no contribution limits, allowing you to invest as much as you want, regardless of your income level.

2. Access to Diverse Investments: With a brokerage account, you can invest in stocks, bonds, mutual funds, ETFs, real estate investment trusts (REITs), and more. This provides greater flexibility in building a diversified portfolio.

3. Tax Considerations: While your investments in a brokerage account are subject to capital gains taxes when you sell them, you have more control over when and how you pay those taxes. Holding investments for more extended periods can lead to lower tax rates through long-term capital gains.

Providers for Roth IRAs and Brokerage Accounts:

Now that you understand the basics, let's look at some of the providers you can consider. This list is not exhaustive but these come up often in discussions.

1. Charles Schwab: With a strong reputation and a vast selection of investment products, Charles Schwab is a reliable choice for investors of all levels.

2. Fidelity: Fidelity offers a wide range of investment options, excellent customer service, and user-friendly online tools.

3. JP Morgan: J.P. Morgan provides a wide array of investment options and personalized support.

4. Vanguard: Known for its low-cost index funds and ETFs, Vanguard is an excellent choice for both Roth IRAs and brokerage accounts.

5. Robinhood: App based investing.

6. Webull: App-based investing.

When selecting a provider, consider factors such as fees, account types offered, investment options, customer service, and ease of use. Each provider has its strengths and may cater to different types of investors, so research thoroughly to find the one that aligns with your goals and preferences.

App-based Investing

While I love that app-based investing started a movement towards zero-cost trading, I worry about app notification and how they incentivize you to check your account often. Investing is a long-term endeavor, and patience is key. Start small, diversify your investments, and focus on building a solid financial foundation. Your future self will thank you for the effort you put in today.

Get Started Small

It is important to get in the habit of investing and learning about your risk tolerance. So start small, and automate the investment process. All providers listed support this strategy.

Note: Make sure to have an emergency fund saved before you start investing. According to the Consumer Financial Protection Bureau, An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income. How much you need will depend on your situation. The typical rule of thumb is 6 months of expenses.