Investing 101

You learn a lot in school like history, geography and science. Rarely does anyone get taught the ABC's of investing. Here are some basics to get you started.

By Maxine Giza

For at least the past four years you've been investing in your future by attending college. Even though classes may be over, investing in your future isn't. Hitting the books in order to get a high-paying job is only part of the equation for financial wealth.

"Someone just out of school is a perfect candidate to start investing. Think about it, you are starting your career, working and bringing in money after being a poor college kid," says Jerry Shpak, Vice President at Spencer Savings. "The sooner you get started the more time the funds are invested and therefore the more growth you will have over time."

Whether you want to brave the stock market or go for safer options, there are many ways to begin saving and investing for your long-term goals.

How to get started

The slew of financial jargon can be intimidating at first, especially when you hear the letters CD and memories of thinking you were cool riding on the school bus with your headphones on is what first comes to mind. Do yourself a favor and study up (yes, again) on terms like 401(k), IRA, bonds and of course CDs. Choose your investment vehicle depending on how old you are and your financial goals.

Mutual funds: the best way to buy them

For most people right out of school investing in mutual funds will be one of the best and easiest ways to get started. Starting with mutual funds can be as easy as enrolling in an automatic investment program, such as the kind offered by Fidelity Investments.

With such programs, "the fund debits a checking or savings account once a month for a specific amount, sometimes called dollar-cost averaging" says Shpak. "The premise is your average cost of purchasing shares is going to be less this way then buying one time. If you think about it, it is impossible to time things so perfectly as to buy on the best day of a market cycle or over years."

The other major benefit to investing with mutual funds is diversification. Unless you have a lot of money, you cannot achieve the same level of diversification with individual stocks. Plus, when you invest in a mutual fund you can own stocks of many large, mid- and small-sized companies as well as international companies. Diversification will help spread the risk among lots of companies, instead of 'betting' on just one or two.

401(k)s: why not to turn down free money

If you are fortunate enough to have a job that offers a 401(k) plan with a company match, or a 403(b) if you work for a nonprofit, run to the HR office to sign up for the free money that often comes with a tax-deferred retirement plan.

The way a 401(k) plan works is that you decide how much money to take out of each paycheck. Then you only pay income tax now on the paycheck amount that's left, so you pay lower taxes. And your employer may also chip in - often up to 4 percent of your contributions. By not participating in a 401(k) plan with a company match, you are essentially turning away free money that your employer is willing to give you as a benefit.

Traditional and Roth IRAs: another tax-deferred way to save for retirement

If your employer doesn't offer a tax-deferred retirement plan, you can still get started on your own by opening either an IRA, or individual retirement account. There are several kinds; possibly the most well-known are the traditional IRA and the Roth IRA. Many financial institutions offer IRAs; it's a matter of doing some research and finding out which place works best for you. In addition to looking at your own bank, companies such as Fidelity, Vanguard, or T. Rowe Price are well known for their IRA programs.

Contributions to a traditional IRA offer tax benefits now. If you invest $3,000 into the account, you can reduce your taxable income by the same amount. Like with a 401(k) or 403(b), the money is invested pre-tax and will be taxed as ordinary income later, when you begin to withdraw from the account. A traditional IRA account is good for people who expect to be in a lower tax bracket upon retirement.

A Roth IRA is different in that your contributions are taxable now, but grow largely tax-free, and many withdrawals are tax-free. So Roth IRAs may make more sense for people who think they will be in a higher tax bracket upon retirement. The maximum amount an individual can contribute to a Roth IRA is $5000.

You can still invest in an IRA if your company offers a 401(k) or 403(b) plan with a match, as long as you don't go over the yearly maximum allowed by the government. It's important to note that retirement savings accounts, such as a 401(k), for the most part cannot be tapped until you are 59 ½. If you do, however, take a loan out against your 401(k), you will have to pay the money back within a certain time frame. The problem with borrowing against your 401(k) is that you have to pay taxes on the money you withdraw, then you have to put money back into the account with money you have already paid taxes on. Essentially you are paying taxes twice when you take a loan out against your 401(k).

With a Roth IRA, you can withdraw money you put in without penalty at any time, yet you cannot cannot touch the earnings until you are 59 ½.

Be careful, but don't fear the markets

The stock market has crumbled and you may not be feeling too confident about putting money into an investment that seems to lose value by the second. This is where being young and having time on our side is a huge asset.

"Think of it as buying on sale, a going-out-of-business type sale," says Shpak. "The prices are way down. You almost can't go wrong given enough time." He says right now is the perfect opportunity to buy up as much as you can. Shpak believes it is just a matter of time (which young investors have plenty of) before the markets return their upward march and bring in the rewards.

Brown-bag that lunch

Investing doesn't require a lot of money to get started. By putting as little as say $100 a month into a retirement account, you can see your money grow substantially. With your money being spread thin among student loan payments, rent and upgrading to a more professional wardrobe, $100 may seem like too much money to spare. Instead of spending $5 a day on lunch at work, brown-bag your lunch and put the money aside and you will automatically save almost $100 a month. ($5 a day x 5 days a week=$25 x 4 weeks a month=$100).

Investment professionals say investing is something you definitely want to start doing NOW. Waiting just 10 years can make a significant impact on the growth of your investment. If you put $100 a month into an IRA account for ten years (totaling $12,000), then let the money remain invested for 30 years, assuming an 8 percent return, you could have $201,400. If you decide that you can't handle taking your lunch to work with you and wait ten years to start investing $100 a month and do so for 30 years (totaling $36,000), assuming an 8 percent return on your money, you will have only $150,030.

You may think that 8 percent sounds like a high percent of return. Given that there is no way to know for sure just how much the market will go up or down in the future, 8 percent has been used as an average amount.

Regardless of the percentage of gain in a given year, the example still shows the power of compound interest over time and why it's better to begin socking money away sooner rather than later. It doesn't take an MBA to figure out that skipping the footlong sub for lunch is well worth it. Besides, you spent at least four years living off cafeteria food and ramen noodles. This is only one meal a day so it won't be nearly as painful.

Road to 1 Million

The path to making the coveted $1 million may not be as far-fetched as you may think. Shpak says a 26-year old with $5,000 can reached the mark by age 65 by investing just $301 a month, assuming that 8 percent return.

Investing without the stock market

If the idea of the stock market still freaks you out, there are other options. For short- to mid-term investments, certificate of deposits, or CDs, are one way to go. CDs are FDIC insured -- meaning, guaranteed by the federal government -- up to $100,000. Plus, a CD gives you predetermined guaranteed amount of interest on your investment. Most banks charge a penalty for withdrawing from a CD before maturity date.

Bonds are similar in that they are also a fixed-interest investment that pays you after a predetermined period of time. However, bonds differ from CDs in that interest is paid in increments. While investing in bonds and CDs are a more secure option, the potential amount of growth is typically significantly less than the stock market might offer.