How To Invest: The First Investment You Should Make

Making your first investment can be confusing at best, frightening at worst. Choosing a lifestyle fund can make investing easy and relatively pain-free.

You've accumulated an emergency fund of the recommended three to six months of expenses. You've also paid off, or have a plan for paying off, all high-rate debt, including any credit card debt. Now what do you do to make your future more financially secure?

The next step that you should take to secure your future is to begin investing. The single best way of doing so is through your employer's retirement plan. If you work for a private company, that retirement plan is likely to be what is known as a "401(k)" plan. If you work for an educational institution or the government, your plan might be known as a "403(b)" plan.

Whatever the title, these plans work in very much the same way. You will need to speak with someone in your employer's human resources office and find out how to sign up for the plan. You will then decide how much of your pay that you would like to contribute to the plan. When deciding how much of your pay to contribute, keep in mind that the contributions are normally withheld on a "pre-tax" basis. This means that your actual out-of-pocket cost should be less that the amount that gets contributed to the plan.



Once you've decided how much of your pay to contribute, the next step is deciding how to invest your contributions. Most plans have eight or more investment options, so it can be difficult to decide how to invest your money. One relatively recent innovation is what is known as a "lifestyle" or "lifecycle" fund. These funds have become more widely available in recent years and are offered by many retirement plans.

Lifestyle funds are generally "funds of funds" that are intended to provide a specific asset allocation. These funds are often targeted to a specific retirement date. For example, Fidelity Investments offers the "Fidelity Freedom 2040 Fund", among others. That fund would be targeted to investors who intend to retire in 2040. All that you would need to do is pick the fund that tracks most closely to your anticipated retirement date. Other popular investment firms also provide lifestyle funds, including Vanguard.

If you feel that you are a more conservative investor than others in your age group might be, simply pick a fund that is targeted to a retirement date that is earlier than your selected date. In the alternative, if you feel that you are a more aggressive investor, simply select a fund that is targeted to a later retirement date.

Selecting a lifestyle fund for your retirement plan contributions will free you from rebalancing your investments on a regular basis. The fund will automatically maintain the selected asset allocation. Finally, it will automatically invest more conservatively as you approach your retirement date.

Keep in mind that these funds are intended to be "one stop shopping." If you invest in other funds in addition to your selected lifestyle fund, you could inadvertently skew the asset allocation in a way that you did not intend to.

We've all heard the phrase "keep it simple, stupid." In this case, lifestyle funds are certainly not stupid. Instead, they are all about keeping investing simple for those of us who don't have the time or inclination to make it more complex than it needs to be.

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