When times are tough, many people find it hard to save any money to invest. But even among those who haven't gotten hit as hard by the high unemployment and slow recovery that we've seen since the recession, many simply let their spare money pile up in a bank savings account rather than putting it to work.
With banks paying next to nothing in interest, though, it's more important than ever to find smarter ways to invest. If you know you should do something else with your money but aren't sure where to start, just follow these four steps. You'll be a better investor in no time.
Step 1: Get going at work.
The best place to start investing is through a retirement plan at work, such as what's called a 401(k) or 403(b) plan. If your employer offers one, it's easy to have money taken directly out of your paycheck and put into your retirement account.
The reason starting with your retirement plan is especially smart is that you get special tax benefits from saving at work. With most plans, the money you save is excluded from your taxable income, giving you a tax break on your tax return for the year that can add up to hundreds or even thousands of dollars. That can mean a nice boost in your savings at the end of the year. Offering you the ability to save as much as $17,000 this year -- $22,500 for those 50 or older -- retirement plans are a must-have if your employer offers one.
Step 2: Make it automatic.
Saving isn't just about retirement. To save for some major purchases like a car, a down payment on a home, or a big vacation, using regular accounts gives you the most flexibility to use your money whenever and however you want.
But rather than you having to remember to move money into a mutual fund or brokerage account every month, most financial companies will let you set up automatic transfers to add to your accounts. With so many people paying their monthly bills electronically from their checking accounts, setting up automatic investments makes it easier to incorporate savings into your regular budget.
Step 3: Start with the basics.
Just because you don't know which stock will potentially make you a millionaire doesn't mean you should give up on investing entirely. With mutual funds and ETFs, it's easy to set up a core portfolio that will work for just about any long-term financial goal you have.
Using a basic asset allocation strategy for your core portfolio is easier than ever. For example, if you're in your early 40s and expect to retire in 20 years or so, then one possible combination of ETFs would include a substantial allocation to the dividend-paying U.S. stocks that Vanguard Dividend Appreciation (NYSEMKT:VIG) owns, along with smaller portions of Vanguard Emerging Markets (NYSEMKT:VWO) for international stock exposure as well as a small helping of bonds through iShares Barclays TIPS Bond (NYSEMKT:TIP) or a similar bond fund. Older investors who are closer to their final goals may prefer to be more conservative with a lighter allocation to stocks, while younger investors with a lot further to go could benefit from greater stock ownership.
Step 4: Try out some ideas.
Once you have a core portfolio in place, consider adding individual stocks. The best place to start for someone who hasn't invested much in the past is in the industries that you're most familiar with, whether it's because of your work or just the products you use all the time.
For instance, someone who works in insurance would be particularly qualified to assess the quality of Berkshire Hathaway's (NYSE:BRK.B) extensive insurance operations to see how they stand up to Berkshire's competitors. Also, with Markel (NYSE:MKL) and other smaller insurance companies using the same general tactics that Warren Buffett used to make Berkshire into the empire it is today, an insurance-industry pro would find it much easier to pick likely winners and losers than someone who didn't have that background.
Give it a go
Bumping your investing up to the next level can seem intimidating. But if you follow these four basic steps, you'll put yourself in a good position to boost your profit potential considerably. That'll make you feel a whole lot smarter.