What should I invest in as a beginner? / 90

Aug 26

Investing can feel like one giant decision when you’re new to it. Should you open a 401(k)? An IRA? A brokerage account? What about an HSA? And once you finally get money into one of those accounts…what are you actually supposed to buy?

The good news is that beginner investing gets a lot less overwhelming when you separate it into two questions:

Where will you invest your money? In other words, what type of investment account will you use?
What will you invest that money in? Once the money is inside the account, what will you actually buy?

Think of the first decision as choosing your bucket and the second as deciding what goes inside it. We’ll tackle them in that order.

And if all of this still feels like a lot, remember: You don’t need to build the most optimized investment strategy on day one. You need a reasonable place to start, and you can adjust as you learn more.

Episode highlights

- [00:00] The two questions that can make getting started with investing feel much simpler
- [02:00] Why an employer-sponsored retirement plan with a match may be the best place to start
- [04:00] How HSAs work, including the triple tax advantage that makes them so valuable
- [05:30] Roth vs. traditional IRAs — and why choosing the “perfect” one matters less than getting started
- [08:00] When a taxable brokerage account might deserve a higher spot on your investing priority list
- [11:00] Why trying to optimize every decision can keep us stuck — and why our investing strategies can change over time
- [12:30] The beginner investing step that’s easy to miss: actually investing the cash after transferring it
- [14:00] How target date retirement funds offer a simple, beginner-friendly approach
- [16:00] A more hands-on strategy using index funds and ETFs
- [18:30] What we’d each do if we were starting from scratch today — plus our beginner investing roadmap

Where should you invest your money?

Before worrying about stocks, index funds, or anything else you can buy, start by choosing the type of account you’ll use.

We like to think of investment accounts as buckets. A 401(k), IRA, HSA, and taxable brokerage account are all different buckets that can hold investments. Some come with more tax advantages than others, which is why you’ll often hear financial experts recommend funding them in a particular order.

There isn’t one order that every person has to follow, but here’s the general framework we discuss in the episode.

1. Start with an employer match, if you have one.

If your employer offers a retirement plan like a 401(k) and matches some of your contributions, contributing enough to receive the full match can be a great place to start.

For example, say your employer matches your contributions dollar for dollar up to 3% of your salary. You contribute 3%, they contribute another 3%, and the equivalent of 6% of your salary is now going toward retirement.

You don’t necessarily have to max out the entire account yet. The first goal can simply be contributing enough to receive the full match.

2. Consider an HSA if you’re eligible.

If you have a qualifying high-deductible health plan, you may also have access to a health savings account, or HSA.

HSAs come with what’s commonly called a triple tax advantage:

Contributions can reduce your taxable income.
Money invested within the account can grow tax-free.
You can use the money tax-free for qualified medical expenses.

You also don’t necessarily have to keep your entire HSA balance sitting in cash. Depending on the account, you may be able to invest some of it for longer-term growth.

In our own HSAs, we both keep some money available for medical expenses and invest the rest.

3. Then look open an IRA.

An individual retirement account, or IRA, gives you another tax-advantaged way to invest for retirement.

There are two main options:

Roth IRA: You contribute after-tax money, and qualified withdrawals in retirement are tax-free.
Traditional IRA: You may receive a tax benefit on contributions now, depending on your circumstances, and withdrawals are generally taxable in retirement.

There are arguments for both, which is exactly why this decision can become such a sticking point.

But if trying to choose the “perfect” IRA is keeping you from investing at all, we’d rather see you choose a reasonable option and get started.

Cassidy has actually moved between Roth and traditional contributions over the years as she learned more and her situation changed. Your first choice doesn’t have to become a lifelong commitment to one investing strategy.

4. Max out your workplace retirement plan.

Once you’ve received your employer match and funded other tax-advantaged accounts that make sense for you, you can consider increasing your workplace retirement contributions.

Again, this isn’t a rigid formula. Think of it as a starting framework rather than a financial rulebook.

5. Consider a taxable brokerage account.

A taxable brokerage account doesn’t come with the same retirement-specific tax advantages as the accounts above, which is why it often appears later on investing priority lists.

But your goals matter.

You might decide to prioritize a brokerage account sooner if:

You’re investing for a major goal that could happen before retirement.
You’re interested in retiring earlier than traditional retirement age.
You want more flexibility around when you can access your invested money.

Cassidy, for example, previously put more money into a brokerage account when she was considering buying a house in five to ten years and exploring early retirement. Later, her goals and account options changed, so her investing strategy changed too.

Tip: You do not have to follow these steps in this exact order. For example, you might decide investing in an IRA is the easiest way to get started (that’s what Emily did!).

What investments should you buy?

Okay, you’ve chosen a bucket to start with. Now we can answer the second big beginner investing question: What actually goes inside it?

There’s an important step here that is surprisingly easy to miss.

Transferring money into an investment account does not necessarily mean that money has been invested.

If you open an IRA and transfer $500 into it, for example, that money may simply sit there as cash until you choose an investment to purchase.

So there are really two actions:

Fund the account. Move money into your 401(k), IRA, HSA, brokerage account, or other investment account.
Invest the money. Use that cash to purchase an investment.

Once you get to that second step, you have plenty of options. But you don’t need a complicated portfolio.

Target date retirement funds

For beginners who want a very simple approach, one option we love is a target date retirement fund.

A target date fund is based on your approximate retirement year and contains a diversified mix of investments. It also automatically adjusts that mix over time, generally becoming more conservative as you get closer to retirement.

That means the fund handles much of the rebalancing for you.

For someone who doesn’t want investing to become a new hobby, that simplicity can be a feature—not a compromise.

Index funds

If you want a little more control over your portfolio, you could instead use a small number of diversified index funds.

Rather than putting all of your retirement contributions into one target date fund, you might hold a few different funds representing different parts of the market.

Cassidy, for example, uses a handful of funds in her own portfolio. One might track the S&P 500, while another provides exposure to bonds. She then decides how much of each contribution should go toward each fund.

Target date funds vs. index funds

We love both these strategies for different reasons, so don’t over think choosing one. Here’s what it comes down to:

Target date fund: You choose one diversified fund based on your approximate retirement date, and the fund handles the allocation and rebalancing over time.
Index funds or ETFs: You choose a few diversified funds yourself, giving you more control but also requiring a little more decision-making and maintenance.

Both can offer relatively simple approaches to long-term investing.

And despite currently using the more hands-on strategy, Cassidy says that if she could go back and start again, she’d probably choose a target date fund because it’s so much simpler.

A simple beginner investing roadmap

So, what could all of this look like if you were starting from scratch?

When we each answered that question, our roadmaps looked a little different because investing decisions depend on the accounts you have access to, your goals, and your current financial situation. Since we’re both self-employed and have qualifying high-deductible health plans, our personal roadmaps reflect those circumstances.

If Emily were starting from scratch today, she would:

Max out her HSA first.
Max out a traditional IRA next.
Split any additional money between her self-employed retirement account and a taxable brokerage account.
Use target date funds for her retirement accounts because she prefers the simplicity.
Take a more hands-on approach with diversified funds inside the brokerage account.

If Cassidy were starting from scratch today, she would:

Max out her HSA first.
Put additional retirement savings into her self-employed retirement plan.
If she maxed that out and still had money available to invest, contribute to a traditional IRA next.
Use target date funds wherever possible rather than building and managing her own mix of funds.

Neither roadmap is the roadmap. They’re examples of how two people can look at the same general investing principles and make slightly different choices based on their circumstances.

If you’re figuring out your own starting point, you can work through the same basic questions:

Do you have an employer match?
Are you eligible for an HSA?
Which retirement accounts are available to you?
Do you have goals before retirement that could make a taxable brokerage account useful?

Your investing strategy doesn’t have to be perfect

Once you know about all these different accounts and all the different things you can invest in, it’s very easy to turn “I want to start investing” into an optimization project.

Should you choose Roth or traditional? Should your next dollar go into your 401(k) or a brokerage account? Should you use a target date fund or build your own portfolio with index funds? What if you make one choice today and realize five years from now that another one would have been slightly better?

Those are reasonable questions. But they can also keep you stuck.

A good investing decision doesn’t become a bad one simply because another option might have been marginally better.

Maybe this year you only contribute to an IRA. Next year, you get a new job with a 401(k) match. A few years later, you decide early retirement matters to you and start adding money to a taxable brokerage account.

Or maybe you start with a more hands-on portfolio and eventually decide you’d rather simplify things.

That doesn’t mean you got your original strategy “wrong.” It means your circumstances, priorities, and knowledge evolved.

We’ve both changed our investing approaches over the years. Cassidy has moved between Roth and traditional contributions and changed how she prioritizes her brokerage account. Emily can look back and see reasons why having more money in a brokerage account might have been helpful.

Hindsight will almost always give you information you didn’t have when you made the original decision. But you don’t need to solve every future investing decision before you’re allowed to make your first one.

Start with a reasonable strategy, learn as you go, and adjust when your situation changes.

TL;DR

Beginner investing involves two primary decisions: which account you’ll use and what you’ll invest in inside that account.
A general account order might include getting your employer match, considering an HSA, funding an IRA, contributing more to your workplace plan, and then considering a taxable brokerage account—but your goals can change that order.
Transferring money into an investment account doesn’t necessarily invest it. Make sure you complete the second step and choose an investment.
Target date funds offer a simple, more hands-off approach, while a few diversified index funds or ETFs can give you more control.
Your first investing strategy doesn’t need to be your forever strategy. Starting with a reasonable approach and adjusting over time is enough.

Resources:

The Finance Girlies content is for educational purposes only and is not personalized financial, tax, or legal advice.

Emily + Cassidy