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WalletPrep worksheet · Investing

How do I start investing?

Name ____________________ Date __________

Key ideas

  1. Follow the order before you buy anything. Starter emergency fund, high-interest debt, the full 401(k) match, an IRA, then more retirement saving or a regular investing account.
  2. An employer match is an instant return. In the example, Jordan puts in $200 a month and the employer adds $200 more, before any market growth.
  3. One broad fund is enough to start. A broad index fund, or a target-date fund that mixes stocks and bonds for you, buys many companies at once.

Vocabulary

Employer match
Money your employer adds to your retirement plan when you contribute, up to a set percentage of your pay.
Index fund
A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.
Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
IRA
Individual retirement account: a tax-advantaged retirement account you open yourself at a bank or brokerage, separate from your job.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.

Work it out

Jordan, 28, earns $5,000 a month before tax, has a starter emergency fund and no card debt. The employer matches 100% of 401(k) contributions up to 4% of pay.

  1. Jordan's 401(k), 4% of pay
  2. Employer match
  3. IRA contribution
  4. Invested each month
  5. Years invested
  6. Assumed return a year
  7. Balance after 30 years
  8. Total put in
  9. Growth

Check yourself

  1. You have $1,000 saved and a credit card balance at 24% APR. What usually comes next?

    • A. Buying individual stocks
    • B. Paying down the 24% card
    • C. Opening a taxable brokerage account
    • D. Saving 12 months of expenses

  2. You earn $4,000 a month and your employer matches 100% up to 5% of pay. How much match do you get if you contribute 5%?

    • A. $100
    • B. $200
    • C. $400

  3. Which is a reasonable first investment for a beginner?

    • A. One broad index fund or target-date fund
    • B. A single company you like
    • C. Whatever went up most last year
    • D. A cryptocurrency your friend recommends

Your turn

Log in to your workplace benefits site and find your 401(k) match formula. Set your contribution to at least the match, and check that the money is invested in a target-date or broad index fund.

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Answer key

How do I start investing?

Work it out

  1. Jordan's 401(k), 4% of pay$200
  2. Employer match$200
  3. IRA contribution$150
  4. Invested each month= $550
  5. Years invested30
  6. Assumed return a year7%
  7. Balance after 30 years$670,984
  8. Total put in− $198,000
  9. Growth= $472,984
  1. Jordan puts in $5,000 × 4% = $200 a month. The employer matches it dollar for dollar, adding $200 more.
  2. Jordan also sends $150 a month to an IRA, so $200 + $200 + $150 = $550 is invested each month.
  3. Over 30 years that is $550 × 360 months = $198,000 put in. At an assumed 7% a year, compounded monthly, the balance reaches $670,984.
  4. Growth is $670,984 − $198,000 = $472,984. Real returns vary and can be negative, so this is one possible path, not a promise.

Check yourself

  1. B. Paying down the 24% card Paying off a 24% card is like earning 24% with no risk. Many people also take any 401(k) match at the same time, since the match is an instant return too.
  2. B. $200 $4,000 × 5% = $200. A 100% match adds another $200 a month.
  3. A. One broad index fund or target-date fund A broad fund spreads your money across many companies at a low cost, so one company's bad year does little damage.