As you know, we just started this blog and we have been inviting our friends and family to visit. One request we got frequently is from our friends who recently graduated from college and started working and want to know how to get started in investing. Therefore, I decided to write on the subject based on my experience. This is a four part series on Getting Started.

Part I: 401k and Employee Stock Purchase Plan

The best way to get started in investing is by participating in a 401k at your work. First thing you should do when you start your new job is to find out how much your employer’s 401k match is. If you don’t know what a 401k is, it’s a retirement account. Most companies don’t pay pension anymore. We can only hope for social security benefit when we retire because at the current rate, social security is going to loose money starting 2041. So when it is our time to retire, we are on our own. Companies offer 401k to encourage employee to start planning for their future and offer to match certain percent of your contribution, so that they don’t have to pay you anything else for retirement. That is only if you contribute. If you don’t contribute, your employer won’t contribute either. Therefore, if your company provides any kind of match, you should participate right away and contribute to the maximum percent that your company matches.

A company match is free money! Don’t pass on it!

A 401k contribution is a pre-tax deduction so you’ll pay little less tax on your income. 401k is a nice way of getting starting on saving because it is taken right off of your pay check. After a while, you’ll get used to thinking about your income as just what you get after all the deductions.

If your company offers a ROTH 401k, you are probably better off signing-up for a ROTH 401k. I’ll talk more about ROTH in part II of this series. In ROTH 401k, you contribute your after tax income. Even though you won’t get immediate tax break, you are done paying taxes on that money any earning it generates for life! Therefore, ROTH 401k is a very good investment option for us.

Your 401k plan will have some mutual funds that you can take a look and invest on them. If you don’t choose a fund, they’ll probably put it on a safe money market fund, which won’t give you much return. You should invest in stock funds. Try to distribute your contribution among large Cap, Small Cap, and International funds. I’ll talk about asset allocation in detail later in this series.

Of course there are limitation on withdrawal from 401k. They are supposed to be for your retirement, not right now. When you quit your job, you can easily transfer (or rollover as they call) your money into a IRA account without paying any tax or penalty so that you have more control of your money. Don’t keep money in your previous employers 401k and don’t rollover into your current employer’s 401k either.

If you work for a publicly traded company, it most likely also offers you an Employee Stock Purchase Plan (mostly referred to as ESPP), you should sign up to the maximum allowed (usually 10-15% of your income), because you’ll get to buy company’s stock at a discounted price (usually 10-15%). Companies usually have a two year cycle of ESPP, so you get to lock-in the price for two years. Therefore, when you get the stocks, that discount is the minimum profit you can make. If the company is doing well, you could make way more than that. I recently sold my company’s stock for 65% profit!

Part II in this series will be on Individual Retirement accounts. Stay tuned.