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You're aware it's time to start investing, but you're uncertain where to begin. Retirement is a given, but there are numerous retirement investing paths to consider. And if you're interested in investing beyond retirement? In his book, I Will Teach You To Be Rich, Ramit Sethi outlines five strategic steps to investing.
Sethi introduces the "personal finance ladder," breaking down five stages of investing. He explains:
Each stage builds upon the last, so once you complete the first, move on to the second. Don't worry if you can't reach stage 5 – most people never even reach the first step. What's most crucial is getting started and opening these accounts.
Stage 1: Maximize your employer's 401(k) match, if available. It’s essentially free money.
Stage 2: Eliminate your credit card and other debts. With high APRs, paying off these debts provides a "substantial immediate return," says Sethi.
Stage 3: Open a Roth IRA and contribute as much as possible. For more details on Roths, check out our beginner's guide to IRAs.
Stage 4: Once you've maxed out your IRA, invest additional funds into your 401(k).
Stage 5: Still have money to invest after maxing that out? Open a regular taxable account and invest there.
Your circumstances may differ. I don’t have a 401(k), so Rungs 1 and 4 don’t apply to me. Even if they did, I might bypass Rung 4 and go straight to Rung 5, as I have medium-term goals I want to save for.
That said, it’s a solid guide to help you understand where to start and where it makes the most sense to invest. Most experts recommend prioritizing retirement accounts to take advantage of tax benefits. For more information on these benefits, check out our post on how investing affects your taxes.
For a deeper dive into Sethi's investment steps, read the chapter "Get Ready to Invest" in his book.
Image by Johan Hansson.
