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When it comes to investing, many of you are coming with a completely blank slate. You want to know what you need to do to get started and what’s the best way to invest money. Learn about the types of account you need to access the markets, where I recommend you start, and what to watch out for in the first week of my Investing 101 series.

On Instagram, I previously hosted a weekly LIVE session every Monday called Market Mondays. I started it to answer all your questions about the markets and investing. But after the first series on Investing in Stocks 101, one question kept coming up. Many of you aren’t there yet: you have money sitting in savings accounts and aren’t sure what to do next to even get started. In this next Market Monday series, I am getting down to basics starting with What’s the Best Way to Invest Money, especially if you are just getting started.

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How to Invest When You are Just Getting Started

When it comes to investing, the first thing that comes to mind for most people is stocks. But there are two things you want to consider:

1. If you followed my first investing series, 10 Things to Know About a Stock (Before You Buy One), you learned that the average retail investor (that’s you and me) does not have the time and money it takes to effectively analyze individual stocks, diversify your portfolio and do it well
2. Many of you, even if you wanted to buy a stock, aren’t sure how to do it. How do you get your money from a bank account into the stock market?

That second, more basic investing question is what I’m going to cover today: how to start investing, if you’ve never invested before, and what’s the best way to invest your money. The good news? You’ve got a completely blank slate to start from. This series will help guide you, step by step, through the different investment account options you may have to choose from, what I recommend starting with, and why. Future weeks will talk about different investment products, understanding risk and return, and a little financial history.

Catch the full replay on my Family Finance Mom YouTube Channel, or read a detailed summary of the best way to invest money below.

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What’s the Best Way to Invest Money

Before you can access the market, you’ll need to move your money from a savings account to an investment account.

Investment Account Options

Today, you might have money sitting in a savings account – but you can’t access the stock market with a savings account. You will have to move your money into an investment account that gives you market access, either directly or through pooled investments.

There are two types of investment accounts you will need to consider: taxable accounts or tax-sheltered accounts. A brokerage account is a taxable investment account. Brokerage accounts have few limitations in terms of annual deposits, withdrawals or what you can invest your funds in… but any realized gains you make are taxable annually. A brokerage account gives you the most investment flexibility, but you lose a piece of what you make every year to taxes.

Tax-sheltered accounts include retirement accounts (401ks, 403bs, IRAs, Roth IRAs) and College Savings, or 529 Plans. Tax-sheltered accounts allow you to make contributions, some pre-tax, some post-tax depending on the account, while the gains compound tax-free until you withdrawal them, either in retirement or to pay for college. And in some cases (like with a Roth IRA or 529 Plan), they remain tax-free if used for their intended purpose.

Investment Vehicles

Once you have money in an investment account, you can then allocate them to investments. But here you have another decision to make. How do you want to access the market?

There are different vehicles to choose from. You can invest directly, buying individual stocks or bonds. Or you can invest through a pooled investment vehicle or fund.

Mutual funds, exchange traded funds (ETFs) and index funds are all pooled investments. You put your money into the fund, where it is pooled together with lots of other investors’ money. The fund then invests directly in securities or other pooled investments. Your stake, or piece of the fund, tracks the performance of the overall fund.

Why would you use a pooled investment fund? Funds give you as a small, individual investor the ability to get broader market exposure and use different investment strategies with far less money than you ever could on your own. As an example, if you tried to replicate an index fund, like the S&P 500, yourself, it would cost millions. But you can buy an index mutual fund share for a few $1,000s or a single ETF share for about $200-300 currently.

So What’s the Best Way to Invest?

Given all these choices – in both accounts and vehicles, what is the best way to invest, especially if you are just getting started?

For most individual investors, the best place to start is with tax-sheltered plans, and ideally, your retirement account. Based on IRS data, as of 2012, over 60% of all taxpayers ages 26 – 64, participated in a retirement plan either themselves or had a spouse who did.

Take full advantage of your plan – and here’s why. A 401k or IRA allows you to invest with pre-tax dollars. So invest after paying taxes, investing $0.60 on the dollar, you get to invest full dollars. This pays off big; not only on tax savings today, but even more so overtime as the gains compound.

If you only invested $0.60 today for the next 20 years at 7% average annual return, you would end up with $2.32. But, if you invested pre-tax a full $1.00, at the same return, in 20 years you would have $3.87, a 67% increase just from investing before taxes.

Additionally, many employers contribute to your retirement plan on your behalf. They may do so be either matching a percentage of your own contributions or by making profit sharing distributions to your retirement plan. If you aren’t contributing at least enough to get the full employer match, you are losing out on free money.

So, if you are looking to get started investing, this is the place to start. Increase your participation in your employee-sponsored retirement plan. If you don’t have one, open an IRA. Next, increase your contributions.

In 2013, the annual 401k contribution limit was $17,500, but the average employee contribution was less than $5,000. If you can afford to, max out those annual contribution limits.

What if I don’t have a retirement plan?

If you are a stay at home mom (like me!), a solo entrepreneur, or even if you just have a side hustle, you may not have an employee-sponsored retirement plan, like a 401k or 403b. But you can still invest through a tax-sheltered retirement account with an IRA or Roth IRA.

The Downsides of Tax-Sheltered Accounts

The single biggest downside of tax-sheltered investment accounts? They have annual contribution limits. As of 2019, an IRA limits you to an annual contribution of $6,000 and a 401k limits you to $19,000.

Another downside? Most tax-sheltered accounts are overseen by an administrator who limits your investment options to a specific set of pooled investment funds, often managed by the same administrator. As an example, your 401k is administered by Fidelity and only gives you access to invest in 30-40 mutual funds, also managed by Fidelity.

An IRA typically has a little more flexibility to invest in direct investments, as well as ETFs and Index funds, more like a brokerage account.

Brokerage Account Considerations

If you decide to use a taxable investment account, like a brokerage account, there are a few things you should first consider.

First, if you are just starting out, use a cash account. You may have the option to buy on margin, but that’s a fancy way of saying you can borrow money to invest. If you aren’t aware of what you are doing, you can end up taking positions far larger than intended, and if the investment loses money, you still owe the broker for what you borrowed.

Next, make sure your brokerage account is with a financially-sound and creditworthy broker. Unlike your savings account, which is FDIC-insured and backed by the federal government, brokerage accounts are not. Brokers may be SIPC members, which offer some protections for your account. You can check your brokers’ status with FINRA here.

You will also want to understand if there are any account limits or balance minimums you need to maintain, in order to avoid fees.

Finally, be sure you understand what the broker will charge you for trading, also known as a commission. For smaller trades, brokers typically charge a fixed fee per transaction. This can be significant relative to the size of your trade – and it doesn’t matter whether you are buying 100 shares of a $4 or 10 shares of a $400 one. It can range from free to $8 or more per transaction. And if you require an actual person to assist you, it can be $25 or more.

Caution: No Fee Trading Accounts

Many of you have asked me about no-fee trading accounts, so I just wanted to leave you with a word of caution. No broker can operate without revenue. If they aren’t charging you a fee to trade, find out how they ARE earning income.

One of the more popular no-fee trading account providers is Robinhood. As of 2019, they are rumored to be going public this year and currently valued at over $5 billion. A recent WSJ article reported:

Robinhood makes money, in part, by sending customer orders to high-frequency traders in exchange for cash. It’s a controversial but legal practice in the brokerage industry called payment for order flow.

In English? This means they are selling your trade data to larger, more sophisticated investors, with better technology or faster market connections, who can trade ahead of you and earn a few pennies off your trade. So yes, you trades are free, but you might get a slightly worse price than you would elsewhere, costing you more.

If you make frequent, small trades, a no-fee trader may still be worth it for you. But otherwise, you are better off paying a small commission with a larger, more established broker.

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So, if you’re ready to start investing, and you want to know the best way to invest money… start by maxing out your contributions to your tax-sheltered options. Up next on Market Monday LIVE? We will talk about how to decide what to do with those accounts, and learn about stocks, bonds and different pooled investment account options.

Be sure to follow me on Instagram and click the weekly countdowns in my stories to get a reminder for Market Monday LIVE!

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