Every journey begins with one step. These words apply particularly to the retirement planning process. Unless we inherit wealth, most of us start the retirement savings journey with a very small amount.

Although the terms “savings” and “investment” are often used interchangeably, these words have different meanings. “Saving” refers to the setting aside of money, which may or may not earn interest. “Investing” refers to the exchange of dollars for shares of ownership in companies (stocks or stocks) that an investor expects to increase in value. Thus, the shareholder is invested in the company. Stocks can also pay dividends to shareholders along the way.

Beyond stocks, individuals can invest in bonds issued by an entity. Bonds work like loans to investors or loans to businesses or municipalities. Assuming everything goes as planned (bonds sometimes fail to pay), bondholders get their principle back when the bond matures.

In addition to stocks and bonds, individuals can deposit funds into an interest-bearing bank account. We recommend that the families we serve include stocks, bonds and cash on their retirement journey. How much money should be allocated to each asset class? With market performance deviating from historical trends, stocks tend to be more volatile than bonds on an annual basis. Over the years, stocks have also generated a better return on investment compared to other asset classes.

Bonds tend to be less volatile than stocks on an annual basis. However, bonds have always produced lower returns than stocks. Again, recent history has fluctuated from the “norm”.

Cash or money market accounts are not subject to volatility but offer almost zero return on investment. The asset classes described above reflect generalized trends and do not guarantee future performance.

People new to the stock market usually choose mutual funds, exchange-traded funds (ETFs), or individual positions. Based on minimum deposit requirements, most new investors start with mutual funds. Since ETFs have lower fees, investors should consider these types of investments when their savings reach the threshold eligible for ETF products.

Unfortunately, individuals often ignore tax diversification. After-tax accounts mean that taxes have already been paid on the funds invested. Employees eligible for the 401k or 403b plans can choose to have their employer withhold money from their paycheck. Most of the time, these accounts are tax-deferred and individuals pay taxes on the initial principle and profit growth upon withdrawal. People who qualify for a Roth IRA pay taxes on the funds deposited into the account, but the income increases tax-free.

This can sometimes be a lot of information to digest, and many people often don’t know where to start. Start by knowing that you need to build an emergency cash fund. This is three to six months of spending. Then fund your workplace retirement plan up to the amount available. Then from there, build your tax diversification by funding a Roth IRA. From there, figure out how to allocate your contributions based on asset classes and volatility. Finally, review your plan quarterly and adjust it as needed.

Joseph “Big Joe” Clark, whose column is published on Saturdays, is a certified financial planner. He can be contacted at [email protected] or 765-640-1524.