Investing is one of the best ways to grow your money in the long run, but it scares many people because of the inherent risk and the difficulty of investing properly. There is no denying that education and practice can help you invest your money more carefully, but you do not need to know much about investing to get started. Here are five tips everyone can use to start growing wealth today.
1. Select low cost investments
Investment always entails some costs. Your broker is likely to charge you fees, and the assets you invest in may have them as well. For example, mutual funds charge an annual fee, called an expense ratio, to all shareholders. This is usually a percentage of your assets and it can eat up your profits over time. You can find out how much you pay in fees by looking at the broker's fee schedule and the prospect of your investments.
Try to keep your costs as low as possible to maximize profits. Index funds are a good choice because they offer instant diversification and low costs. There are mutual funds – bundles of shares and bonds – that you buy as a package. But unlike conventional mutual funds, which consist of assets that are often changed by fund managers, index funds passively track a market index, such as S&P 500 . Because there is less work for fund managers to do, the index fund's expense ratio is low, often below 0.5%.
2. Use the right accounts
Pension accounts are where most people invest, and for good reason. Money you contribute to a tax-deferred retirement account, like most 401 (k) s and traditional IRAs, reduces your taxable income for the year, even though you have to pay tax on pension distributions. Roth retirement accounts do not give you a tax break this year, but after you pay taxes on your first contributions, your money grows tax-free.
Both accounts have the potential to save you money on your taxes while growing your wealth. But the correct account type depends on how you think your current income stacks up against your retirement income. Tax-deferred accounts make the most sense if you think you are in a higher tax class today than you would be during retirement, while Roth accounts are better if you think you are in the same or lower tax class today than you will be when you retire . In either case, you must be aware of the annual contribution limits. These are $ 19,500 for a 401 (k) in 2020 and $ 6,000 for an IRA. Adults 50 years and older can contribute $ 6,500 and $ 1,000 respectively.
If you are maximizing retirement accounts or want to be able to access these savings before 59 1/2 without penalty, consider investing through a taxable broker account. These accounts do not offer the same tax benefits as retirement accounts, but they can still help you save money. If you hold on to your investments for more than one year, they will be charged with capital gains instead of income tax. Here is a comprehensive guide if you are interested in learning how this works, but regardless of your income, you should end up paying less in taxes on your investment income than if you were charged the same income tax.
3. Stay Well Diversified
Diversification is important no matter how much money you invest, but it becomes increasingly important as you invest larger amounts. Putting most or all of your money into a single stock can come back to bite you if the stock plunges. It may take years to recover what you lost, or you may never recover it at all. Therefore, it is wise to spread your money among many different assets. Mutual funds are an easy way to do this because they are bundles of many stocks and bonds, so no single stock or bond can affect your portfolio too much.
You also need to make sure you are diversified into many different industries and sectors. For example, if you have all your money in tech stocks and the tech industry takes a big hit, you can lose a lot even if you have invested your money in several different companies.
4. Practice on Average Dollar Cost
Average dollar cost is a simple strategy where you invest a fixed dollar amount in an asset according to a regular plan – once a week, once a month, etc. The idea here is that you & # 39; I will end up paying a fair price in the long run because sometimes you will buy when the price is higher and sometimes when it is lower. This is a better approach than trying to put time in the market, because if you make a mistake, you can lose money by investing when the prices are high.
5. Consider the help of a financial advisor or robo-advisor
If you do not trust yourself to invest your money effectively, consider hiring a financial advisor who can do the job for you. You have to pay for these services, but this may be worth it in the long run because advisors can choose investments and strategies that will help you grow your money faster than if you just invested them on your own.
Choose a financial advisor who is only a fee rather than commissions earning commissions. The latter may be tempted to recommend investments that give them profits, although they are not ideal for you. Look for an advisor certified by the National Association of Personal Financial Advisors (NAPFA) or a similar organization.
Another alternative is a robotic advisor. These are computer programs that invest your money according to a certain algorithm based on questions you answer when setting up your account. The costs are usually lower than what you would pay a financial advisor, but the advice is also not tailor made.
Even if you follow all of the above advice, you always take some of the risk when investing. But it is worth it, if you do not, you are guaranteed to lose money as inflation erodes the value of savings. Try some of the tips above to start increasing your wealth today.