When I think about investing my money wisely I’m influenced by several things. I think about my age, retirement, how much I’m able to put away each month, and I won’t lie, I’m also motivated by fear.
The fear of having to work into my 70s and 80s is not pleasant.
What if I get sick in my old age? I don’t want to be old, sick and broke. OK, that sounds really depressing, but these are all factors and hard truths that you should prepare for.
What you do now with your money will impact your lifestyle later in life, so invest it wisely. And I want my latter years to be just that, golden and shiny and secure. I’m sure that’s what you want too, right?
So what are the best ways to invest your money strategically so you can get the most consistent results? There are some basic rules to investing for the long-term. While everyone has a different style for how aggressive they want to go, the two most important factors to consider are age and income.
Take a look at the following ways you can invest your money wisely, and if you have lots of detailed questions, it’s best to consult a certified financial advisor.
1. Crowdfunding Investments
Thanks to tech companies like Fundrise and EquityMultiple that use crowdfunding to pool investments, you can invest in real estate with as little as $500 to $1,000.
There’s also RealtyMogul that offers commercial real estate investing with as little as $1,000 to the masses, through crowdfunding.
Real estate crowdfunding insiders say you can expect annual returns of 8 to 12 percent. However they can be much higher. But as with anything money-related, some naysayers have their reservations and caution investors to fully research and talk to a financial advisor before they decide to purchase.
Lending Club uses crowdfunding to offer personal loans to those who need it for various reasons, such as real estate or venturing into a new business.
While crowdfunding may be an investment consideration, be sure to have your foundation set before you start investing in alternative assets. Your priorities should be to actively contribute to your 401(k) or IRA first.
2. Online savings account
This investment strategy falls in line with short-term goals, but it’s crucial to your finances.
If you’re still saving money in your big-name bank that offers a teeny percentage in annual interest, stop. These days, there are consumer-friendly online banks that are not only free to open, but also offer rates of up to 1.55 percent. If you’re saving diligently, you might as well earn some interest on that, right?
Online savings accounts are great for saving liquid cash for a specific goal, such as an emergency fund, a trip, holiday presents or a car.
However, I strongly suggest saving for an emergency fund before a trip, holiday presents or a car.
Having some cash that’s easily accessible gives you comfort and helps ease stress. A savings account is more flexible for withdrawal. If you want to pull money out of your IRA or 401(k) early, you’ll get penalized by taxes and fees.
Money in the Bank is Comfort
Sometimes life throws you a curveball, as Sarah experienced when she quit her soul-crushing job without a new one lined up.
Sarah and her husband quietly tucked away a portion of their paychecks automatically each month from their checking to savings account. Just a few years later, Sarah realized she had enough savings to live comfortably for more than a year.
This is the kind of cushion that everyone needs, and the best place to save that money is in an online savings account. Aspiration Bank offers a competitive, free, high-yield savings account.
Saving Tip: The easiest way to save is to ask your employer if they can allocate a portion of your paycheck directly into your savings account.
If that’s not possible, set an automatic withdrawal from your checking a few times a month to funnel money into your savings. Start with a percentage, say, 5 percent of your paycheck, and then increase it as you scale back on spending and increase your savings.
3. Focus on long-term, period
Sometimes, playing the stock market and putting your money in individual stocks can be fun. But in the end, it’s not a consistent way to build a foundation for your retirement.
Investing for the long haul means you need to understand that the value of your investments will go up and down over time. Even if your stocks aren’t performing as you’d hoped, don’t worry. Things will always even out, especially when you’re investing over a span of 20 years or more.
Vanguard founder Jack Bogle talks about this a lot and stresses that a long-term should be embraced, along with low fees and index funds. Similarly, billionaire Warren Buffet plays it safe and believes an index portfolio of 90 percent S&P 500 and 10 percent Treasurys is probably the best bet for most investors.
Both have wisely advised to keep it simple and go for index funds, as they generate the highest returns for the lowest risk. Check out a brokerage like Ally Invest to buy index funds as low as $3.95 per trade.
Use Time to Your Advantage
The earlier you start putting your money away, the more you can benefit from the power of compound interest. The younger you are when you start saving, the longer you have to make your money grow.
Let’s say you were smart enough to start saving in college and invest with just $100 and contribute $200 each month.
At a 7 percent rate of return, in 30 years you’d have $227,467. Of course, the goal would be to pay a lot more than just $200 each month, but this is just an example of the power of compound interest.
There’s a helpful calculator on Investor.gov that can show you detailed results, plus the difference in how much you’d earn with and without interest (I included a screen grab for you to see).
Investor Tip: Avoid buying individual stocks
Buying individual stocks and hoping that you’ll strike it rich is a huge gamble for your retirement and goes against all mantras for investing wisely. Let’s say you buy shares for a hot tech company that happens to tank, goes bankrupt or even experiences a bad quarter. You can lose your hard-earned money pretty much overnight.
4. Traditional 401(k)
When I used to work at a personal finance company, I was shocked to find out only 2 percent of their employees had enrolled in the 401(k) program. Two percent — and this is a company full of employees who are supposed to be helping others learn about money!
Does your employer offer a 401(k)? If so, you need to sign up, pronto. I can’t stress this enough.
A 401(k) is a savings plan offered by your employer that allows you to take a portion of your paycheck and invest it while deferring the income taxes on the saved money until you withdraw the money at retirement.
The best way to invest in a 401(k) is to make sure you’re contributing enough to get your employer match. Employer match can vary widely, from a few percentages to 100 percent.
Let’s say your employer offers a 50 percent match for your contribution of up to 6 percent. If you contribute the full 6 percent of your annual pay, your employer will contribute 3 percent. This is free money!
Even if your employer doesn’t offer a match, it’s still worth signing up. I’d also recommend maxing out your 401(k) each year. Currently, you can contribute up to $18,500. Check out a tool called Blooom to see if you are paying too much in 401k fees.
5. Roth IRA
In addition to a 401(k), you can open a Roth IRA.
A Roth IRA is an individual retirement account in which you can save after-tax income of $5,500 per year. If you’re over the age of 50, you can contribute $6,500.
If you have both a 401(k) and Roth IRA, you can save up to $24,000 each year, or $25,000 if you’re over the age of 50.
The earnings on a Roth IRA are tax-free, and withdrawals are also tax-free, as long as you make the withdrawals after the age of 59 ½.
You can open an account using a low-fee online brokerage like Vanguard.
6. Traditional IRA
This is slightly different than a Roth IRA, since your contributions may qualify for a deduction on your tax return. Your earnings may grow tax-deferred until you take them out when you retire.
The difference between a Roth IRA and Traditional is the fact that many investors believe they’ll be in a lower tax bracket upon retirement. So, paying taxes on the Traditional IRA after they retire may cost less than paying when they are in the process of earning them.
Again, it depends on what your lifestyle and work situation is like.
7. Mutual Funds
A mutual fund is a pool of money created by other investors, companies, and organizations. Think of it as a portfolio of stocks and other bonds.
Just like other investment vehicles, you’ll need to adopt the long-term strategy and invest in a more broad portfolio of stocks and bonds.
Mutual funds are considered great investments for the long haul because they’re diversified funds and are taken care of by a professional investment manager who does all the research and trading for you.
The funds can be purchased through a brokerage account, but you can save money on trade commissions by using a company like Vanguard or Fidelity.
Exchange-traded funds, or ETFs, are a group of securities that can be purchased or sold through a brokerage firm on a stock exchange, which sort of makes it similar to buying an individual stock.
The nice thing about ETFs is that you can have access to a ton of markets and industries from around the world. You can invest according to your goals and how much risk you’re willing to take.
There are all kinds of different ETFs you can purchase, and unlike mutual funds, there are no sales load fees. Instead, they charge a brokerage commission. ETFs were designed for individual investors, but keep in mind trading fees add up when you invest frequently.
A CD is a certificate of deposit and typically offers a higher interest rate on your money. But, unlike an online savings account, you can’t withdraw the money whenever you feel like it. If you do, you’ll get penalized with fees, which defeats the whole purpose of investing in the first place.
A CD has a fixed interest rate and a target date of when you can take your money out, also called the maturity date. The length of time that you want the CD to mature is up to you, and there are a wide variety of options, from three months to a decade.
CDs are great if you don’t need the liquid cash. To give you an idea of how much you’d earn, let’s say you opened a five-year CD with a deposit of $5,000 and an interest rate of 2.5 percent. That money would earn you around $625.
CDs are low-risk and often don’t come with any monthly fees to open one.
10. Invest 15 Percent of Your Income
Set a goal to consistently aim to invest 15 percent of your income. Max out your 401(k) and IRA each month.
Side hustle to increase your income
If you just can’t seem to make ends meet by investing 15 percent of your income each month, consider ways to increase your income. Well Kept Wallet shows you lots of ways to earn extra money, from the super easy, such as renting a room in your home through Airbnb, to creating your own e-commerce site using iPage for selling products.
There’s no excuse for not being able to add a few hundred bucks each month that goes directly into your investments or savings.
Real stories from smart side hustlers
I recently spoke to a friend who said he uses his rental property to cover his entire mortgage. Everything he and his wife earn goes straight into savings and investments. OK, so maybe you don’t have a rental property to help you out. But use the skills you have and find something you can market.
I have another savvy friend who recently went back to full-time employment after freelancing for a year. She kept some of her clients to keep her side hustle going. She earned enough each month from her side gigs to put her employment income straight into savings and investments.
What’s your way of hacking your income? Create a plan and get going.
Keep it simple
As the saying goes, time is money. So, the sooner you start investing, the longer you’ll have for your money to be able to grow. Yes, investing can be an overwhelming process, but keep it simple and start with a 401(k) and IRA.
If you already have those accounts, increase your monthly contributions until you can max them out. After that, use any number of investments, like crowdfunding or a CD.
Have a cool investment strategy to share with the community? Let us know how you invest wisely.