How to Invest Money Wisely – 7 Simple Ways

When you’ve got money to invest, there’s no shortage of directions you can go. Everyone from family members to strangers on Internet forums will have an opinion of what you should do with it and why it will make you rich. Unfortunately, however, the vast majority of that advice is complete nonsense.

To grow your hard-earned savings without taking a lot of unnecessary risks, there are a few basic principles you’ll want to follow. In this post, we’ll go through 7 simple ways to invest your money wisely that will be sure to build your fortune over time.

1. Invest for Compound Growth

One of the easiest ways for anyone to effortlessly turn their investments into thousands or even millions of dollars is to take advantage of compound growth. Compound growth is when you earn money on top of both your contributions as well as the money you’ve already earned.

For example, let’s say you invested $500 per month into funds that produced an average annual return of 10 percent per year. Over 30 years, you’d have invested:

$500 x 12 months x 30 years = $180,000

However, thanks to monthly compound growth, your savings would have potentially grown to $1,130,244. That’s 950,244 more than what you contributed! 

You can try this for yourself (or with other numbers) using this free calculator here.

2. Avoid Taxes Whenever Possible

Every year, the IRS allows you to save thousands of dollars in taxes. All you have to do is invest your money into tax-deferred retirement plans. These include:

  • A workplace retirement plan like a 401k, 403b, or 457
  • An individual retirement account (IRA) with any financial institution of your choice
  • A self-employed option such as a SEP-IRA, Solo 401k, or SIMPLE IRA

Every dollar you save into your retirement plan is a dollar you didn’t have to pay taxes on. To put this into perspective, if you maxed out your 401k with $19,500, you’d effectively be keeping $4,680 for yourself instead of handing it over to the IRS (assuming a top tax rate of 22 percent).

3. Consider the Impact from Fees

Investment fees are always measured as a percentage of your overall balance. It’s very easy to see fees like 1.0 or 2.0 percent and think to yourself that they won’t have an influence. However, the reality is that even a few percentage points can make a very substantial difference to your bottom line.

Here’s an example from Vanguard. Let’s say you invested $100,000 and it earned an average of 6 percent over the next 25 years. That investment alone would work out to $430,000.

But then consider the fees. If that investment had an expense ratio of 2.0 percent, then you’d effectively only be making around 4.0 percent per year. This would result in your investment only compounding to $260,000. That means you’d almost half of your nest egg would be lost to fees!

For the best results, use a broker that offers investments with low fees. Index funds are an ideal choice.

4. Automate as Much as Possible

Nothing gets in the way of investing intelligently like your own emotions. Humans are wired to be risk-averse; the pain of losing something is greater than the potential benefit of gaining something else. So when it comes to investing, this is why we hesitate even though we know it’s the smart thing to do with our money.

The best way to take your emotions out of the equation is to make the process as automatic as possible. This can be done simply by automating your contributions. For instance, with a 401k the money is taken right of your paycheck with no manual involvement on your part. That works great because you get whatever is leftover and won’t even realize the money is gone.

Similarly, IRA contributions can also be automated. Nearly every financial institution will have a feature that lets you transfer money from your bank account every month. As long as you think of it like any other bill, you’ll never even miss it.

5. Don’t Invest Based on Speculation

It can be very tempting to invest in whatever is trending: Cryptocurrencies, meme stocks, … whatever seems hot at the moment. But when you put your money into something based on nothing more than a hunch or because everyone else is, then you’re investing based on speculation, and that’s a very dangerous way to go. 

The truth is that the best and most stable investments are the ones that are downright boring. This is yet another great reason to invest in an index fund. Especially when it comes to index funds that follow the stock market, you’ll never gain or lose any more than what the benchmark does. According to Vanguard founder Jack Bogle, that’s a strategy that will have you beating the majority of active fund managers!

6. Emergency Funds are Investments Too

Investing isn’t always about having the biggest nest egg or retiring with millions of dollars. Sometimes investing can also mean protecting your future. And that’s exactly what an emergency fund is supposed to do.

Emergency funds are cash reserves containing 3 to 6 months’ worth of living expenses that should be used if unexpected happens and you need money quickly. While some financial gurus will say that having this much money sitting around in cash is a wasted opportunity, I want you to look at this from another perspective. 

Emergency funds are there to make sure you don’t have to rely on high-interest credit cards or personal loans to get the immediate funding you need. This could save you from getting into debt and avoid racking up thousands of dollars in interest unnecessarily. Therefore, think of it as an insurance policy that protects your finances from potential disaster.

7. The Best Time to Invest Is Right Now

You can read all the websites or books on investing. But until you actually invest your first dollar, you’ll never make any money. That’s why the best time to invest is always right now! 

Don’t get left behind on the sidelines. Contribute to your 401k plan and open an IRA. Even if you make some mistakes along the way, I’m convinced that over time you’re always better off than if you had done nothing at all.

If you need help finding more money in your budget to invest, then use an app like Buxfer to help show you where you can cut spending. Buxfer’s Insights feature helps categorize your transactions as it seamlessly imports them from your credit cards and bank accounts. This helps you to easily see where all your money is going and where you might want to make some adjustments.

You can learn more about the Buxfer Insights feature by clicking here.

Image credit: Unsplash

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