There are a variety of ways to invest your money and build wealth, and when you’re looking to start, it may even seem daunting. This article aims to get the basics nailed down so that you can start making your money work for you. In the generic sense, investing simply means to spend money to make money. However, for now we want to focus on strategies that involve low effort, and (as much as possible,) low risk.
Contribute to Your 401(k)
A 401(k) is a plan sponsored by your employer that allows you to make tax-deferred (a.k.a. pre-tax) contributions. Some employers may opt to match your contributions up to a limit, but even if they don’t, it’s a smart idea to take advantage of a 401(k) if it’s available to you.
Investing in a 401(k) is definitely a long-term investment, as you will incur penalties for making withdrawals before the age of 59 1/2. When you start withdrawing from your 401(k), it will be taxed as ordinary income. Another, perhaps less obvious advantage of the fact that your contributions are made pre-tax, is that you effectively lower your taxable income.
If your employer offers a 401(k) you should consult with an expert to find out more about your specific situation.
Open a High-Yield Savings Account
The name says it all–a high-yield savings account is an account that has a higher-than-average return. Whereas you can expect to get a return somewhere in the neighborhood of 0.01% in a traditional savings account at your bank, it is not uncommon for a HYSA to get around 2.00%. Yeah, that’s literally 200x better. Unlike a checking account, there some restrictions to keep in mind when saving in a HYSA.
For example, you will not be getting an ATM/Debit card. Remember: this is not meant to be an every-day spend account–it’s a savings account, and as such, you’ll be limited to 6 withdrawals a month. For something like an emergency fund, or a long-term goal savings account, that’s perfect. Ideally, you’re not taking anything out of this account–just making deposits.
There is one similarity with a traditional savings account you’ll be glad to find here: FDIC insurance. With that in mind, there is almost no reason to ever save in a checking or traditional savings account for the long-term.
A few companies offering HYSAs out there that you may want to consider are: Amex, Ally, Synchrony, and Discover, among many others.
Invest in an Index Fund
A mutual fund is an investment that allows investors to pool their money together (the fund) to purchase an portion of a stock portfolio. Whereas in a mutual fund the fund manager actively manages the mix of stocks in a portfolio, an index fund tracks a particular index–for example the S&P 500.
It’s important to remember that not all index funds are created equal. Most funds charge some sort of management fees, which can mean an expense ratio of 1% or more.These fees can eat into your profits in significant ways, which is a good reason to consider low-fee funds. In this area, Vanguard funds excel with expense ratios as low as 0.04%. Using these low-cost funds, you can purchase a fraction of the entire market for just a few hundred dollars per share.
While other mutual funds may be worth looking into, for those getting started, many consider index funds to be a solid foundation to build upon.
Wrapping Up
This list is not an exhaustive list of all the investment avenues out there, but can be a good place for you to start. Be weary of investment techniques that seem to good to be true. While aggressive strategies can yield results in the right circumstances, there’s no need to jump in head-first into the deep end of the pool without first getting your feet wet. As always, consult a professional for specific advice on your situation. Happy investing!
