Key Takeaways
Active vs. passive investing |How much to invest |Determining risk | Choosing investment accounts | Opening investment accounts | How to invest money at any age
What’s the most effective way to build wealth and save for long-term goals such as retirement? The answer is simple: invest your money. Where it gets tricky is knowing where and how to invest money to create the most wealth. That’s because there is no one-size-fits-all strategy available. The best ways to invest money are based on certain factors, such as your savings goals, risk factors, age, and the types of investments you want to make. FortuneBuilders explores how to invest your money at any age.
1. Decide Between Active & Passive Investing
Before you start investing, the first thing you’ll want to do is create goals for your investments. You’ll quickly learn that your investment strategy will change based on whether your goals are short-term or long-term.
Building up an emergency fund or buying your dream car in the next five years might be examples of short-term goals. Examples of long-term goals include buying your forever home or saving up for retirement. While you can certainly invest money for short-term goals, this guide will focus on long-term goals such as building wealth for retirement.
Once you’ve outlined your goals, decide whether you want to be an active or passive investor.
Active investing requires a hands-on approach. You manage your investments yourself, which requires market knowledge and research. This type of investing offers a higher potential for reward but comes at greater risk. Although you can partner up with a professional portfolio manager, you’re expected to conduct your own analysis, select your stocks, and manage your portfolio consistently.
If active investing doesn’t sound appealing, you’re more likely to select passive investing. “Slow and steady wins the race” is the motto for a passive investor who selects investments that are stable and predictable. Examples of passive investments include dividend stocks and mutual funds. You could also consider pursuing rental property investment, which involves buying properties that are rented out to tenants. Although it can take several years to decades to break even, you’ll eventually begin turning a profit and secure passive rental income for your retirement.
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2. Decide How Much Money You Want To Invest
How much money do you want to invest? Many Americans put off investing their money because they think they can’t afford it.
Although it may not feel intuitive at first, it isn’t the amount that matters. You can start with as little as $100. What matters is that you’re financially ready to start investing and can commit to investing consistently over time. This is thanks to something called compound interest. Your money will grow more effectively if you save consistently over time versus investing large chunks of cash sporadically. The key is to get started as soon as you possibly can.
Not sure if you’re financially ready? The main thing to consider is your emergency fund. Experts generally recommend that you have enough savings to cover up to six months’ worth of expenses in case of an emergency. This is a stellar target, but you don’t necessarily need to have saved this much to start investing. Really, the goal is to avoid having to sell your investments any time you hit a bump in the road, such as having to repair your car or pay down your credit card debt. As long as you have enough cash set aside to cover unexpected expenses, then you can generally start investing safely.
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3. Determine Your Level Of Risk
Know that investing is inherently risky. Even the safest investment options carry at least a nominal level of risk. However, as an investor, you have to take on some risk to reap the rewards. The key to success lies in choosing appropriate investments based on your age, savings goals, and expertise.
For instance, young professionals in their 20s can afford to take on more risk. That’s because if they suffer market losses, they have plenty of time to recover for retirement. However, they might not be so versed in the investment market yet. Because of this, they might select a slightly more aggressive and risky stock portfolio that is selected and managed for them by a robo-advisor.
In contrast, a 40-something is approaching retirement sooner than later and should not take on too much risk. They might divide their investments into separate buckets. For instance, they could put the majority of their savings into modest-yield, low-risk bonds, and mutual funds. They could maintain a smaller portfolio of higher-yield, higher-risk individual stocks. As they age, they could redistribute more funds into low-risk investments to ensure they won’t lose any money before they retire.
4. Choose The Best Investment Account For You
Once you have an idea of your savings goals, time horizon, and preferred level of risk, it’s time to choose your investment account.
There are many investment accounts to choose from. Some offer special tax advantages if you’re saving for a specific purpose, such as retirement. Be careful to review account and plan rules, because they often have taxes and penalties if you withdraw money before retirement age.
Other types of investment accounts are general purpose and can be used for goals other than retirement, such as saving up for your dream home or simply to grow wealth.
The two most popular types of retirement investment accounts include the 401(k) and the Individual Retirement Account (IRA).
A 401(k) is a retirement savings account offered by most employers. Your contributions are taken directly out of your gross pay. This is beneficial in a couple of ways. You’re paying yourself first, which means you’re less likely to miss the money since it never hits your bank account. Second, it lowers your taxable income, although you’ll have to pay income taxes when you withdraw money from the account later. If your employer offers 401(k) matching, definitely take advantage. This means that they will contribute the same amount you do, which doubles your retirement savings. They often require a minimum contribution per month before they will provide this benefit, so be sure to meet this minimum to participate.
IRAs are also popular. These are retirement investment accounts you can open on your own, regardless of if you have a 401(k). Different retirement accounts have annual contribution limits. If you have a 401(k) but have maxed out your contributions for the year, you have the option of supplementing your retirement savings by opening an IRA. A self-employed person might open an IRA since they don’t have an employer-sponsored retirement plan. Note the difference between a traditional IRA and a Roth IRA. Your contributions to a traditional IRA are tax-deductible, but you’ll pay income taxes during retirement. If you prefer not to pay taxes in retirement, choose the Roth IRA. You make after-tax contributions today in exchange for not having to pay income taxes on withdrawals in retirement.
5. Open Your Investment Account
Once you’ve decided what type of investment accounts you want to open, it’s time to find your provider.
There are many online brokers and investment platforms to choose from. Many are beginner-friendly and don’t require a minimum deposit. Robo-advisors use algorithms to build a portfolio for you, based on your risk tolerance and investment goals. (You’ll typically fill out a questionnaire when you first sign up.) This is a great option if you prefer to put your investments on autopilot. However, these portfolios are typically made up of funds and not individual stocks or bonds. If you prefer the latter, consider using an online broker. Brokerage accounts allow you to choose and manage your own investments and offer a wide range of options.
If you are electing to contribute to a 401(k) provided by your employer, you may not have to worry about choosing a brokerage or platform. Employers often contract with providers and will guide you through the process of opening your account and start making paycheck contributions.
How To Invest Money At Any Age
Your age is a major factor that goes into devising your investment strategy. Your risk profile changes as you age, and so will the types of investments that you will choose. Your contributions to your investment accounts will likely also change as you age. Here are some tips on how to invest your money through life’s various stages.
How To Invest Money In Your 20s: Begin Retirement Planning
If you ask someone if they have any financial regrets, more often than not they will tell you that they wish they had started investing in their 20s. This is because 20-year-olds have the biggest advantage of time over any of their older counterparts. Thanks to compound interest, any money you can afford to invest during this decade has the largest opportunity for growth.
However, investing in your 20s takes great discipline. You’re likely in an entry-level position, living paycheck-to-paycheck and paying off student loans. Even if you can’t contribute the recommended amount, contribute any little bit that you can. You’ll thank yourself later when your consistent contributions turn into a sizable nest egg over the next few decades.
Because you’re young, you can afford to take on some risk, and you have plenty of time to absorb and recover from market fluctuations. This means that you can focus on aggressive stocks and wait to invest in slow-growth investments such as bonds.
How To Invest Money In Your 30s: Maximize Your Contributions
If you didn’t find the opportunity to invest in your 20s, you need to start investing in your 30s. You are still young enough that you can take advantage of compound interest. Further, you may have advanced enough in your career that you can start contributing larger shares of your income toward your retirement savings.
Although your 30s will bring on additional financial responsibilities, such as caring for a family or paying a mortgage, you must prioritize retirement savings. Consider maxing out your retirement accounts each year if you can. While you’re still young enough to invest in riskier assets, start adding in some safe options such as bonds.
How To Invest Money In Your 40s: Build Your Portfolio
Your 40s are ideally when your retirement contributions are on comfortable autopilot. This can be a time when you finesse your portfolio and build it out more.
However, many Americans find themselves scrambling to start saving for retirement at this time. You must focus all of your energy into playing catch-up. It may be worthwhile to work with a financial advisor who can help you select investments that are aggressive enough to help you beat out inflation without putting your savings at risk. Continue maxing out your retirement contributions whenever possible.
How To Invest Money In Your 50s: Build Your Portfolio
As you get closer to retirement, it’s time to start easing off the riskier investment options. Reallocate your investments such that your approach is more conservative. Seeking the advice of a professional can be great so that you can make sure you’re on track to meeting your savings goals and that your portfolio has the right mix of investments for your age.
Your 50s is also a great time to play some catch-up if needed. The IRS allows this by increasing the contribution maximums for workers over the age of 50. For instance, you can make a “catch-up contribution” of $6,500 to a 401(k) in 2022. This is in addition to the $20,500 contribution limit.
How To Invest Your Money After Retirement
Just because you’ve retired doesn’t mean that you have to stop investing. You’ll likely start collecting retirement benefits from Social Security. If you’re lucky, you might even have a retirement pension from your company. This means that you don’t have to cash out your retirement savings in entirety. Instead, simply withdraw what you need to live comfortably.
You can choose to leave your remaining savings as is so that they continue growing. You might also choose to reallocate these savings into stocks that provide dividend income.
Once you turn 72, one thing to watch out for is required minimum distributions (RMD). These are minimum amounts that you must withdraw from your retirement accounts each year. If you don’t, you’ll face a 50 percent penalty. Be sure to understand your RMD amounts and deadlines. You don’t have to worry about RMDs if you have all of your savings in Roth IRAs or if you have a 401(k) through a company at which you’re still employed.
Summary
Knowing how to invest money is not an intuitive skill. It often requires trial and error, time, and practice. It also requires self-discipline, and outside help from coaches and advisors can be extremely helpful too. If you’re relatively young, know that you have time to recover from any “mistakes” you might make in the investment game. The important thing is to simply start investing while you have time on your side. If you’re older, know that it’s best to take action and start investing rather than beating yourself up about not getting started sooner. Working with a financial advisor can be a great tool if you feel behind or unsure what types of investments are appropriate for your age.
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