5 Principles to Invest Your Money Wisely

Investing may seem daunting at first, especially if you get started when the market is experiencing a crash, but it doesn’t have to be a terrifying ordeal. If you do your research and due diligence, you should be well on your way to a healthy and robust financial future. Do you want to learn how to invest money but don’t know where to begin? We’ve put together this guide for beginners to help you grow your hard-earned money, even when the market gets rough.

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1. Start investing as soon as you begin earning

One of the most important factors in how much wealth you can accumulate depends on when you start investing. There’s no better example of how the proverbial early bird gets them worm than with investing. Starting early allows your money to compound and grow exponentially over time even if you don’t have much to invest. Compare these 2 investors, John and Brad, who set aside the same amount of money each month and get the same average annual return on their investments:

John

Begins investing at age 35 and stops at age 65

Invests $200 a month

Gets an average return of 8%

Ends up with just under $300,000

Brad

Begins investing at age 25 and stops at age 65

Invests $200 a month

Gets an average return of 8%

Ends up with just under $700,000

Because Brad got a 10-year head start, he has $400,000 more to spend in retirement than Jessica! But the difference in the amount Brad contributed was only $24,000 ($200 x 12 months x 10 years). So never forget to start investing as early as possible. It’s a huge mistake to believe that you don’t earn enough to invest now and will catch up later. If you wait for a someday raise, bonus, or windfall, you’re burning precious time. Neglecting to invest even small amounts today will cost you in the long run.

The earlier you start saving and investing, the more financial security and wealth you’ll have. Please remember that you’re never too young to begin planning for your future. But what if you didn’t get a head start on investing and now you’re worried about running out of time? You’ve got to just dive in and get started. Most retirement accounts allow for additional catch-up contributions to help you save more in the years leading up to retirement, which I’ll cover in a moment.

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2. Passive Investing

This “set-it-and-forget-it” approach to investing is for people who don’t have the time or interest to do all the heavy lifting themselves. There are a lot of options out there if you want to hire someone to invest for you. You can invest in mutual funds or invest in exchange-traded funds (ETFs) through a Robo advisor.

If you’d rather not be too involved in the investing process, then you’ll probably prefer using a Robo advisor. These platforms do all the work for you, once you’ve answered a few questions about your investing goals and how much risk you want to take. Betterment is the biggest Robo-investing platform in the industry, and it’s a good starting point for beginning investors and a useful platform for more experienced investors.

However, there could be a limit in what you can invest in. You can also use a service such as the Paladin Registry to locate a fiduciary investment advisor who’ll act in your best interest.

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3. Minimize Taxes

The more you save on taxes, the more money you have available to invest and earn compound interest. There are several ways to minimize your tax liability, including deferring it by managing your portfolio to control the difference between when the tax is accrued and when it is paid.

You can minimize your tax liability by using a Roth IRA. Your family can structure its holdings to take advantage of the stepped-up basis loophole upon death, protecting heirs from capital gains taxes. Utilize the asset placement technique, which strategically locates your assets to minimize tax payments. Or you can form family limited partnerships to transfer wealth and lower gift and estate taxes.

To take advantage of any breaks Congress has given you under the law, speak with your advisors to find out what you’re missing.

4. Control Your Expenses

Another aspect of investing wisely is controlling your fees and expenses. Sometimes, fees can be worth the cost. For certain high-net-worth people with complex needs, a registered investment advisor charging a 2% fee can absolutely be worth his weight in gold. Someone structuring a portfolio using a charitable remainder trust or another setup would be well-served by paying a professional to assist.

But for most small- and medium-sized investors, cost matters. You can reduce expenses by choosing something like a low-cost, passively managed index fund from a firm like Vanguard, or by paying close attention to the expense ratio of a chosen mutual fund. You may consider switching to a discount brokerage to save on trade fees, or you might use a Robo-advisor to manage your investments instead of an expensive financial advisor.

Investing wisely is key to growing your net worth, and you can get there with careful attention. Cultivating the financial habits above allow you to minimize costs, maximize returns, and proactively manage your investments as your financial future takes shape.

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5. Invest money to accomplish long-term goals

Investments are the opposite of savings because they’re meant to grow money that you spend in the distant future, namely in retirement. Investing is also best for smaller goals you want to achieve in at least 5 years, such as buying a home or taking a dream vacation. Historically, a diversified stock portfolio has earned an average of 10%. But even if you only get a 7% average return on your investments, you’ll have over $1 million to spend during retirement if you put aside $400 a month for 40 years.

So, start investing a minimum of 10% to 15% of your gross income for retirement. Yes, that’s in addition to the 10% for emergency savings that I previously mentioned. Consider these amounts monthly obligations to yourself, just like a bill with a due date you receive from a merchant. If saving and investing a minimum of 20% of your gross income seems like more than you can afford, start tracking your spending carefully and categorizing it. I promise that when you see exactly how you’re spending money, you’ll find opportunities to save more.

After you build up a healthy emergency fund, continue putting aside 20% of your income. You could invest the full amount or invest 15% and save 5% for something else, like a new car or a vacation.

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