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7 Simple Principles to Invest Money Wisely No Matter Your Age

You can achieve your financial goals by using simple, but tried and true, investing principles. Laura covers 7 key concepts to grow your net worth over time no matter if you're an investing newbie or have been at it for decades—even if you don’t have much to invest.

By
Laura Adams, MBA
10-minute read
Episode #489
7 Simple Principles to Invest Money Wisely No Matter Your Age

 

3.    Build savings for short-term goals and emergencies.

Though we tend to use the terms saving and investing interchangeably, they’re not the same thing. Savings is cash you keep on hand for short-term planned purchases and unexpected emergencies.

For instance, if you’re saving money for a car that you plan to buy within the next year or two, keep it 100% safe in a high-yield bank account. You might save for annual holiday gift-giving or unexpected medical expenses.

A common question is whether you should invest your savings since the interest paid on a bank account is so low. The answer is almost always no.

Unless you have a huge amount of cash reserves, your savings should not be invested because the value could drop at the exact moment you need to spend it.

The purpose of savings is not to put it at risk to make it grow, but to preserve it so you can tap it in an instant if you need it.

If you don’t have an emergency fund that’s equal to at least 3 to 6 months’ worth of your living expenses, make accumulating one a top financial priority. Set aside 10% of your gross pay until you have a healthy cash cushion to land on if you lose your job or can’t work for an extended period.

4.    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.

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.

Related Content: 5 Clever Ways to Save More Money

5.    Leverage tax-advantaged accounts for faster results.

One of the best ways to invest money is under the umbrella of a tax-advantaged account, like a workplace 401k or 403b. If you’re self-employed, you have options too, such as an IRA, SEP-IRA, SIMPLE IRA or a Solo 401k.

Retirement accounts help you accumulate a nest egg and cut your tax bill at the same time. When you invest in “traditional” accounts, you contribute on a pre-tax basis. That means you defer paying tax on both contributions and earnings until you make withdrawals in the future.  

Another option is to contribute to a Roth 401k or Roth IRA, where you pay tax on contributions upfront, but get to take withdrawals completely tax free later on.

If your employer offers a retirement plan, start participating as soon as possible—especially if they match some amount of your contributions. Here’s why matching is such a big deal:

Let’s say you get a full match on the first 3% of your salary that you contribute to a 401(k). If you earn $40,000 a year and contribute 10% of your salary, that comes out to $4,000 (10% of $40,000) a year or $333 a month. If that’s all you invested over 40 years with a 7% average return, you’d have a nest egg over $875,000.

But now consider what happens when your matching funds kick in: If your employer matches contributions up to 3% of your salary, they’ll add an additional $1,200 (3% of $40,000) a year or $100 a month into your account.

Now you’re socking away $5,200 ($4,000 plus $1,200) a year instead of $4,000, which means you’ll have over $1.1 million after 40 years. That’s about $260,000 more thanks to those additional matching funds!

See also: 7 Pros and Cons of Investing in a 401k Retirement Plan at Work

Even if your employer doesn’t match contributions, I’m still a big fan of using workplace retirement accounts because they give you multiple benefits. Not only do they automate investing by deducting contributions straight out of your paycheck before you can spend them, retirement plans cut your taxes. And you can take all your money with you—including your vested matching funds—if you leave the company.

Even if your employer doesn’t match contributions, I’m still a big fan of using workplace retirement accounts because they give you multiple benefits. 

In addition to retirement plans, there are other types of tax-advantaged accounts that help you save money for different purposes. One is a 529 savings plan, which allows earnings to grow tax fee if you use the funds to pay for qualified education expenses.

Another account that offers huge tax savings is a health savings account or HSA. It’s available to pay for qualified medical expenses completely tax free when you have a high deductible health plan.  

See also: How to Invest Money in Your IRA or 401k Retirement Account

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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