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The Best Strategies to Invest Your Money Wisely

Laura answers a podcast listener's question about how to invest money for higher returns. Find out how much and where to put your money so you create financial security without taking too much risk.

By
Laura Adams, MBA
9-minute read
Episode #445

Even though safe, low-yield options—such as a bank savings or a money market deposit account—are poor choices for your retirement funds, they’re perfect for your short-term goals and emergency savings.

So, even though we tend to use the terms saving and investing interchangeably, don’t confuse them. Here are the major distinctions between saving and investing:

  • Saving is putting money aside without exposing it to any or little risk, such as in a savings account, money market deposit account, or a certificate of deposit (CD). 
  • Investing is committing money to an endeavor or account with the expectation that you’ll make a certain amount of profit or income. The risk is that you’ll receive less than what you expect. Or worse yet, there’s a possibility that you could lose your entire investment. As I mentioned, increased risk generally goes along with the potential to make more money.

See also: The Best Accounts to Bank Benefits

Even though safe, low-yield options—such as a bank savings or a money market deposit account—are poor choices for your retirement funds, they’re perfect for your short-term goals and emergency savings.

Where Should I Invest Money?

Before you do any investing, your first financial priority should be to accumulate some amount of emergency savings. That’s how you avoid getting into financial trouble if you have a large, unexpected expense or lose your job or business income.

Ideally, everyone should have a minimum of 3 to 6 months’ worth of their living expenses tucked away in an FDIC-insured bank savings account. If that amount seems unattainable, start by saving a reasonable amount, such as $500 or $1,000. Then work on building your emergency savings at the same time you invest for the future.

The idea is that setting up your accounts and getting in the habit of saving and investing, even very small amounts, allows you to achieve financial success.

See also: A Blueprint to Organize Your Personal Finances

Once you’ve created a financial safety net, here are three strategies for how to invest your money wisely:

Strategy #1: Invest in a workplace retirement account

Workplace retirement accounts include plans like 401ks, 403bs, and 457s. They offer nice tax advantages and are mandatory, in my opinion, if you also get company matching.

A company match is when your employer invests a certain amount of money on your behalf when you invest your own money. Always contribute enough to max out a company match so you get as much free money as possible.

Employer-sponsored plans make investing really convenient because the funds are automatically deducted from your paycheck before you see them.

For 2016, the contribution limit for most workplace plans is $18,000 or $24,000 if you’re age 50 or older.

Strategy #2: Invest in an Individual Retirement Arrangement or IRA

IRAs are the second best place to invest. They’re the answer when you don’t have a workplace retirement plan or if you max out a workplace plan and still have more money to put away.

Everyone, even minors, with earned income can contribute to an IRA. They offer great tax advantages with unlimited investment options, but you can’t invest as much in them as you can with a workplace plan.

The IRA contribution limit for 2016 is $5,500 or $6,500 if you’re 50 or older. There’s no income limit for a traditional IRA. But with a Roth IRA, single taxpayers are ineligible when they earn over $132,000 and joint filers are ineligible when their household income exceeds $194,000.

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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 frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous 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.