A lot of people have become accustomed to trading money for time. They assume that to improve their financial situation, they need to increase their income.
They think of ways how to earn money and forget to ponder how their money can work for them.
As a result, they become slaves of money.
People who are ahead in the game know better. They know how to let their money grow while they sleep. Following the steps below will help you do it too:
Pay Your Debts
If you want to grow your money, the last thing you want to have is debt. Staying debt-free will save you more money than you think.
For instance, you are paying 3% interest for a $500,000 house. You are not only losing the money you pay for the interest. You are also losing the chance to gain the money that this amount can earn over the years. The $15,000 worth of interest can gain $1,500 per year if invested properly.
If it is not easy for you to pay your debt, you can do it slowly, especially if the interest you are paying is more than 3%. You can pay more than the monthly due by trying to reduce your other expenses.
Spend Less than You Earn
Spending less than you earn will not only help you pay your debt but also let you have extra money for investing. Most people think that their salary is just enough for their annual expenses but in most cases, you can cut off your spending by at least half if you would like to.
Monthly subscriptions, expensive dinners, and overpaying for insurance and utilities are some of the things you can reduce to improve your budget. I would suggest deciding how much you want to save and working around what is left instead of the other way around.
Most of the time, if you only save whatever “extra” you have, you will be left with nothing.
This is also the reason why everyone gets caught in the rat race. The regular increase in the paycheck often comes with an increase in lifestyle. If, however, you decide that you want to save 30% of what you earn, you will be forced to get rid of unnecessary bills. That way, you can only spend 70% of your income.
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Invest the Difference
Whether you are a beginner investor or have good experience with investing, a huge portion of your money ought to be spent on total market stock index funds.
Total market stock index funds are passively managed funds that are composed of different publicly traded stocks. Unlike actively managed funds, they have a very low expense ratio, meaning you pay fewer fees and keep most of your returns.
History has proven that low-cost index funds keep going higher over the years. The market always goes up, but it is hard to pick individual stocks because it’s hard to predict the performance of each company. With index funds, you own part of different companies, making it very hard for all of them to crash at the same time.
Some of the best total market stock index funds you can invest your money in are:
- The Vanguard Total Stock Market Index Admiral Shares (VTSAX)
- The Schwab Total Stock Market Index (SWTSX)
- The iShares Russell 3000 ETF (IWV)
- The Wilshire 5000 Index Investment Fund (WFIVX)
Learn About Taxes
Your index funds are better invested where your money and dividends can grow tax-free.
If you have an employer it offers retirement plans like 401(k) or 403(b), your total stock market index funds would go here. If the previously mentioned funds are not on the list of their contribution options, you can pick the investment with the lowest expense ratio, check the performance, and assess the included stocks in that fund.
Take advantage of the employer match if it is available. That is, your minimum amount of contribution should be at least how much the employer is willing to give for free.
Aside from being able to grow the interest and dividends tax-free, the money that goes into your 401(k) or 403(b) is pre-tax. You will only pay taxes when withdrawing your money at a certain age – 59 ½ for 401(k) and 55 for 403(b). The only downside of having your money in a tax-free account is you cannot withdraw your money until retirement. If you do, you will pay a penalty.
Your investing should not stop in your employer’s retirement plan. Depending on changes, the annual limit would be around $18,000 – $19,500 per year. Other accounts you can open include:
Traditional IRA
Your contribution here depends on your annual income – it may be pre-tax (tax id paid upon withdrawal) or after-tax money (no tax upon withdrawal). Just like with 401(k) and 403(b), your interest and dividends grow tax-free and you can only withdraw once you reach a certain age. The current annual limit is $6,000 (age 50 and below) or $7,000 (age 50 and up).
Roth IRA
Your Modified Adjusted Gross Income (MAGI) should be less than 140,000 if you want to contribute the maximum amount of $6,500 (or $7,000 for ages 50 and up). Your contribution uses after-tax money, wherein interests and dividends also grow tax-free.
You can withdraw your capital anytime, and withdraw the earnings after 5 years for a first-time home purchase or educational expenses. Once you reach age 59 1/2, you can withdraw money without penalty, and without paying tax.
Personal/brokerage account
This is where you want to keep and invest any other extra money. Here, you pay taxes for dividends and gains. You can also take out the money anytime you want but you will also have to pay for taxes.
Hold Your Investments
Saving and growing your money should not be complicated.
Once you determine how much money you have to invest and where to invest it, you can automate your contributions and leave your money there for decades.
The stock market can go up and down through the years, along with this is your money. You don’t have to worry about this because history has proven that no matter what happens, the market will recover. It might take some time but it will for sure happen. If everything is automated, I would suggest not checking your accounts from time to time. Doing so might cause you to make emotional decisions like selling at inappropriate times.
Most people panic whenever they see that the market is going down. They think it will be another crash and many experts will say that the market might not recover.
This happened a few times, the most recent one is in 2020 when the pandemic started. Everyone said that the market might not recover. Sometimes, it could help not to hear about the news.
Most people who own stocks sell their shares when the market goes down, thinking that they will save whatever is left of their money before the total crash comes. The better thing to do is to hold your investments and buy more shares.
To End
Growing your money doesn’t have to be difficult. However, it takes practice and discipline to develop good spending habits – which leads to more opportunities to invest.