How To Grow Your Money – 5 Safe and Proven Ways
Almost everyone wants more money, but money is elusive. Or is it? There are a lot of get-rich-quick schemes out there, but smart investors know how to sift through the noise and stick to foolproof investment strategies. Here are 5 proven, direct, and safe ways to grow your money today.
1. Set Up Tax-Efficient Retirement Plans
Anyone seeking financial stability knows the importance of saving for retirement. As of 2019, only 50% of American households reported having savings for retirement.
To set yourself up for true golden years, establish a tax-efficient retirement account as soon as possible. You may want to consider these two popular retirement plans: 401(k)s and IRAs.
If you haven’t heard of a 401(k), it’s a retirement savings plan set up and offered by many U.S. employers. This plan moves some of your paycheck dollars into different investments (like stocks and bonds) for retirement. You can choose to contribute pre-tax dollars or after-tax dollars to your 401(k).
Since your 401(k) pulls money out every pay period, it sets up a nicely automated investment plan that will grow with market returns, tax-deferred or tax-free, until withdrawal.
Additionally, many employers offer an employer match, where your company contributes a matching amount to your 401(k) up to a certain percentage of your paycheck. This is the closest thing to free money your employer will ever give you, so take advantage of that match!
IRAs are a personal favorite because they are set up by an individual and take in pre-tax or after-tax dollars.
With the traditional IRA, you contribute pre-tax dollars, and your retirement savings grow tax-deferred. Additionally, you may be eligible to receive tax deduction savings upfront for your traditional IRA contribution when you file your income taxes.
With the Roth IRA option, you will make contributions with after-tax dollars. The amount in your Roth account grows with the market, and upon withdrawal, you will be able to take all of the cash out tax-free.
IRAs also offer varied investments and certain exceptions to the early- withdrawal penalty, such as using the money to purchase your first home.
2. Use the Magic of Compounding
Compound interest and investing are when you allow your investments to grow over time, leading to substantial wealth accumulation as your money earns interest, reinvests the interest, and repeats in a snowball effect.
Suppose you invest $5,000 in a retirement account each year with an annual interest rate of 7%. Assuming you let the investment grow over 30 years, the power of compound interest will come into play. At the end of the 30 years, your initial investment would have grown to approximately $472,303, thanks to the compounding effect.
3. Diversify Your Investments
Diversifying your investments is an easy way to mitigate risk while maximizing your return. By avoiding putting all of your eggs into one basket, you can reduce the impact of a single investment’s performance on your portfolio.
Choose investments in different asset classes, companies, industries, and geographical dimensions. This is also a way to create a unique portfolio that caters to your values and interests.
Suppose you invest all your retirement savings and buy the stocks of a single company XYZ. If that company goes bankrupt in the future, you will lose a lot of your money. On the other hand, let us say you invest your money in a mutual fund comprising stocks and bonds of many top-performing companies, domestic and foreign, in various sectors. Your investment risk is less than that of investing all your money in the stock of an individual company. Even if one of the companies in the fund does not do well, your risk is mitigated by some other companies in the fund doing well.
4. Avoid Lifestyle Inflation
Keeping up with the Joneses has left millions struggling to keep up with their bills. This way of life connects to lifestyle inflation, also called “lifestyle creep”. Lifestyle inflation happens when someone makes or receives more money – such as through a raise, bonus, or inheritance – so they start spending more. Joe gets a bonus, so Joe buys a fancy new car even though his old one had no issues and no monthly car payment.
While upping your expenses may be tempting, redirecting any extra funds towards investments will help you see a significant financial impact over time. You can still buy yourself something fun occasionally, but unnecessary expenses will quickly put you in a worse financial situation than when you were making less!
By instead investing extra income, you’ll accelerate your savings, keep your spending under control, and benefit more from compounding returns to reach your long-term financial goals sooner.
5. Invest in Real Estate Wisely
The key to successful real estate investments includes buying property in high-appreciating areas, buying when interest rates are low or refinancing down the line, and factoring in property taxes and home insurance rates when considering a property.
Once you find the right home, however, you’ll be able to take advantage of the mortgage interest tax deduction, which deducts the interest paid on your mortgage from your taxable income when filing your tax returns. Depending on your state and home, you may also be able to deduct property taxes and a home office deduction.
Bringing It All Together
Ultimately, growing your money is a simple goal with a myriad of different routes you can take to get there. Investors create their fortunes through a wide variety of means, but these tried-and-true methods are a surefire way for anyone to become increasingly wealthier over time.
The most important thing here is diversified investing over a long time with the power of compounding will do the magic for you —you will find yourself on the road to financial independence.