First, I have to say that I am not a licensed Financial Advisor, and as such, I will not tell you specifically what you should invest in. I will tell you a little about what is out there, so you at least have an idea where to look if you find that you have extra money and want know the best way to grow your money.
No risk, Low Reward
The easiest and least risky place to put extra cash is in a savings account. Look for accounts that pay the most interest if this is the way you decide to go. Savings accounts have no risk, as the money you put in just stays there and earns a minimal amount of interest. It won’t make you rich, but it is accessible and safe.
Retirement Accounts and Compound Interest
If you are working and your company offers retirement savings accounts, this is another way to save. Typically, these are 401K or 403b accounts. The way they work is that you decide what percentage of your income before taxes are taken out you want to save, and the money comes out automatically each payday. The remaining amount in your paycheck is then taxed as usual. It isn’t tax-free, though, because whenever you later withdraw from the account, the money is taxed at your current tax rate. The idea is that you could be at a lower tax rate in the future when you are retired, and so you could potentially save in taxes. The money also grows over time, usually more than it would in a savings account. It goes into an account at whatever firm your employer has chosen, such as Fidelity or Lincoln Financial, and it is invested in a variety of different investments, like stocks, bonds, and mutual funds. The stock market has historically made more money than inflation alone, so the idea is that your money will grow over time by being invested in these accounts. They also grow due to the idea of compound interest. The way compound interest works is basically that each month the money you put in earns interest, and then the following month the money and the interest it earned both earn interest, and this process continues, multiplying your money over time. In the case of investing, compounding interest is a great way to gain money over time. It is also the reason large purchases bought with large loans end up costing way more than the original purchase. The money you borrow has interest added each month, which has interest the next month and so on. Compound interest is a double-edged sword, so using it in your investments is to your advantage.
One other advantage to workplace retirement accounts is that many companies offer what is called matching contributions. This means that for a certain percentage of your earnings that you invest, your company will put the same amount into that or another retirement account for you. For example, if a company offers a 4% matching contributions, that means if you put 4% of your income into a 401K, they will also put that same amount into an account for you to access at retirement. You can still contribute above that amount, but only the first 4% would be matched by your employer. It is free money, and a good rule of thumb is that if you are contributing to a workplace retirement account, you want to at least contribute enough to get the whole matching funds. If they offer 4% or 5% or whatever, you want to contribute at least that amount. This maximizes your free money.
There are limits to the amount of money that one can save in each type of retirement account, so be sure to look up and be aware of these limits. They change periodically, so you need to keep up to date.
Individual Retirement Accounts
For those earning money, but their employer doesn’t necessarily offer retirement accounts, there are also individual retirement accounts, or IRAs, including Traditional and Roth, that are opened in a brokerage by you. They are similar to 401K and 403b in that the money is put into an account and invested in a diverse portfolio designed to gain money over time. The difference is usually you have already paid the taxes on the amount you put in, so that money won’t be taxed again when you take it back out. You will pay taxes on whatever money is earned, however. You don’t need an employer as you can open these accounts on your own. There are multiple avenues to take to invest in these types of accounts, from automated low fee, to in person Financial Advisors in different companies. Always look at all your options and the fees versus the benefits before deciding which one might be right for you.
Other Ways to Invest
Beyond the traditional investments through employers and IRAs, there are almost endless other ways to invest money. They all come with their own set of risks and benefits. You could invest in real estate by buying rental properties, or just invest in a fund called an REIT or real estate investment trust that takes money from a bunch of investors like yourself and puts it into a bunch of different real estate transactions or even real estate stocks in order to hopefully gain interest and or dividends, which are bits of money each month from the overall earnings.
You could use investment apps, like Stash or Acorn to put small amounts of your money into the stock market and watch how it performs. Starting your own business is investing in yourself. Doing a quick online search will show you a multitude of options. Do your research before choosing what suits you best. Most likely, you will want to invest your extra money somewhere, though, so you can take advantage of the compound interest that will grow your money over time.
The younger you are able to start, the better, since the longer the money is invested the longer it has to grow. Even small amounts invested regularly can grow to quite astonishing amounts over time. Starting when you are in your 20s vs yours 50s can literally mean hundreds of thousands of dollars difference.
Investing extra money can be a great way to really grow your cash over time. The younger you start, the more your money can potentially increase.
Compound interest can make your money into a snowball that gets bigger the longer it is invested. This works in reverse as well, as it can increase debts that are not paid down in a timely fashion.
Each investment avenue comes with its own set of risks and benefits. There may also be charges and fees. Always research any investment you are considering thoroughly before putting your money into anything. Seek the advice of a Financial Professional, such as a CPA or Financial Advisor if you aren’t sure.
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