Don’t worry, this isn’t one of those boring “how to save money” articles. We’re here to talk about investing and make use of all that extra moolah you’ve been stashing away. If you remember one thing about this article it is this… Open an investment account with a firm like Finhabits or Betterment and set up a schedule for recurrent contributions. Then just sit back, relax, and watch your money grow! It doesn’t really matter which type of account you choose (brokerage, 401k, IRA, Roth IRA), because once it’s set up the process for saving money is the same. Sure they have different tax implications but don’t let that stop you from starting.
The key to any of these strategies is to start TODAY. There is no better time to start than right now. This is because of compound interest. Compound interest is the action of earning interest on the previous period’s interest. For example, if you save $100 for one year and get a 3% interest rate you would make a total of $3 (3% x $100). And the second year, you are now starting with $103 to invest. So you earn interest on interest. So the money snowballs or compounds over time. Compound interest is why we’re so excited about investing and saving money in the first place!
Now that you understand what compound interest does to saving money, it’s time to look at how it’s possible to actually start doing this for yourself.
You’re probably asking yourself “Ok, how do I get started?” There are actually dozens of ways to invest and lots of different strategies you can use, but for the sake of this article we’ll stick to three things: index funds, real estate investing, and peer-to-peer lending. These are three of the easiest and relatively low risk strategies that will help you quickly build wealth over time.
10 or 5 years ago everyone was talking about how the Dow Jones was in free fall because of the great recession. The Dow Jones has been a standard point throughout history for calculating stock market growth. The index fund is a good way to invest in it. Index funds are basically a benchmark of the market, they track the broad market performance and are not specifically focused on any one company or industry.
Index funds usually own all of the stocks within the benchmark indexes. They will generally have less management fees than actively managed funds. Also, they are more tax efficient since their stocks don’t generate much income for most investors after taxes, so you’ll pay less taxes every year. There’s no minimum deposit required to invest in an index fund and you can start even with as little as $50 just by opening a brokerage account with Vanguard.
Real Estate Investing
Another way to invest is to buy a house or apartment building and rent it out. You can do this on your own or you can buy into a real estate investment trust (REIT) that does this for you. However you want to do it, the goal of this type of investing is to make money on the difference between rental rates you charge and the amount of money it costs you to maintain them. The best part about this kind of investing is that your rental income will be tax effective. You only pay taxes on any profits once they’re distributed, which is usually at least annually.
To start with real estate investing, you’ll need to either buy a new house or a new condo and rent it out. This is called the “flip and rent” strategy. It was popular during the housing boom years and has always been very profitable when done correctly. Generally, you buy a house then fix it up and put it on the market for rental prices that are significantly higher than what you bought it for. If you’re good at doing this you can make up to 100k in profits each year from your new rental property while only paying off the loan for your property over time. If you didn’t do the full renovation and just cleaned it up, then you will still be making money but the profit margins are significantly lower.
To rent a property out, you’ll need to find tenants and decide how much to charge them. Once you find renters, decide what is the best tactic for getting them to pay on time and to take care of things they’re supposed to take care of. Then start sending them checks from your rental account each month. If they don’t pay on time or don’t take care of the property they agreed to rent, then you’ll have another tenant coming in at a higher rate.
Peer to Peer Lending
This method for investing is a little more complicated and a lot riskier. Here, you’ll lend money to somebody via an online peer-to-peer lending platform (like Prosper or Lending Club). Once you become a member, you’ll invest in notes that can be sold out to other investors. Each loan has its own terms and will vary depending on each lender. Most of these loans will pay more than 8% interest and this rate is usually guaranteed by the borrower. However, with higher interest rates come higher risks. If the borrower stops paying their monthly payments, they can still default on the loan and you could lose some or all of your investment. This type of investing is like stock market investing and a little more like gambling. However, Peer-to-peer lending has matured in the last decade and has become an acceptable way to lend money to other investors.
Before you start throwing your money away on a vacation or expensive spa treatments you should take some time to think about your financial future. Saving up all that extra cash you’re not spending will pay off if you stick with it. If there’s anything that reading personal finance books has taught me, it’s that the best thing you can do for yourself is learn how to follow your own financial plan all the way through. If you have any comments, questions or concerns, please post them in the comments section below and I’ll get back to you.
So there you have it! By following the above investing advice you’ll be on your way to making a lot more money over time.