Everybody wants their money to work hard for them. I mean, who wants to keep all their hard-earned cash resting in a savings account earning a minuscule interest rate, right?
That’s why everyone should learn how to start investing. Your money should be earning more money for you, harnessing the power of compound interest. The earlier you start investing your cash, the longer you give your money to grow.
For beginners, investing can be intimidating. You might not understand the lingo. Investment “experts” throw a lot of jargon at you. Well, have no fear! Investing for your retirement and your future isn’t as complicated as you might think. Here are seven effective ways to stash your cash and help your money grow.
Employer-Sponsored Retirement Accounts
A super-simple way to get started investing is with employer-sponsored retirement accounts. You’ve almost certainly heard about these accounts before. In fact, your work probably already offers one of them. These are benefits like a 401(k), 403(b), SIMPLE IRA, SEP IRA, and more. Setting up one of these accounts is as simple as can be. Just sign a few forms, and you should be set to go. Typically, you can even have the money deducted from your paycheck. That way, you won’t even miss it!
One of the biggest benefits of these types of accounts is that there are nifty tax advantages. If you contribute pre-tax earnings, it will reduce your total taxable income for the year. (Keep in mind, you do have to pay taxes on it upon withdrawal, though.) Or, if you contribute after-tax money to a Roth-style account, every cent earned on that money grows tax-free! Additionally, many employer plans offer some sort of matching incentive. If your company offers a 5% match, for example, you’d put in 5% of your income and the employer would put in an additional 5% at no cost to you. In most cases, it’s smart to contribute at least enough to take full advantage of that free money.
Individual Retirement Accounts (IRAs)
An Individual Retirement Account, better known as an IRA, is exactly what it says it is – a retirement account that you open yourself. IRAs provide a great alternative or addition to an employer-sponsored account. Setup is fairly straightforward, especially if you go with an online investment advisor like Betterment, Wealthfront, or any number of other companies.
There are two basic types of IRAs you should know about:
- Traditional IRAs: With these accounts, you contribute pre-tax earnings. You’ll then pay taxes on the money when you withdraw the funds.
- Roth IRAs: With a Roth, you’ll contribute after-tax earnings. Since you’ve already paid taxes on the money, your money is allowed to grow tax-free.
Keep in mind that there are limits to the amount you can contribute to your IRAs. For 2018, the maximum amount you can sock away in a combination of traditional and Roth IRAs is $5,500 ($6,500 for those age 50 and older). Additionally, Roth IRAs have income restrictions, so higher wage earners may not be eligible.
Exchange Traded Funds (ETFs)
ETFs are a basket of different types of investments which may include stocks, bonds, commodities, and more. Although they trade on the market like stocks, ETFs are often meant to mimic the rise and fall of an index, essentially tracking a certain segment of the market or the market as a whole. ETFs are another example of how to diversify your investments. Investing all of your money in just one place is risky, but spreading your investments over several different types could potentially decrease your risk and boost your long-term financial goals.
Real Estate Investment Trusts (REITs)
Interested in becoming a real estate investor? If you don’t have the substantial cash needed for a down payment on a property, or simply don’t want to manage a property as a landlord, you may consider investing in REITs. REITs are companies that own and manage multiple real estate properties that produce income. Some are known as Equity REITs, which can be traded publicly, like stocks. Others are Mortgage REITs, and they provide financing for these properties. Both are great ways to gain exposure to the real estate market at a fraction of the cost and effort.
Physical Real Estate
Investing some of your cash in a physical real estate is another way to diversify your income streams. If you’re interested in the work of being a landlord, this a great option. Tangible real estate presents several ways to increase your income and net worth. Get started on the right foot by making a savvy deal on the purchase of the property. Then, create residual income through rental fees for as long as you own the place. You can also earn a nice check when you eventually sell the property, hopefully at an increased value from your purchase price. Being a landlord does require some involvement and expenses on your part. You’ll need to find reliable renters who’ll pay on time and take care of the place. You also will be responsible for all repairs and maintenance.
Peer-to-Peer Lending (P2P Lending)
P2P lending involves crowdfunding personal loans for borrowers. You get to act like a bank, lending money for a time and earning income from the interest charged. Check out Lending Club for more details on how to get started if P2P lending appeals to you. The returns you can earn are competitive, plus you don’t need a ton of cash to get started. Their minimum investment is only $1,000.
Your Own Business
Being an entrepreneur and owning your own business may be a high-cost investment up front. However, it can also reap huge financial rewards as you grow your business. Remember, these days, not every business requires a physical store. With a simple internet connection, many entrepreneurs make money doing what they love! Investing in your own business is really an investment in yourself. You not only have the chance to earn more income; being a business owner can also improve your overall happiness and quality of life. If you enjoy the work you do, it may hardly feel like work while it still provides plenty of financial security.
Diversifying to Grow Your Income
You don’t have to select every one of these options to invest wisely in your future. Selecting just a few can do wonders for your long-term financial health. Just be sure to get started so you can begin watching your money grow!
Greg Johnson is a personal finance and frugal travel expert who leveraged his online business to quit his 9-5 job, spend more time with his family, and travel the world. He is the co-owner of the popular blog Club Thrifty, where he teaches others how to spend less and travel more.