Want to be a successful investor? Money Girl explains how to get started, build financial safety nets, use tax-advantaged accounts, choose investments, and reduce risk. Find out how to create the best investment strategy based on your financial situation, age, and risk tolerance.

23 minute read


Before I start the show. Here’s a quick word from our sponsor, where does fine art meet the art of sausage racing, where to good times flow, whether you’re on a river or in a craft brewery in Milwaukee where unique unites this fall, head to the fresh coast to indulgent food baseball and the brand new totally free brew city beer pass. It gives you buy one, get one offers at participating craft breweries, go to visit milwaukee.org/beer pass and start looking forward to Milwaukee.

If you’re like most people, you know, investing money as a smart idea. But if you haven’t gotten started because you think investing is too complicated or risky, it’s time to learn how to invest without taking too much risk. This podcast we’ll cover why it’s essential to start investing as soon as possible and the different types of investments to choose from. We’re going to cover how you can create the best investment strategy based on your financial situation, your age, and your risk tolerance. Hello friends. And thanks for joining me this week. My name is Laura Adams and I’m a personal finance and small business expert and author. Who’s been hosting the money girl podcast since 2008. My mission is to help you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress. I create every show to make sure you come away with practical advice that helps you make better money decisions and takes your financial life to the next level.

Be sure to subscribe to the show and participate by sending me your money, questions or comments. You can leave a voice message. 24 7 at 3 0 2 3 6 4 0 3 0 8. You can also email me using my [email protected] Or you can connect with me on Instagram at Laura D. Adams. And if you want to read a companion blog post for this show or any episode, they’re always published in the money girl [email protected], just look forward today’s episode, which is number 697 called 10 things. Every successful first-time or seasoned investor should know. I get a lot of questions about investing. And I think one of the main points of confusion is when it’s a good time for you to invest, you know, when is it appropriate for you to use your financial resources for investing versus for other financial goals that you may have? And then when people start investing, they’re really confused about, you know, which investments should I pick?

What’s the right type of investment for me. Should I be using a brokerage account or should I be using a tax advantage account? So we’re going to cover all of that in this show. And we’re going to go through 10 things that every investor should know. And the first one is pretty basic, but it is saving and investing are for different financial goals. So let’s back up a little bit before we get into what to know about investing. It’s really important to clarify that saving and investing are not the same. We kind of use those terms interchangeably quite often, but I want to differentiate them here for you. Saving is putting money into a safe, low yield account. That could be a bank savings account, a money market account, or even a certificate of deposit or CD so that you preserve the money saving is the right move.

When you’ve got short term goals, they could be buying a car next year or taking a vacation within a year or two. It’s also appropriate for your emergency fund because it keeps your money completely safe with savings. You know, that cash will be there when you need it. There’s just no chance that it’s going to lose money. Now it may not gain much money either. It may not earn much interest and that’s fine because saving is about again, preserving money now, investing this is very different because it’s the right strategy only for your longer term goals that you want to achieve. And at least, you know, I’d say three to five years and these goals might include buying a home, paying for a child’s college. And of course, retiring with investing. You put money into financial instruments, it could be stocks, bonds, mutual funds with the expectation of getting future growth and investing is not appropriate for your short term goals.

In other words, you should never invest your emergency money because market values can fluctuate wildly within short periods, and you run the danger of needing to use that money at the point that the value plummets. So investing requires some amount of risk, but without it, you are not going to earn the types of returns and the growth that you need to achieve. Significant financial goals, such as retiring. A really good rule of thumb is to always invest a minimum of 10 to 15% of your gross income for retirement year in and year out. All right? The second thing that you should know is that you need to have financial safety nets before investing. So while I’m always going to encourage you to begin investing as soon as possible everyone’s situation is different. So first, if you’ve got any dangerous deaths, these might include overdue taxes for your federal or state returns, overdue child support, or any accounts that are in collections.

You need to address those before you use your money to invest. If you don’t address these dangerous deaths, they can really cause you a lot of financial misery down the road. Additionally, if you’ve got high interest credit card debt, I’d like you to consider paying it off as soon as possible by doing that, you’re going to get an instant rate of return by eliminating the monthly interest expense. So for instance, if you’ve got a credit card that’s charging you 25% APR, that means by paying that debt off, you have an instant guaranteed return of 25% and that’s after taxes. So the return for paying off credit card debt in a lot of cases is much higher than the return that you can get for investing. So again, if you’ve got high interest cards, uh, you may want to consider tackling them just depending on, you know, what the debt is, how much debt you’ve got and what the interest rate is.

I mentioned savings. And so that’s a critical financial safety net that you also need to have before investing money, maintaining a cash reserve will help you just manage things that come up in life, unexpected expenses and hardships, like losing your job, having a big home repair bill or a medical bill, a good savings target is three to six months worth of your living expenses. And so when I talk about living expenses, these are the necessities, housing, food utilities, and those debt payments that you’re making. So here’s an example. If your living expenses total $3,500 each month make a goal to build up a minimum of 10,500 in savings. Remember that stowing money in a savings account is only acceptable for your short-term goals and your emergency fund, and it’s not appropriate for your longer term financial goals. Before you put money into investments. Another safety net you need is specific insurance policies like health insurance, making even a quick trip to the emergency room for an illness or an accident could really set you back.

It could cost many thousands of dollars. So without insurance, you really are putting everything that you’re working toward at risk. And while mortgage lenders require you to have home insurance, most renters don’t buy renter’s insurance. So if you are a renter, I would encourage you to get a renter’s policy. It’s an inexpensive policy and it protects your belongings and your liability and other things as well. And it makes it very worth the average annual cost of $185 a year nationwide. So for an average cost of $185 per year, a renter’s policy gives you a lot of financial protection. So I would encourage you to get that before you start investing. And lastly, if you have family members who depend on your income, you also need life insurance to protect their financial futures, getting a 10 or 20 year term life insurance policy for let’s say half a million dollars may cost less than $300 a year if you’re in relatively good health.

So don’t neglect to look at life insurance when you need it. So assuming you’ve got savings and these financial nets in place, we can move on to the third thing that you need to know, which is that investing sooner rather than later, turbocharges results. The sooner you start investing, the more wealth you can build. And that’s just a fact, even if you don’t have much money to invest, it’s better to get started. So your money grows year after year. Let me give you an example. I want you to consider two different people who invest the same amount each month and they receive the same average annual return. The first is Sarah. She begins investing at age 35 and she stops at age 65. So over those 30 years that she’s investing, she’s putting in $250 a month and she receives an average return of 7%.

So when Sarah is ready to retire at age 65, her account balance is going to be less than $300,000. Probably not enough to retire comfortably on the second investor is Matt. He begins investing at age 25 and stops at age 65. So he’s got 40 years of investing and he’s also doing $250 a month and receiving the same average return of 7% that Sarah was receiving. But Matt ends up with approximately $622,000 after investing over those 40 years because he started to invest 10 years earlier than Sarah Matt reaches retirement age with over $300,000 more to spend, even though he only invested $30,000 more than Sarah. Over those 10 years, Matt has a much higher account balance because his money had more time to compound and grow. So the point of this example is to make sure you know, that even if you don’t have $250 a month to spare right now, start investing some amount.

As you earn more money, you can invest more money. And if you’ve got a cash windfall, maybe it’s a gift. You receive a bonus at work or a tax refund. Be sure to invest that money to waiting for the perfect time to invest will cause you to lose significant earnings. Just like that difference between Matt and Sarah, Sarah waiting to invest, cost her a lot of money. And if you try to catch up later, it’s going to be really challenging and costly because you’re going to have to invest a whole lot more per month. So don’t ever think that you’ll just catch up later on. You know, you’ll a lot of people will say, well, I’m, you know, later on, I’ll be earning more money. I’ll have a better job. And then I’ll start investing. It is actually better to begin investing smaller amounts each month now than to wait waiting is just too risky.

All right. The fourth thing that investors need to know is having a diversified portfolio reduces risk for the average investor buying and selling individual securities or stocks is not a wise strategy. That’s because no one can predict with certainty, whether their values will go up or down, even investment professionals, get it wrong a lot of the time. So while there is no other common investment that outperforms stocks, their prices can be very volatile, rising and falling throughout a day. A better strategy is to invest in one or more diversified funds. Funds are great because they bundle investments such as stocks, bonds, assets, and additional securities that make them really convenient for investors to purchase. And they may focus on one asset class or a mix of asset types. So you could have a stock fund that only owns stocks or a bond fund that only owns bonds.

Or you might have a balanced fund that owns a combination of those different types of securities. Investment funds are diversified because they’re made up of hundreds or even thousands of underlying securities. Again, it could be stocks, bonds, currencies, even real estate diversifying is really the secret sauce of investing successfully because it allows you to earn higher average returns while reducing your risk. If some of the securities within a fund lose value, others are going to hold steady or even increase in value. So that’s how a diversified fund actually minimizes your potential losses. And since the 1920s, the historical average return of the stock market overall has been approximately 10%. So if you’ve got decades to go before you retire, I want you to consider investing a large percentage of your portfolio in stock funds, not in stocks individually, but stock funds. Yes, stock prices will fluctuate during the short term, but if you’re investing for retirement, you’re concerned about the longterm and stock fund prices are likely to increase over the longterm, giving you an excellent return on your investment.

But I would say, you know, even if you only earned an average of 7% on your investments, you didn’t get the 10%. That is the historical average. If you only got 7%, you would still have a nest egg worth over a million dollars after investing $400 a month for 40 years, let’s say you chose to put your money in a savings account instead of investing it. If you saved $400 a month for 40 years, and you got, let’s say half a percent return, which is probably pretty generous these days, you would end up with a meager $212,000. That’s opposed to the million dollars you would have if you had invested the funds and gotten a 7% return. So that just shows you the power of investing versus savings. Now, I will say if you’re close to retirement or maybe you’re already retired, you want to take a more conservative approach.

That’s essential to minimize risk a really good rule of thumb to understand how much stock you should own is a really simple formula. Just subtract your age from either 100 or 110. For example, if you’re 30 years old, subtracting 30 from a hundred gives you 70 or 30 from one 10 gives you 80. That means you might want to own at least 70 to 80% of your investment portfolio in stocks or stock funds with the remaining 20 to 30% in other asset classes like bonds, real estate and cash to take advantage of as much growth as possible. And if you’re 60, you should be more conservative, subtracting 60 from a hundred or 110 means you might want from 40% to 50% of your portfolio in stocks and the remaining 50 to 60% in less risky assets, such as bonds and cash to preserve your wealth.

The fifth thing investors need to know is there are different types of investment funds. So in addition to stock funds, I mentioned there are different types and categories of funds that you should be familiar with. Here are a few that you’re likely to see on a typical investment menu for a retirement plan or even a brokerage account. Uh, you’ve got mutual funds. These are a collection of assets managed by a fund professional buying and selling shares of a mutual fund are restricted to the end of the trading day. When the fund’s net asset value gets calculated. Now you’ve got another type called exchange traded funds or ETFs. These are similar to mutual funds in many ways because they are a basket of assets. However, they trade more like individual stocks, which means you can buy yoursel ETF shares throughout the day, and you should expect to see price fluctuations.

So that’s different from a mutual fund that only has an asset value calculated. Once a day, you’ve got index funds. These are mutual funds that usually come with low fees and maybe made up of thousands of underlying investments. The concept behind an index fund is that it tries to match or even outperform a specific index such as the S and P 500 or the Dow Jones. So again, an index fund is just another type of mutual fund and another type is called target date funds. These are mutual funds that automatically reset the mix of the assets in a portfolio. According to your set timeframe, such as when you plan to retire. So let’s say you plan to retire in 2040, the target date fund would invest the underlying assets according to what’s the best for you. It would be more aggressive and own more stock funds in the beginning.

And then as you get closer to retirement age, it would slowly get a little bit more conservative. I want you to be aware that funds come with different fees, which are known as an expense ratio. For instance, a 1% expense ratio means that 1% of the funds assets will get used for paying things like management and advertising each year in general, it’s best to choose lower cost funds, such as ETFs and index funds to avoid unnecessary costs that eat away at your returns. So when you’re choosing investments from a menu, take a look at the, at the fees. In addition to the returns that different funds are getting before I start today’s show here’s some amazing news. Discover matches all the cash back. You earn on your credit card at the end of your first year. And what’s even more amazing is that discover is accepted at 99% of places in the U S that take credit cards, learn more at discover.com/yes, 2021 Nielsen report limitations apply.

The six thing investors need to know is that investing through workplace retirement accounts saves money. When you purchase investments using a retirement account, like a workplace 401k, or 4 0 3 B, you accumulate wealth for retirement and get terrific money saving tax benefits. Most employers offer both traditional and Roth accounts, which have different rules and advantages. Traditional accounts allow you to defer paying tax on both contributions and earnings until you make withdrawals in the future. But Roth accounts like a Roth 401k or Roth 4 0 3 B require you to pay tax upfront on your contributions, but they provide you with tax-free withdrawals in retirement, which is huge. And note that you can choose either type at work, no matter how much money you earn. Workplace retirement accounts are even more valuable. If your employer pays matching contributions. For example, your company may match your retirement contributions up to a limit such as 3% of your salary.

So if you earn $60,000 and you contribute 3% a year, which would be $1,800, your employer would also contribute $1,800 a year, or that comes out to $150 per month to your retirement account. It’s pretty sweet. But even if you don’t get employer matching, it’s really wise to max out your workplace retirement account every year, make that the first place you invest for 2021, you can contribute up to 19,500 or $26,000. If you’re over age 50, your elected retirement plan contributions get deducted from your pay automatically making it really easy to invest consistently. Plus if you leave your job, you can transfer your vested balance into an IRA by doing a tax-free rollover. All right, number seven, there’s a retirement account for everyone. You may be thinking, but Laura, what if your employer doesn’t offer a retirement plan? Or what if you’re self-employed or you’re a stay at home spouse?

Yes, you can invest using a retirement account to everyone with earned income, even minors qualifies for a traditional IRA. You make pre-tax contributions and defer taxes until you take withdrawals in retirement. There are no income limits to qualify. And if you’re married and file taxes jointly, but you have no income, you can actually invest based on your spouse’s income for 2021, you can contribute up to $6,000 or 7,000. If you’re over age 50 to a traditional IRA, the annual contribution limit is the same for a Roth IRA, but it comes with a qualifying income limit. For 2021. You must earn less than 140,000 as an individual taxpayer or less than 208,000 as a married couple filing jointly to qualify, to make Roth IRA contributions. Using a Roth account makes sense. When you believe your taxes in retirement will be higher than they are right now.

And in addition to investing through a traditional or a Roth IRA, you have more retirement account choices. When you’re self-employed a couple of popular accounts are a SEP IRA and a solo 401k. They’re similar to a traditional IRA, but they have much higher contribution limits such as up to $58,000 a year, based on how much you earn. All right, number eight, there are various tax advantaged investment accounts. So if you like the idea of cutting your current or future taxes, I would say, do not stop with retirement accounts. There are even more available. Here are a couple of money saving accounts. You can use that. Also save taxes. You’ve got a 5 29 college savings plan. This would allows you to invest in a menu of options for qualified education expenses for yourself, a child or another close family member. You must pay tax on your contributions, but your earnings grow tax free.

Then you can take tax-free withdrawals to pay a variety of costs, including private school for younger kids. And you can use up to $10,000 per year for that. You can pay college tuition room and board, computer equipment, books, and supplies. Another really great account is a health savings account or HSA. This is available when you’re enrolled in a high deductible HSA qualified health plan. You might purchase the coverage through a group plan at work, the federal or state health marketplace, a health insurance website, or even an insurance broker with an HSA. You can make tax deductible contributions up to an annual limit, and even invest that money in a menu of options. Your withdrawals are entirely tax-free when you use them for eligible healthcare expenses, which is an amazing benefit, no matter which types of tax advantage investment accounts you use. It’s a good idea to automate your contributions and increase those contributions slightly each year.

That will definitely keep you on track to reach your financial goals. Number nine, ignore what you can’t control as an investor drops in the stock market are uncontrollable. So don’t drive yourself crazy by focusing on unavoidable, actual or potential losses when it comes to your investments. Instead, stay focused on building wealth over the longterm, using a buy and hold strategy. What happens in the financial markets from day to day only matters if you need to liquidate your investments during the same period. In other words, ignore media hype and ignore stock tips from friends and never make rash decisions like selling your investments. When their value drops, your goal should be to get investment growth over decades, not month to month or even year to year. And lastly, number 10, get investment advice when you need it. The money you invest today will grow and ultimately support you after you stopped working or change your lifestyle and retirement.

If you’re unsure how to choose investments, don’t hesitate to seek advice from your benefits department at work, an account representative or an independent financial advisor. And if you don’t understand a financial professionals, explanations or recommendations, keep asking questions until you do. You’ll be glad you did. Especially when you end up building a healthy nest egg, that gives you peace of mind and financial security in the future. Before we go, if you haven’t joined my free private Facebook group, yet it’s called dominate your dollars. And it’s an amazing group of people who are asking excellent questions, helping others and reaching their financial goals. You can search for the group on Facebook or send me a text message for your direct invitation. You can text the word dollars, D O L L a R S to the number 3, 3, 4 4 4. And I’ll send you a direct invitation. You can also visit Laura D adams.com where you’ll find my contact page and more about me, my books, and online classes. That’s all for now. I’ll talk to you next week until then here’s to living a richer life. Money girl is a quick and dirty tips podcast. It’s audio engineered by Steve Ricky Berg with script editing by Adam Cecil. Our operations and editorial manager is Michelle marvelous. Our assistant manager is Emily Miller and our marketing and publicity assistant is Davina Tomlin.

If you liked the episode, you just heard you’ll love the modern mentor podcast. Another show on the quick and dirty tips network. Have you ever wanted career advice from a professional? Well, every week on modern mentor host, Rachel Cook, give straightforward answers to complex questions to help you navigate the workplace. Check out episode 6 61 on how to communicate better with colleagues from different generations, whether you’re just starting your career or you’re 40 years in, you’ll learn a lot from this episode, check out modern mentor on Spotify, apple podcasts, or wherever you’re listening now.

If you’re like most people, you know investing money is a smart idea. But if you haven’t gotten started because you think investing is too complicated or risky, it’s time to learn how to invest without taking too much risk.

This episode will cover why it’s essential to start investing as soon as possible and the different types of investments to choose from. You’ll learn how to create the best investment strategy based on your financial situation, age, and risk tolerance.

Let’s get into the details of how to be a successful investor.

Tip #1: Saving and investing are not the same

Before diving into what to know about investing, it’s important to clarify that saving and investing are not the same. Saving is putting money into safe, low-yield accounts such as a bank savings account, money market account, or certificate of deposit (CD), so you preserve it.

Saving is the right move when you have short-term goals, such as buying a car or taking a vacation within a year or two. It’s also appropriate for your emergency fund because it keeps your money completely safe. You know your cash reserve will be there when you need it.

However, investing is the right strategy for longer-term goals that you want to achieve in at least three to five years. They might include buying a home, paying for a child’s college, and, of course, retiring.

With investing, you put money into financial instruments, such as stocks, bonds, or mutual funds, with the expectation of future growth. By using a buy-and-hold investing strategy, you increase potential returns over a long period. Investing isn’t appropriate for short-term goals because market values can fluctuate wildly over a short period.

Investing requires some amount of risk, but without it, you aren’t likely to earn enough growth to achieve significant financial goals, such as retiring. A good rule of thumb is to invest a minimum of 10% to 15% of your gross income for retirement every year.

Tip #2: Build financial safety nets before investing

While it’s wise to begin investing as soon as possible, everyone’s situation is different. First, clear up any dangerous debts, such as overdue taxes, child support, or accounts in collections. If you don’t, they can cause you significant financial misery down the road.

Additionally, if you have high-interest credit card debt, consider paying it off as soon as possible. You’ll get an instant rate of return by eliminating the monthly interest expense.

I mentioned savings, which is a critical financial safety net to have before investing money. Maintaining a cash reserve helps you manage unexpected expenses and hardships, such as a job loss, home repair, or medical bill.

A good savings target is three to six months’ worth of your living expenses (such as housing, food, utilities, and debt payments). For example, if your living expenses total $3,500 each month, make a goal to build up a minimum of $10,500 in savings. Remember that stowing money in a savings account is acceptable for your short-term goals and emergency fund but is not appropriate for long-term financial goals.

Before putting money into investments, another safety net you need is specific insurance policies, such as health insurance. Making even a quick trip to the emergency room for an illness or accident could cost thousands of dollars.

While mortgage lenders require you to have home insurance, most renters don’t buy renters insurance. It’s an inexpensive policy that protects your belongings and liability, making it well worth the average cost of $185 per year nationwide.

And lastly, if you have family members who depend on your income, you also need life insurance to protect their financial futures. Getting a 10- or 20-year term life insurance policy for $500,000 may cost less than $300 a year if you’re in relatively good health.

Tip #3: Invest sooner rather than later for turbocharged results

The sooner you start investing, the more wealth you can build. Even if you don’t have much money to invest, it’s better to get started, so your money grows year after year. For example, consider two people who invest the same monthly amount and receive the same average annual return.

The first is Sarah, who begins investing at age 35 and stops at age 65. Over those 30 years, she invests $250 a month and receives an average return of 7%. When she’s ready to retire, her account balance is less than $300,000.

The second investor is Matt, who begins investing at age 25 and stops at age 65. He also invests $250 a month and receives the same average return of 7%. But Matt ends up with approximately $622,000 after those 40 years.

By starting to invest 10 years earlier than Sarah, Matt reaches retirement age with over $300,000 more to spend, even though he only invested $30,000 more than Sarah ($250 x 12 months x 10 years). Matt has a much higher account balance because his money had more time to compound and grow.

So, even if you don’t have $250 a month to spare, start investing some amount right now. As you earn more money, you can invest more. And when you have a windfall, such as a cash gift, bonus, or tax refund, invest it, too.

Waiting for the perfect time to invest causes you to lose significant earnings. And trying to catch up later will be more challenging and costly.

Tip #4: Having a diversified portfolio reduces risk

For the average investor, buying and selling individual securities or stocks isn’t a wise strategy. That’s because no one can predict with certainty whether their values will go up or down. While no other common investment outperforms stocks, their prices can be volatile, rising and falling throughout the day.

A better strategy is to invest in one or more diversified funds, which bundle investments, such as stocks, bonds, real estate, cryptocurrency, and many other types of securities, making them convenient for investors to purchase. They may focus on one investment asset class or a combination.

Investment funds are diversified because they’re made up of hundreds or thousands of underlying securities. Diversifying allows you to earn higher average returns while reducing risk. If some of the securities within a fund lose value, some will hold steady or increase in value, which minimizes your potential losses.

Since the 1920s, the historical average return of the stock market has been approximately 10%. So, if you have decades to go before you retire, consider investing a large percentage of your portfolio in stock funds. Stock prices will indeed fluctuate during the short term, but prices are likely to increase over the long term, giving you an excellent return on your investment.

But even if you only earned an average 7% return on your investments, you’d still have a nest egg worth just over $1 million after investing $400 a month for 40 years. If you chose to put money in a savings account instead, by saving $400 a month for 40 years with a 0.5% return, you’d end up with just $212,000.

However, if you’re close to retirement or already retired, taking a more conservative approach is essential to minimize risk. A good rule of thumb to get an idea of how much stock you should own, subtract your age from 100 or 110.

For example, if you’re 30, consider owning at least 70% to 80% of your investment portfolio in stocks, with the remaining 20% to 30% in bonds, real estate, and cash to take advantage of as much growth as possible. If you’re 60, you should be more conservative. You might want from 40% to 50% in stocks and 50% to 60% in less-risky assets (such as bonds) to preserve your wealth.

Tip #5: Take advantage of different types of investment funds

In addition to stock funds, there are different types and categories of funds you should be familiar with. Here are a few you’re likely to see on a typical investment menu for a retirement plan or brokerage account:

Mutual funds are a collection of assets managed by a fund professional. Buying and selling shares in a mutual fund are restricted to the end of the trading day when the fund’s net asset value gets calculated.

Exchange-traded funds (ETFs) are similar to mutual funds in that they are baskets of assets. However, they trade like individual stocks, meaning you can buy or sell ETF shares throughout the day and should expect price fluctuations.

Index funds are mutual funds that usually come with low fees and may be made up of thousands of underlying investments. Index funds aim to match or outperform a specific index, such as Standard & Poor’s 500 Index or Dow Jones Industrial Average.

Target date funds are mutual funds that automatically reset the mix of assets in their portfolio according to your set time frame, such as when you plan to retire.

Be aware that funds come with different fees, which are known as an expense ratio. For example, a 1% expense ratio means that 1% of the fund’s assets will get used for paying yearly expenses, such as management and advertising. In general, it’s best to choose lower-cost funds, such as ETFs and index funds, to avoid unnecessary costs that eat away at your returns.

Tip #6: Invest through workplace retirement accounts

When you purchase investments using a retirement account, such as a workplace 401(k) or 403(b), you accumulate wealth for retirement and get terrific money-saving tax benefits. Most employers offer both traditional and Roth accounts, which have different rules and advantages.

Traditional accounts allow you to defer paying tax on both contributions and earnings until you make withdrawals in the future. Roth accounts, such as a Roth 401(k) or Roth 403(b), require you to pay tax upfront on your contributions, but provide you with tax-free withdrawals upon retirement. Note that you can choose either type no matter how much you earn.

Workplace retirement accounts are even more valuable if your employer pays matching contributions. For example, your company may match your contributions up to a limit, such as 3% of your salary. If you earn $60,000 and contribute $1,800 (3% of salary) per year, your employer would add $1,800 a year or $150 per month to your retirement account. Pretty sweet!

But even if you don’t get employer matching, it’s wise to max out your workplace retirement account every year. For 2021, you can contribute up to $19,500 or $26,000 if you’re over age 50.

Your elected retirement plan contributions get deducted from your pay automatically, making it easy to invest consistently. Plus, if you leave your job, you can transfer your vested balance into an IRA by doing a tax-free rollover.

Tip #7: There’s a retirement account for everyone

But what if your employer doesn’t offer a retirement plan? Or you’re a stay-at-home spouse or self-employed as a freelancer or solopreneur? Yes, you can invest using a retirement account, too.

Everyone with earned income (even minors) qualifies for a traditional IRA. You make pre-tax contributions and defer taxation until you make withdrawals in retirement. There are no income limits to qualify. If you’re married and file taxes jointly but have no income, you can invest in a spousal IRA based on your spouse’s income.

For 2021 you can contribute up to $6,000 or $7,000 if you’re over age 50 to a traditional IRA. The annual contribution limit is the same for a Roth IRA, but it comes with a qualifying income limit. For 2021, you must earn less than $140,000 as an individual taxpayer or $208,000 as a married couple filing jointly to make Roth IRA contributions.

With a Roth IRA, you must pay tax upfront on your contributions but can make tax-free withdrawals of both your original contributions and account earnings in retirement. Using any Roth account makes sense when you believe your taxes in retirement will be higher than they are now.

In addition to investing through a traditional or Roth IRA, you have more account choices when you’re self-employed. Two popular accounts are a SEP-IRA and a solo 401(k). They’re similar to a traditional IRA but have higher contribution limits, such as up to $58,000, based on how much you earn.

Tip #8: Use tax-advantaged investment accounts

If you like the idea of cutting your current or future taxes, don’t stop with retirement accounts. Here are a couple more money-saving tax-advantaged accounts:

  • 529 college savings plan allows you to invest in a menu of options for qualified education expenses for yourself, a child, or another close family member. You must pay tax on your contributions, but your earnings grow tax-free. Then you can take tax-free withdrawals to pay costs including private school (up to $10,000 per year), college tuition, room and board, computer equipment, books, and supplies.
  • Health savings account (HSA) is available when you’re enrolled in a high-deductible, HSA-qualified health plan. You might purchase the coverage through a group plan at work, the federal or state health insurance marketplace, a health insurance website, or an insurance broker. With an HSA, you can make tax-deductible contributions (up to an annual limit) and invest in a menu of options. Your withdrawals are entirely tax-free when used for eligible healthcare expenses, which is a terrific benefit!

No matter which types of tax-advantaged investment accounts you use, it’s a good idea to automate your contributions and increase them slightly each year. That will help keep you on track to reach your financial goals.

Tip #9: Ignore what you can’t control

Drops in the stock market are uncontrollable, so don’t drive yourself crazy by focusing on unavoidable actual or potential losses when it comes to your investments. Instead, stay focused on building wealth over the long term using a buy-and-hold strategy.

What happens in the financial markets day-to-day only matters if you need to liquidate your investments during the same period. In other words, ignore media hype and stock tips from friends and never make rash decisions, such as selling your investments when their value drops. Your goal should be to get investment growth over decades, not month-to-month or even year-to-year.

Tip #10: Get investment advice from a pro

The money you invest today will grow and ultimately support you after you stop working or change your lifestyle in retirement. If you’re unsure how to choose investments, don’t hesitate to seek advice from your benefits department at work, an account representative, or an independent financial advisor.

And if you don’t understand a financial professional’s explanations or recommendations, keep asking questions until you do. You’ll be glad you did, especially when you build a healthy nest egg that gives you peace of mind and financial security in the future.

This article originally appeared on Quick and Dirty Tips.

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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

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