With more Americans living paycheck to paycheck and consumer goods, particularly food, dramatically rising in cost, many financial experts note simply living below one’s means and trying to save is not enough to stay afloat.
Investing into the stock market and preparing for retirement are ways to add stability to income and also hold numerous tax advantages.
“Educate yourself about money, investing and saving,” recommends author Stephanie Lahart. “I encourage you to start investing in yourself instead of things! Set yourself up for a better future and start making better choices. Building wealth takes time.”
Below are some tips to help maximize investments:
- If you do not have investments, set up a brokerage: A brokerage account, available through providers including Fidelity, Ameriprise, and Charles Schwab, allows individuals to invest in the stock market. Stocks give partial ownership of a company or group of companies.
- The Standard and Poor’s (S&P) 500, a tracker of America’s 500 largest companies, has had an annual growth rate of roughly 8% over the past 80 years. Even during economic crashes such as the Great Depression and the Great Recession, the S&P 500 has rebounded and grown over time.
- The stock ticker for S&P 500 index funds is FXAIX (Fidelity), SWPPX (Charles Schwab), or SPX. Try to choose an index fund with a low expense ratio and a dividend. While buying individual stocks is a means to develop wealth over time, index funds are a way to significantly reduce risk in the event of an individual company’s failure or insolvency.
- Set up recurring contributions: Even if it is only $1 a week, compound interest and discipline are virtual guarantees to grow your wealth in the long-term.
- Set up investment plans for dependents as early as possible: 529 college savings plans can be opened with a social security number shortly after birth, and only require a small opening deposit. 529 investments are tax-deductible and grow over time, helping to reduce the out-of-pocket costs of higher education or trade school, and can also be applied to down payments on a home, or converted into retirement savings.
- Establish retirement savings: Setting up a Roth Individualized Retirement Account (IRA) or a 401(k) plan; both are tax-advantaged ways of saving for retirement. People can make tax-free withdrawals from your Roth IRA at 59.5 years old. However, early withdrawals have immense tax penalties, and withdrawing from retirement should be an absolute last measure. Further, be aware of recent changes to 401(k) plans that incentivize investment into crypto and private equity, both of which are unnecessarily risky long-term investments.
- Develop discipline. Be consistent. The discipline and consistency needed to develop wealth is more difficult to acquire than the income needed to develop wealth. Traders with a “buy and hold” strategy tend to outperform active traders in both the short and long term, while unnecessary gambles, early withdrawals, and short-term stock sales can raise your tax burden and add undue risk.
Billionaire Robert F. Smith, founder and CEO of Vista Equity Partners emphasized the basic tools toward wealth, in a Dec. 2019 conversation with Financial Freedom.
“Not everyone wants to make the sacrifice in the trade-off to become wealthier,” said Smith, “and the first part of that trade-off is savings and investment and time.”