Investing isn’t really that hard once you understand how it works. A sensible investment strategy will increase your wealth over time. The hardest part is saving money now, in order to enjoy having more money later. As difficult as it may be, saving and investing is the only way to achieve financial independence and escape life as a wage slave.
You need to be ready to start investing
The first step is to make sure you are in a financial position to start investing. This means having no high-interest unstructured debt, such as credit card balances. Credit cards may charge up to 25% interest rates, so it doesn’t make sense to try to earn a 5-8% investment return while you are paying out a higher interest rate servicing debt. Before you begin investing you should also save enough money to for your emergency fund, because you would never want to sell an investment at a bad time because you are suddenly in need of cash.
If you don’t have high-interest debt and you have an emergency fund established, then you are ready to start investing. The best initial investment vehicle is the ROTH IRA. The ROTH IRA is designed for retirement investing, but it has built-in flexibility which makes it a smart initial investment vehicle.
The ROTH IRA has some great features
Here are some of the features of the ROTH IRA: 1) It is funded with after-tax money. Currently, a ROTH IRA owner can contribute $5,500 a year ($6,500 a year if they are aged 50 years or older). 2) The earnings you make off of your contributions will be tax free when you access them in retirement. 3) Your contributions are not locked away; you can access your contributions without penalty, should you need them for some reason.
After establishing a ROTH IRA, you must decide how to invest the funds within it. The best asset allocation is for you to decide, but be careful not to be too conservative early in your investment life. Since I am currently working and don’t plan to retire for many years, I invest 80% in a total stock market index and 20% in a total bond market index. This asset allocation has had an average annual return of 9.5% between 1926 and 2016.
What type of investment returns can you generate?
Let’s run some numbers to see how this strategy would play out for someone. Let’s create a fictitious person who is 33 years old. He or she will plan to work until age 63. Between now and age 63, he or she will save $100 a week ($5,200 a year) in a ROTH IRA. He or she is going to use of asset allocation of 80% stocks and 20% bonds the entire time. The historical return for this asset allocation has been 9.5%, but to keep everything in today’s dollars we will reduce it to a 7% annual return to eliminate inflation. At the end of 30 years, the person will have invested $156,000 and will have a total of $491,000.
You can use the investment calculator provided by the U.S. Securities and Exchange Commission to see how you would be able to do based on your own circumstances. And remember, the sooner you start investing, the sooner you can achieve your own financial independence!