Once an individual has paid off debt and developed a healthy savings account, their next step in the journey to financial literacy is investing their money. Thanks to compound interest, investing money is the simplest way to make it grow, and it’s easier now more than ever to get started. Here are three ways that investments can be made easier.
1. Enroll in a Retirement Plan
Opening a retirement savings account, such as a 401(k) or Roth IRA, is one of the best ways to start investing. Along with earning compound interest, these types of retirement accounts have tax benefits. For example, contributions to a 401(k) will lower an individual’s taxable income, but future distributions will be taxed upon withdrawal. Roth IRA funds come from after-tax dollars, allowing for tax-free growth. You can have a 401(k) and a Roth IRA going at the same time, but keep in mind that a 401(k) is only accessible through an employer.
2. Use Investing Apps
Also known as Robo advisors, investing apps provide the personalized service of a financial planner without the hefty price tag. A Robo advisor is an algorithmic software that makes automatic investment decisions based on personalized data. Typically, the algorithm will regularly diversify and rebalance portfolios based on market conditions to meet a mathematical goal. According to SoFi, Robo advisors are beneficial for their “affordability, convenience, and the avoidance of potential human errors.”
3. Put Money into Real Estate
Historically, real estate has been a relatively safe place for investing money. These days, buying property isn’t the only way a person can invest in real estate. A real estate investment trust, or REIT, is a specialized business that crowdsources capital from multiple sources to purchase physical commercial properties. Even with little or bad credit history, anyone with the funds can invest in a REIT. Under most circumstances, the trusts are exempt from corporate taxes and make it possible to share ownership of the property. Through this method, the cost and risk of owning property are diluted among multiple shareholders.
Diversification is Key
No matter how an individual decides to invest their money, the most important thing to keep in mind is diversification. Different avenues of investing come with their own risks, so it’s best to maintain a portfolio with a variety of assets. A well-diversified portfolio maximizes the potential of returns while minimizing risk over time. There are two strategies for accomplishing this. Investing across asset classes means spreading investments between the three main asset classes, which are stocks, cash, and real estate. Investing within asset classes means spreading investments between options under each asset class.
Thanks to modern technology, it is possible for the average person to make investments on their own terms. No matter what avenue a person chooses, they should start investing as early as possible to take advantage of compound interest and subsequent growth over time.