Monday, July 18, 2011

8 Tips For Investing Money to Build Wealth

In order to build wealth, you have to make your money work for you. In other words, you need to make proper investments and earn a good return.

This is not as difficult as it seems. With all the negative press going on concerning the stock market right now, you might feel it is better to keep your money under a mattress rather than investing it. However, this is simply not true.

The stock market has provided a 10-15% rate of return over the last 80 years. Of course, this is no guarantee that it will do the same during your investment horizon. Past performance is not necessarily an indicator of the future. However, what else do we have to go on?

In order to make money with our investments, we should follow some simple tips.

I should tell you right now that I am not an investment professional of any kind. I do not profess any expertise whatsoever with investing. I am just passing along what I think is some sound advice. Invest at your own risk!

Practical tips for investing from a layman

I believe in keeping my investment strategy simple. I'll admit that seeing my net worth grow is very exciting to me, but the nuts and bolts of investing is not. If you are an investment geek, then you probably won't find much to get excited about below. However, if you are like me, you need simple, practical information to help you grow wealth for retirement. Here's what I've learned:

1. Pay off your debts before investing

I've already told you why I believe being debt-free is the path to financial success. You should pour all your financial might into becoming debt-free as soon as possible. Freedom from debt is the most important step toward building net worth. Remember, your net worth equals your assets minus your liabilities. Therefore, it makes sense to eliminate your debt before you start investing your money anywhere else.

2. Set an investment goal before you begin

It is best to know where you are going before you head out. By knowing your destination, you can keep the ship on course. An investment goal will serve as a guide for your investment decisions. As you invest, questions are going to arise about where you should put your money, how much you need to save each month, and when to make certain changes. Without an investment goal, you really have no way to answer these questions.

3. Find someone that will teach you about investing

I highly recommend finding an investment geek that you can trust and that will teach you what you need to know. An investment geek gets all excited about the ins and outs of the stock market, mutual funds, charts, graphs and reading a prospectus. Me? I'd rather be whipped with a rubber hose. However, I know that it takes expertise to invest smartly. Find a broker, advisor, counselor, mentor, family member, friend, or neighbor that has a long track record of success in the market to teach you in layman's terms what you need to know.

4. Understand your investments before you invest

If you don't fully understand the investment and how it works, then do not put your money into it, no exceptions. It doesn't matter how convinced anyone else is that this is the next big thing. You want to understand it and be 100% comfortable that you know what you're getting into before you give your money to anyone. This is why your financial advisor needs to be a teacher and not a salesman. There is no reason to hurry. Take another day and make sure you understand.

5. Diversify your investments

In the stock market especially, you want to spread your money out across numerous different companies. The easiest way to do this is by investing in mutual funds. By investing in a mutual fund, you are, by definition, diversifying your investments. The fund manager takes your money and everyone else's and invests it in a collection of stocks according to the fund's stated objective. I recommend spreading your money across multiple mutual funds. This is called asset allocation.

6. Learn to allocate your assets intelligently

You will generally distribute your money into more than one mutual fund to diversify your portfolio. This distribution is called asset allocation. Dave Ramsey recommends investing 25% of your investment dollars into the following types of mutual funds:

    Growth & Income
    Aggressive Growth

Over time, you will probably need to look at rebalancing your portfolio to maintain this type of allocation. This is necessary because you will earn more in certain of these areas for a given period of time.

7. Take advantage of matching funds in 401k

Many employers offer a 401k plan so you can invest pre-tax money for retirement. Usually, the employer agrees to match whatever funds you invest up to a certain amount. For instance, your employer may match your investments in your 401k up to 4% of your annual salary. This is free money. You should seriously consider participating in the 401k plan to take advantage of these matching funds. Also, do not forget to rollover your 401k when you change employers!

8. Keep a long-term mindset when investing

Investments in mutual funds and the stock market in general should be thought of as long-term investments. This means that you should only invest money that you won't need in the form of cash for five years or more. Also, you shouldn't worry about fluctuations in the market. You only realize an actual loss when you sell at a low point in the market. If you leave your money in, then your investment balance will go back up when the market recovers. Trying to time the market is a losing proposition.

Basic investment tips that work when followed

These are basic tips for investing to build wealth. However as with most things, if you get the fundamentals right, then you are 90% there. Most people that have any wealth will agree with the majority of these tips. I encourage you to research this further on your own. You are the only one responsible for your financial well-being. Take charge and make your goals happen!

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