Investing money for retirement and building wealth may seem like an overwhelming task at first. That’s usually because you’re trying to see the end result without mapping out a clear path to get there.
However, if you set reasonable goals and break them down into small steps you can create a very do-able plan that will pay huge dividends in the end.
Set Your Goals
The first step in achieving any goal is to know what that goal is. I’m not talking about something vague like “I want to retire comfortably,” or “I need to start a college fund for the kids.”
I’m talking about real planning. Initially it may take some time and thought to come up with how much you feel you need to live comfortably during your retirement.
It may also take some research to find out how much college will cost by the time your child is ready.
But essentially all you really need to figure out in the early planning stages is what you’re saving for, how much money you will need and when you will need it.
This can be a bit of a challenge especially if you're a beginner investing but this is the goal. You need to clearly state what it is you need and when or you’ll never get it. Without this information, you have nowhere to aim and your efforts to save money will be mediocre at best. Don’t worry about how you will do it right now. That will come later. Just take this time to determine what you will realistically need and your time-frame.
Remember too, that your plan will likely change over time. This is especially true for retirement planning. And though it’s important to make every effort to get it right, take comfort in knowing you can change it along the way.
You can also have multiple goals. However, investing money for retirement is something everyone should do. And while it’s better to start as early as possible, it’s never too late.
There are also many great programs for investing money for your child’s college fund. This is great way help insure they receive the best education possible.
While retirement planning and college funds are some of the most popular reasons for investing money, they are by far not your only options.
You can set up investments to help accelerate savings for purchases as well. These accounts don’t have the same tax benefits as retirement and college plans but you can really grow your money fast if you choose wise investments.
Once you’ve decided what you’re saving for, how much money you will need, and when you will need it, it’s time to move on to the second stage of planning.
Ways To Achieve Your Goals
There are so many avenues for investing money. Some come with little or no risk while others can keep you up at night. A good rule of thumb is the riskier the investment, the higher the potential reward.
Also, the further out you are from needing the money, the more risk you can theoretically take. This is because you’ll have more time to recover should you incur losses.
Another thing to keep in mind is that you don’t need large sums of money to start investing. You can begin with just a few dollars each week or month. Of course, the more money you’re able to invest, the quicker you’ll reach your goals.
Some of the most popular tools for investing money are:
They are listed somewhat in order of their risk potential with the safest at the top. You won’t lose the money you’ve put into savings accounts, money market accounts or CD’s because most reputable financial institutions are insured through FDIC and your accounts are protected up to a certain amount.
However, the others are more risky and you do have the potential to lose some or all of the money you’ve invested in them. On the flip side, they will pay out a lot more if things do go well.
Some of the different plans available for investing money and building wealth are:
Some of these plans offer wonderful tax benefits such as enabling you to use pre-tax dollars to invest, potentially putting you in a lower tax bracket. And some are tax-deferred. This means your money grows tax-free and you don’t pay taxes until it’s withdrawn.
However, you should be aware that with retirement accounts, if you withdraw your money too early you will be hit with penalties as well as taxed.
How To Get Started
Now that you’ve set goals, know where you want to go and seen some of the options available to take you there, it’s time to find out how to get in the game.
There are a number of different ways you can go about actually investing money. Your choice or choices should depend on the amount of money you have available to invest, your experience level, and your risk tolerance just to name a few.
One of the most important things to remember is to always do thorough research before handing your money over to anyone. This could not only help you avoid scams but it could also help you earn more in interest, dividends or other future income.
Savings Accounts, Money Market Accounts and CD's
We’ll start with the most basic of investments. Just about every financial institution offers savings accounts, money market accounts and CD’s. However, their terms and interest rates vary greatly. Check around to find the best rates and terms for your situation.
Stock Market Investing
With stock market investing, you can buy and sell shares, stocks, and bonds on the stock market.
This should be treated as extracurricular investing and should be done only after you have a sufficient retirement plan implemented.
The funds used for this type of investing should be extra money that you can afford to lose. You stand to gain big investing in the stock market but the risk is definitely there, too.
While you can buy some stocks directly from certain companies, you will probably want to open a brokerage account before you begin to trade.
While these do charge fees, the traditional or full-service brokers offer one-on-one guidance which can be extremely helpful for the beginning investor.
You can also opt for a discount broker. These are geared more toward the do-it-yourself investor. You won’t receive the individual attention like with the traditional broker but you’ll save a lot in fees.
Regardless of which route you choose, you'll want to do your own stock research before investing in any company.
Education Savings Plans
The 529 Plan and Coverdell Education Savings Account are education savings plan. The 529 Plans are operated by individual states or educational institutions while the Coverdell Accounts are federally based. They're designed to help you save for your child’s future eduction costs.
Both have amazing tax benefits as well. They allow your money to grow tax-deferred and the distributions to pay for college or other eduction are practically tax-free. Each state has at least one 529 Plan available and many offer several.
It’s important to check out the different programs available to find the one that’s right for you. Also you’re not limited to colleges and universities in your own state. The funds from these plans can usually be used to pay tuition in qualifying out-of-state colleges and schools as well.
401k and IRAs
401k and IRAs are both very popular retirement plans and offer nice tax benefits. Mainly, you aren’t taxed on the money that goes into your retirement plan until it’s withdrawn. They are both great options for investing money for retirement.
401k plans are retirement plans that are offered by some employers. The amount you specify is deducted from your paycheck each pay period. This makes saving automatic. Some companies will even match your contribution up to a certain amount. This is free money to you. If your employer offers this, take advantage of it.
IRAs can be set up by individuals for the purpose of investing money for retirement. They usually offer more investment options than a 401k but no one will match your contribution with these.
Both 401k and IRAs have yearly contribution limits. However depending on your investment structure and length of time until retirement, these plans have the ability to easily cover your post-retirement expenses.
Defined Benefit Plans
A defined benefit plan is a retirement plan provided by your employer. Unlike a 401k, your employer contributes all the money. The amount you receive at retirement depends on your salary and how long you worked for the company.
There are two types of defined benefit plans. One is a pension and the other is a cash-balance plan. Some companies require you to work a certain number of years before you are fully vested in the plan. However, once you’re vested you can look forward to receiving benefits after retirement that didn’t cost you a dime.
Self-employment plans offer ways for you to save for retirement and receive tax benefits if you happen to be self-employed. There are several options available if you fall into this category.
You can choose from a SEP IRA, Simple IRA or individual 401k. These plans offer up-front tax breaks and your money grows tax-deferred. There are also Roth versions of both the IRA and 401k plans. These allow you to pay taxes up-front but withdraw the money at retirement tax-free.
Annuities are a special form of investment that is a contract between the investor and the issuing insurance company that states that the insurance company will pay you a series of payments for either a specific period of time or for the rest of your life.
You pay a specified amount of money to an insurance company and they in turn will pay out the accrued money to you over time, in one lump sum or to another designed recipient.
The benefit that annuities have over savings accounts is that your money is allowed to grow tax-deferred which can make a big difference over time.
Investing Money in Your Home or Real Estate
Investing money in your home or other real estate can be a good way to save for retirement. As the equity in your home or property grows, your net worth increases.
At retirement you can sell your real estate assets and use the money to fund your lifestyle. Or you can choose to sell your home and downsize to a condo or smaller home using the left over money to pay for your retirement.
This should only be one part of your retirement plan though; especially if the only real estate you own is your home. Home values could decrease in your area leaving you with less equity than you planned for.
However, if you supplement this with a 401k or IRA for example, this could be a nice addition to your retirement income.
Starting Your Own Business
Investing money in starting your own business could potentially set you up for life. However this is one of the riskiest ventures of them all. You’ll not only be investing money but time and energy as well.
But if you do build a successful business, you can choose several options at retirement. You can maintain control and work part time, you can allow someone else to run the company while you collect a portion of the profits or you can choose to sell the company altogether.
Even with this strategy, I would still suggest supplementing with some other form of retirement income like a 401k or IRA. Diversification is a good thing.
You may also choose to supplement retirement income by investing money in tangible goods. Things like precious metals, antiques or art are some examples.
If you have specialized knowledge about certain collectibles, you could make a lot of money this way. These things may not earn dividends or interest but may rise in value over time allowing you to sell and realize a significant profit.
Now that you’ve seen some practical ways of investing money for different goals it’s time to see the theory behind it all. Basically, the higher your net worth, the more comfortable your retirement will be and for longer.
The formula to find your net worth is pretty simple.
Net Worth = Assets – Liabilities
Assets are possessions that increase in value or provide a return like a savings account, retirement plan, stocks, bonds or real estate. Things like clothes or vehicles are technically assets but they decrease in value over time.
Liabilities are debts like mortgages, credit card balances, car loans, student loans or medical bills. Basically debts are any amounts of money you owe that can be paid off.
Things like utilities, gas, and groceries are not debts. They are expenses. They are on-going expenditures needed to live and will always be there. So don’t include them.
The quickest way to increase your net worth is to pay down your debt. If you carry a lot of debt, especially credit card debt, the high interest rates you pay will off-set any income you make with your investments. This is because of compound interest.
Compound interest can work for you or against you. If you can turn it in your favor your net worth will soar.
Compound interest is the reason why a relatively small amount of money invested each week over the course of your working life can fund your retirement. It’s a powerful thing.
So start as soon as possible by making room in your budget to first pay off high-interest debt and then to begin investing money in a retirement plan, college fund or any other need you may have.
By planning and making a small financial sacrifice now you could have the ability to send your child to college and give them the best start possible. And imagine being able to retire comfortably and enjoy your golden years. These are attainable goals. So start now and enjoy your future.From Investing Money to Home