At some point in your life, you may have decided that you don’t want to work full-time anymore and now want to retire early. But how are you going to do it? If you haven’t already, it’s time to start thinking about investing your money so that you can build enough wealth to sustain yourself after retirement. Because at the end of the day, if you don’t take care of your future, who will?
1) Embrace Compound Interest
Compound interest refers to money you earn from investments over time. If you had $1,000 and your investment yielded 5 percent interest, at year’s end, you would have $1,050—and that $50 is pure profit. It’s called compound interest because it compounds: Each year, your earnings are added to your principal, which increases how much money you’ll make in future years.
2) Start as early as possible
As with many things in life, time is of great importance when it comes to investment. Starting early will allow you time to work on your knowledge and give you more time in which to make returns on your money. If you start later in life, don’t fret—you can still catch up! However, it’s never too early (or too late) to start thinking about your financial future.
3) Do it yourself
Retirement funds often come in the form of some type of retirement savings account. A few options are IRAs (individual retirement accounts), 401(k)s (named after section 401(k) of the Internal Revenue Code), and Roth IRAs (an individual retirement account that allows earnings to grow tax-free).
The most important thing is to open an account now and start saving, no matter how small your contributions are initially. The sooner you start investing, the more money you’ll have later in life!
4) Have an emergency fund
Even if you have $50,000 in your retirement accounts and $30,000 tucked away in an emergency fund, don’t assume you can afford whatever comes your way.
The key is to pay yourself first: Before investing in anything else—new clothing, dinner at a fancy restaurant—make sure you have enough money saved up in your emergency fund so that if an unexpected expense arises, you’re covered.
5) Prioritize your investments
In order to start investing your money, you’ll need to open up an investment account. There are many places that can help you get started with investing your money, such as Betterment and Wealthfront. When you’re deciding which service is right for you, think about how much money you want to invest and how often.
6) Diversify wisely
There are more than 7,000 publicly traded companies in America, but if you put all your money into one of them, you could lose everything if it tanks. To avoid such an outcome (and financial ruin), diversify your investments across different industries and markets—that way if one goes down, others might be thriving and can offset any losses. If all else fails, turn to real estate: Houses have historically been less volatile than stocks.
7) Follow basic rules for retirement accounts
If you’re not sure what you want to do with your investments, start by following these rules. They might be boring, but they are effective.
To get started, it’s important that you find an investment account that matches your risk tolerance: Aggressive investors look for higher returns and invest in more volatile securities such as stocks or real estate. Conservative investors on the other hand look for lower returns and keep their investments in safer places like bonds or cash accounts.
8) Dollar-cost average wisely
Don’t make any emotional decisions with your investments. By purchasing an investment on a regular schedule, you help ensure that you won’t buy at the market peak and sell at the market bottom.
You can make your investments even more effective by investing through automatic monthly deposits so you don’t have to worry about adding new cash when markets are volatile. To ensure that your money is going toward growing assets instead of shrinking ones, wait until after day-to-day fluctuations pass before making any moves.
9) Time the market wisely
When you’re first learning how to invest money, one of your biggest fears is missing out on gains. The key is time: Don’t sell too soon and let your profits ride by holding on just a little longer. With 10+ years of historical data available, you can be reasonably confident that you won’t miss out on a market rebound.
10) Consider investing internationally
One of many reasons to invest internationally is that it can help you beat inflation. If you’re in a country with a weak currency, investing in foreign markets can help you take advantage of stronger currencies and rising asset prices.
So while U.S. stocks may be performing poorly, international investments are doing just fine. It’s an ideal time to reallocate your funds into globally diversified indexes and ETFs (exchange-traded funds).