Investing – Grow Your Wealth

January 21, 2021

This is the second post in my new Pillars of Personal Finance series.

Dreaming of Possibilities

From Day 1, way back in December of 1985, I loved Investing. I wasn’t great at it nor did it come easily to me, but the compounding nature of investments was fascinating. Just thinking about the possibility of generating wealth sent a little shiver down my spine. I was a middle-class kid, working my way through college as a cashier in a supermarket and I was barely making it. I was only a missing paycheck or two away from losing my car and moving back home when my best friend Roger approached me with an “Investment Opportunity”. I didn’t have any money to invest, but I signed up for $100 per month any way. What I got was a poorly performing mutual fund, with an 8.5% front-end load. But, I began my journey as an Investor and I have never looked back.

Thankfully, my parents were also aspiring middle-class investors and they gave me some great advice. They taught me how to read a prospectus, diversify asset classes, avoid loads and pick good mutual funds. Most important, they taught me how to invest consistently to accumulate wealth. Most middle-class kids aren’t so lucky. Their parents don’t know how to invest or even budget their money. So, I’m paying it forward now, to anyone who is interested.

Why Invest?

The critical reason you need to invest is to convert your savings into future income and wealth. If you just put your savings in the bank, you will only have the money you saved, before taxes and inflation reduce that amount. If you invest your money with a solid return, you will have an asset that compounds on itself, to grow exponentially. First it doubles, then quadruples, then grows to 8x, 16x, 32x or even 64x times it’s size. The only limit is time and it takes quite a while for your money to double. The sooner you start and the higher your rate of return, the more your investments will grow. The more you invest, the more wealth your investments will return.

Getting Started

Becoming an Investor is a lot easier than some people think. It’s as easy as signing up for your company’s 401K plan, downloading an App or opening a mutual fund or brokerage account. What is hard is consistently returning a profit, without losing your money. This scares a lot of people out of the market, who should be investing. I’m not going to cover a ton of details, because the purpose of this post is to encourage everyone to start investing. Getting started is the key to a better future. You can always get more sophisticated later. Get started Now.

Invest for Goals

The first step in the investment process is to define what you are investing for. If your goal is to buy a house, you don’t want to start a college or a retirement account. If you are saving for retirement, you can’t afford to get taxed to death. So, choosing the right account type, is very important. Here are some common financial goals to invest for:

Emergency Fund
Buying a Home
College Funds
Retirement
Opportunities (business, real estate, etc.)
Wealth & Security

Account Types

When you start an investment account, it is critical to select the right account type:

Standard/Taxable – Individual, Joint, Guardianship, Trust
Retirement – 401K, Roth 401K, Traditional IRA, Roth IRA, Rollover IRA, SEP IRA
College – 529, Coverdell
Minor Accounts – Uniform Gift to Minor Act (UGMA), Uniform Transfer to Minor Act (UTMA)

The intricacies of each account type are well beyond the scope of this post, but it’s super important to pick the right account type. Most brokerage and mutual fund companies will have specific information on this. When in doubt, choose Standard/Taxable, Individual. That way, you can easily move it into another account type or cash it out in the future, without facing a bunch of penalties and restrictions.

Investment Types

Investors are so lucky these days. There are tons of convenient online investment options available.

Mutual Funds
ETFs (Exchange Traded Funds)
Discount Brokers
Investment Apps
REITs (Real Estate Investment Trusts)

Investor Resources

Here are some posts and articles to help you begin investing:

4 Types of Investment Accounts You Should Know (Nerd Wallet)
Why I Invest in Mutual Funds (Hope to Prosper)
Exchange Traded Funds (Investopedia)
Best Brokers for Commission-Free Trading in 2021 (StockBrokers.com)
Best Investment Apps of 2021 (Money Under 30)

The Bottom Line

Investing can dramatically increase your lifetime income, because your money earns money, then the returns from your money earn even more money. Compounding is the magic that creates millionaires.