Building wealth isn’t complicated. You need to live on less than you make and save the rest. You need to invest your money in assets that appreciate so that your money can make more money. The more time you have for your money to work for you, the more potential you have to become wealthy.
Compounding interest is interest on interest. When you have $100 in an account that makes a 10% rate of return each year, the interest you make after one year is $10. This $10 gets added to your original investment, and you now have $110.
In the second year, you make 10% but on the new balance, which is $11 in investment returns. In the second year, you made an extra $1 in interest. In the second year, you made 11% of your original investment because of interest on interest. Each year, you gain more and more because of compounding interest. This is how you build wealth.
Many ways can be used to build wealth, but I prefer investing in stocks. You want to buy assets that appreciate if you want to build wealth. This means, if you put too much money into vehicles and other toys that depreciate, you won’t build wealth.
When it comes to stocks, stay away from individual stocks and anything you don’t understand. Invest your money in mutual funds, ETFs, and index funds.
Stay away from commodities, currencies, and alternative investments like Bitcoin. Yes, some people make money with these, but the risk isn’t worth it. Invest in mutual funds, exchange-traded funds (ETFs), and index funds.
Real estate can also be a good investment. Don’t buy any investment with debt because this adds unneeded risk.
Mutual Funds, ETFs, and Index Funds
Most of your retirement money should be invested in funds, either in mutual funds, ETFs, or index funds. When investing in mutual funds, you can diversify into US large, medium, and small capitalization funds and international funds.
Some funds cover the whole market. These are Total Stock Market Index Funds. Vanguard, Fidelity, iShares, and others offer total market index funds. Buying one of these total stock market index funds will give you exposure to most of the publicly traded companies in the United States.
Index funds passively track a benchmark index, and some of them come with exceptionally low expenses. You can buy an index fund that tracks the S&P 500 index, the Nasdaq, or any other index in the world.
Index funds are what I use. It’s a simple, low expense way of diversifying and owning stock in many companies.
Time is Your Friend
When it comes to investing, time is your friend. The more time you have the more intervals there are for your money to increase. You have more time for compounding interest to work. Use your time now to get out of debt and build your emergency fund so that you can start investing as soon as possible.
It’s best to not take on debt and have those payments. Instead, your income should go to building wealth. The earlier you can start, the better. Look at the difference below when one person starts investing $1,000 a month at age 25 compared to ages 35 and 45. Investing at age 25 instead of age 35 can mean multiple millions of dollars more when you are 65.
Timing the Market
Don’t try to time the market! Once you are debt-free and have your emergency fund in place invest a portion of your income each time you get paid.
It doesn’t matter if the market is going up or down. When you consistently invest over time, you average out your basis. Dollar-cost averaging. You keep buying when you get paid, and you reinvest the dividends. This is the simplest strategy to use when you are investing for the long-term.
Don’t wait until you are 55 before you decide to build wealth. Get on a plan now! Have goals. Time and compounding interest are your friends. Get out of debt so that you have money to invest. Find good mutual funds or go with index funds.