If You Want to Increase Your Capital, You Will Have to Invest
If you want to increase your net worth, saving as much of your income as possible is a good start, but that’s just for now.
To truly maximize your income potential, you will need to do more than just deposit it in a savings account. You will need to invest.
This means creating a traditional IRA or Roth IRA to boost your retirement savings. It also means setting up a separate brokerage account to hold any savings that are not currently part of your emergency fund (or are not being held for a short-term purchase such as a vacation).
Why you need a brokerage account in addition to retirement accounts
Why should you consider setting up a brokerage account, that is, an investment account from which you can make deposits and withdrawals as you wish, in addition to your retirement investment accounts? Because your money in a brokerage account will grow much faster than in a savings account.
Yes, the market can go down and your investment accounts can lose money, so investing your emergency fund is not a good idea. It may also not be a good idea to invest the money you think you will need in the next few years, although it all depends on how comfortable you are (and how much money you can afford to lose). Money Under 30 contains a good analysis of the potential risks and benefits of investing money that you plan to use in two years:
As you can imagine, investing in any account other than an FDIC insured savings account is always risky. Therefore, you should ask yourself if the risk of losing some of your money is worth the additional profit that you could get by investing it. Let’s look at the numbers:
- If you start with $ 3,500 now and invest $ 500 a month in an ING account at 0.75 percent, then in two years you will have about $ 15,640.
- If you invested mainly in bonds and some stocks, hoping for a 4% yield, you would have around $ 16,200 in two years. Of course, a 4 percent return is optimistic – you can get close to 2 percent and there is always a chance that your investment will remain the same or even decrease at the end of the period.
One final consideration: taxes. Savings interest is taxed at your marginal income tax rate. Any investment income you hold for more than one year, as well as qualified dividends, are taxed at the lower capital gains rate. Regular dividends and investments that you hold for less than one year are also taxed at the rate of your income. The bottom line is that there is an opportunity to save a little on taxes by investing, not saving.
How to start investing
So … how to start investing? CNBC has a great review, starting with this reminder that investment accounts are still the best way to accumulate wealth in our current economy:
You cannot save your way to wealth, and not everyone can make money there. It remains to invest.
If the word “wealth” doesn’t work for you, feel free to use it instead of “net worth,” “financial security,” or “enough money to retire.” The point is, investing is often one of the best ways to increase your income, whether you want to get rich or just want to set aside enough money to cover big expenses like a wedding or home.
We also have several guides to help you navigate the world of investing, and here are the ones I recommend you read:
There is an important point in this last post, by the way: if you are still working on building your emergency fund, this may not be the right time to start investing. While you should always take advantage of any investment opportunities that come with your employment package, such as a 401 (k) with company matching, you should not start investing your savings in the market until you have set aside enough money for cover a short-term emergency. Put that money in a savings account and then start saving up the money you want to invest.
How much money do you need before you can invest?
How much money do you need before you can start investing? Actually, not that much. While certain types of index funds will not be available to you until you have saved enough money to deposit them – the VTSAX Vanguard, which is a general stock market index fund, requires a minimum investment of $ 3,000 – you can still open an individual brokerage account. or an IRA and start investing even if you’ve only saved up a couple hundred dollars.
If you don’t want to manage your investment accounts, you can always work with a robot advisor. These investment services are ready to help you even if you may be able to deposit a small amount of money into your investment account every month. Here’s our guide to the pros and cons of robo:
My Vanguard investment accounts (which I manage myself) are currently generating 6.2% returns. This is a much better figure than you could get with even the best savings accounts. This means that my money is in the right place right now – and since I know that my money in these accounts is growing faster than anywhere else, I have an incentive to put as much money into these accounts as possible. This means that overall I am saving more and this is a win-win.
If you have tips for aspiring investors or thoughts on when you should (or shouldn’t) start investing, share them below! If you are investing for some time, let us know if you agree that this is an important tool for people who want to increase their net worth and save for the future.