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A high-yield cash savings rate might outpace inflation, but you won't get rich from your monthly interest earnings. If you are committed to a wealthier future, adding an investment program to your savings strategy is the way to do it.
Use this step-by-step guide to establish a sustainable, profitable, and long-term investing habit that helps you realize your financial goals.
Step 1. Make sure you're ready
Investing involves the risk of financial loss. It also consumes cash that may be better used for other purposes, such as paying bills or repaying debt. For these reasons, it's wise to get your finances in order before you put money into appreciable assets like stocks or real estate.
Two important issues to address are high-rate debt and cash savings.
Pay off high-rate debt
Average credit card interest rates usually run higher than 20%. That is roughly double the long-term average annual return of the stock market. It is also several times greater than real estate's long-term average annual appreciation.
The takeaway? Credit card debt costs more than you can realistically expect to make investing. This is especially true in the short term when asset performance can stray from the averages. If you have high-rate debt, pay it off before you invest.
Learn more: The best 0% APR credit cards
Establish cash savings
Cash savings functions like an insurance policy for your investment portfolio. With enough cash on hand, you should not need to reach into your investment account to cover unexpected expenses. You can instead leave your capital invested to reach its full potential.
Many experts recommend accumulating enough cash to cover three to six months of your living expenses. With this balance, you can hopefully withstand a layoff, health scare, car accident, or other expensive emergency without selling your investments.
Over time, cash loses purchasing power due to inflation. You can minimize that effect by storing your emergency funds in a high-yield savings account.
Step 2. Invest in tax-advantaged accounts first
Before investing in a taxable format, make sure you are taking full advantage of tax-advantaged retirement accounts. The tax perks you get in a 401(k) or IRA are valuable and expedite your wealth production.
Learn more: 401(k) vs. IRA: The differences and how to choose which is right for you
401(k)s
A 401(k) is typically available through an employer, though you can set up a Solo 401(k) if you are self-employed. There are two types of tax treatments for 401(k) contributions, called traditional and Roth. Your 401(k) may offer one or both contribution types.
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Traditional 401(k) contributions are taken from your paycheck before income taxes are calculated. They reduce your taxable income. Taxes on the investment returns are deferred until you make withdrawals. Withdrawals are taxed as income.
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Roth 401(k) contributions are made with after-tax funds. They do not reduce your taxable income. However, you pay no taxes on the annual investment returns, and qualified withdrawals in retirement are tax-free.
Learn more: What is a 401(k)? A guide to the rules and how it works.
Whether you opt for tax-deferred or tax-free investment growth, your account balance appreciates faster relative to taxable investing. In a taxable account, your real return is the gain minus the taxes you pay on those gains. Many investors must withdraw funds from the account to pay those taxes, which reduces the invested balance and gain potential. Investing within a tax-deferred account, on the other hand, postpones the tax liability so your full balance can remain invested, compounded, and growing over time.
Many 401(k)s additionally offer employer-matching contributions, which also accelerates wealth. Experts recommend taking full advantage of employer-matching contributions before any taxable investing.
Learn more: How a 401(k) match works and why you should seek it out
IRAs
IRAs are widely available from financial institutions and some smaller employers. IRAs also allow for traditional and Roth contributions, but not in the same account. You would deposit traditional contributions to a traditional IRA and Roth contributions to a Roth IRA.
IRAs, relative to 401(k)s, usually have more diverse investment options. IRAs also have lower contribution limits unless you are contributing to a SEP IRA through a business you own. Additionally, Roth IRA contributions are subject to income thresholds. If you earn a high income, you may not be eligible.
Step 3. Decide whether you need professional help
You can invest outside of your retirement accounts independently or with the help of an advisor. If you decide to seek outside guidance, you can choose from a robo-advisor or a full-service financial advisor.
Robo-advisor
A robo-advisor is a managed investing program. Investments are selected for you based on a stated risk profile and strategy. You may have access to a human advisor, or you may not.
Robo-advisors generally cost less than human advisors, but the investment programs may be too generic to serve your needs.
Learn more: Robo-advisor: How to start investing right away
Full-service financial advisor
Full-service financial advisors can tailor an investing strategy to your situation. Many will also guide you on other financial strategies, such as budgeting, debt repayment, and insurance.
Investment managers normally have higher fees than robo-advisors. Some earn trading commissions, while others charge an annual fee based on how much money they manage for you.
Learn more: How much does a financial advisor cost?
Step 4. Choose what to invest in
If you decide to invest on your own, your next step is creating an investing strategy that aligns with your goals, timeline, and risk tolerance. Your strategy can take different forms, but many investors express their approach as a target asset allocation.
Asset allocation is the composition of your investments across asset types. Because each asset type responds differently to market conditions, the way you combine them shapes your portfolio's overall risk level and performance.
Five common asset types are described below.
Stocks
Stocks are ownership positions in companies. The most accessible stocks are those that trade on public exchanges, such as the New York Stock Exchange or the Nasdaq. Stocks are available for purchase within many taxable brokerage accounts and some IRAs.
Stocks can gain or lose value from one year to the next, but they tend to appreciate over the long term. Some stocks additionally provide cash income by way of dividends.
Read more: Check out the latest stock market news
Bonds
Bonds are debt securities. The bond issuer is the borrower, and investors, called bondholders, are the lenders. Bonds are most readily accessible to individual investors through mutual funds and exchange-traded funds (ETFs).
Bond values can rise and fall with interest rate changes, but the terms of the debt do not change. If a bond promises to pay a fixed rate of 2% monthly and then repay you $1,000 when the debt matures, those things will happen — unless the issuer defaults.
Bonds provide stability and income within an investment portfolio.
Precious metals
Precious metals include gold, silver, and platinum. You can invest in these metals physically by purchasing coins or bars. You can also invest in funds that hold precious metals on behalf of their shareholders.
Learn more: What to know before buying gold, silver, or platinum from Costco
Precious metals appreciate over long timeframes, but they can be reactive to economic conditions. Gold, for example, tends to rise in value when investors are feeling uncertain about the stock market. For this reason, gold is often held as protection against stock market downturns.
The downside is that gold can remain flat or negative when stocks are performing.
Read more: How to invest in gold in 4 steps
Cryptocurrency
Cryptocurrency is decentralized digital currency. Decentralization means no bank or government agency oversees or regulates transactions. The most popular cryptocurrencies are bitcoin and ethereum.
Cryptocurrencies can be volatile and unpredictable. As an example, bitcoin lost more than two-thirds of its value between late 2021 and early 2023. It then set record highs multiple times in 2024.
Some investors hold cryptocurrencies to diversify their investment holdings. Others use these currencies to make private, low-cost money transfers around the world.
Real estate
You can invest in real estate directly or indirectly. The direct method is to purchase real property to resell or rent. If you prefer to be less hands-on, you can buy securities that invest in real estate. These are more volatile than physical property because they can be traded quickly. Their market values, therefore, can be more reactive to financial market conditions.
Investors purchase real property for appreciation potential and rental income. The long-term average annual appreciation for real property underperforms the stock market, but home prices are less volatile than stocks.
Real estate securities are popular as diversification assets.
Step 5. Set your budget
You can amplify your results by investing regularly, and a budget helps you do that. Choose an amount you can funnel into your investment account monthly without impacting your ability to pay bills. Assuming you are maxing out available retirement contributions, you can start small — say, $50 monthly. Plan on raising the amount as you build your investing skills and confidence.
You can stay on track by automating the funds transfer into your investment account. If possible, automate the trades as well. Doing so removes emotion from your trading decisions and establishes investing as a habit.
Step 6. Plan for portfolio maintenance
Even if your portfolio is simple, it will require some maintenance. Tasks to consider annually include evaluating results, validating your strategy, and rebalancing.
Evaluating results
Check the performance of your holdings against their peers. For example, if you have an S&P 500 index fund, verify that it is performing on par with other S&P 500 funds.
Validating your strategy
Review your target allocations and the portfolio's overall performance. Consider whether you need adjustments to lessen volatility or improve growth potential.
Rebalancing
Rebalancing is the process of restoring a targeted asset allocation.
Say you like the moderate growth profile of a portfolio with 60% large-cap stocks and 40% U.S. Treasury securities. Even though you make ongoing investments in this ratio, your portfolio likely reflects something different. This is because stock values can rise or fall, but bonds remain relatively stable. Usually, you will end up with a higher-than-intended stock percentage, which increases your risk. To rebalance your 60/40 allocation, you would sell some of your stock positions and use the proceeds to buy U.S. Treasurys.
You will not need to rebalance if you use a robo-advisor or a human advisor. Also, human advisors should periodically initiate conversations to evaluate results and validate the strategy.
Learn more: 5 questions to ask your financial advisor
Invest confidently
If you are making regular retirement contributions, adding a modest taxable investment program is a wise addition to your wealth plan. Whether you opt for professional help or independent investing, learning about asset types and allocations will make your wealth journey more rewarding — and potentially, more profitable.
