In this article we are going to discuss how to save and invest money wisely.
The world of investments can seem complicated. Investing your money wisely is not a complicated process. All you need is a little basic knowledge, patience to make your investments better over your lifetime.
The reality is that the overall majority of millionaires got there by investing their money wisely for the long term.
Investing can be more profitable than just saving money in a bank—but there are also risks involved in it. Whether you are a beginner or an expert, it is important to keep these five things in mind.
Related Post: Financial Planning for Beginners
Table of Contents
Here are the Steps to know How to Save and Invest Money Wisely
Understand your investment
Investing money wisely is all about understanding what you don’t know. The price of potentially investable assets is really high, from postage stamps to collateralized debt obligations. It’s better not to buy a CDO if you don’t know anything about it.
If you are also not aware of master limited partnership (MLP) better don’t buy it. Never buy or hold any investment you don’t know, it can help you save your money and trouble.
Although past performance does not ensure your future returns, in the long run, the stock market has usually beaten other asset classes. The best way to approach the stock market is index funds because it is a low-cost fund that tracks the performance of the market.
Diversification
Diversification allows investors to shuffle their investments and take advantage of market movements and helps in minimizing the risk of loss.
It reduces risk. This is one of the most important features in portfolio management which we should not forget. The risks can be reduced by diversification between assets that are not correlated.
Let us think about a 20000 portfolio that only includes silver. If this 20000 is subjected to the risk then the price of silver changes. If silver drops 50%, the portfolio price suddenly changes from 20000 to 10000. This investment is not diversified and visible to you to reduce if gold falls drastically.
Now consider a 20000 portfolio that is uniformly distributed between 20 different assets. To lose half of the portfolio value, five assets should lose their complete value. The portfolio is much more defended from a large swing in value.
Compound Interest
Interest that is calculated on the total principal amount plus accumulated unpaid interest. It increases your investment with interest on interest that has accumulated over time. The earlier you start investing, the higher its effect on your net value.
Example
Let’s consider you have 1,0000 rupees on your savings account with a 10%compound interest yearly. By the end of that year, you earned 1000 (10%) of interest on your primary investment, and now you have 1,1000.
Here’s where the compounding comes in. For suppose you leave 1000 of interest in your savings account, that money works just as hard as your primary investment. Again you earn 10% of interest.
So, at the end of the second year, you now earn $1100, bringing your total to $1,2100. You think it is a small amount but if you plan for the long term. This small amount can get you big results.
Minimize Fees
The more you save your money in an investment, the more you have a chance to get high compound interest. Generally, fees come in many forms like trading stocks, buying and selling of shares, etc.
Those who have invested their retirement amount in mutual funds won’t realize that their hard-earned money is getting whittled away by management fees. It’s better to avoid your investment with the fund company that charges more than 1%per annum.
If you consider the market, diversify, understand compound interest and minimize fees, you’ll be on your way towards investment success.
Minimize taxes
There are several ways to decrease your tax while investing. By using deferred taxes you can manage your portfolio to control the difference between when the tax is accrued and when it is paid. More the taxes you save can help you to get more compound interest.
What is a Roth IRA?
IRAs (Individual Retirement Accounts) are savings plans that offer some tax benefits to help people to save for retirement. The ROTH IRA is funded with after-tax contributions – that is to say, you have already paid income taxes on the money put into this account.
What is the asset placement technique?
It is nothing but putting your money to work in the best possible way is known as asset allocation. It is also a collection of investments you own at a given point of time. The kind of asset placement you choose will depend upon risk tolerance, objectives, investment horizon
By using Roth IRA tax shelter. you can reduce your tax liabilities. Your family will have an advantage when death, protecting heirs from capital gain taxes. You can also use the asset placement technique to track your assets and minimize your tax payments.
