Investing doesn’t have to be difficult. In fact, it shouldn’t be difficult, it should be rewarding.
Fortunately, there are things you can do to become a smarter investor that don’t require you to work harder. Here are three methods you can use to invest smarter, not harder.
1. Set up automatic transfers
One of the best ways to make investing easier is to make it automatic. Having money sent directly to your brokerage or retirement account when you get paid can take some of the legwork out of investing. All you have to do is go to the account you are investing in and buy the assets that interest you; you don’t have to worry about making a transfer every time you want to invest.
Having an automatic transfer set up for the same time you get paid can also make things easier for you because you get used to not “seeing” the money first and can adjust accordingly. For example, if you get paid $3,000 every two weeks and plan to invest 10% of your paycheck, having that automatic transfer can quickly get you used to living on the $2,700 without losing the $300 you invest.
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2. Use index funds
Researching and investing in individual companies can be challenging and time consuming. That’s what makes index funds ideal for many investors. An index fund is a type of mutual fund or exchange-traded fund (ETF) created to mirror a specific market index. For example, him S&P 500 consists of the 500 largest companies in the US by market capitalization. An S&P 500 index fund consists of and tracks those 500 companies.
Since index funds follow a set index, be it company size, industry, social mission, etc., they are passively managed and have low expense ratios. The difference in seemingly small percentages may seem minimal, but it can easily add up to thousands in the long run.
One of the keys to long-term investment success is diversification; You don’t want the success (or decline) of your portfolio to depend on the success of too few companies. The right index funds can provide instant diversification because you simultaneously invest in multiple companies with a single purchase. Using index funds can ensure that you are invested in companies of different industries, sizes, and even growth potential.
3. Invest in tax-advantaged accounts
One of the main reasons to invest is to make sure you are financially comfortable in retirement. To help and encourage investment for retirement, the IRS offers opportunities for tax-advantaged accounts, such as 401(k), Roth IRA and traditional IRA. Many people use a 401(k) plan because it is offered by their employer and they don’t have to go out of their way to open an account. However, IRA accounts are not tied to an employer and you must open them yourself.
Although the maximum contribution to both a Roth account and a traditional IRA is a combined $6,000 ($7,000 if you’re age 50 or older), tapping into them can pay off. You contribute after-tax money to a Roth IRA, and in return, your money grows and compounds tax-free. If you made a $6,000 investment in an S&P 500 index fund in your Roth IRA, which historically returns 10% per year, and never made another contribution, you would have accumulated more than $104,000 after 30 years, with no taxes due.
So imagine the impact if you contribute for years. There is an income limit for eligibility to contribute to a Roth IRA, so if you’re still eligible, it’s in your best interest.
You also contribute after-tax money to a traditional IRA, but your contributions are potentially deductible from your taxable income. Reducing your taxable income will save you money up front (although you will have to pay taxes when you make withdrawals in retirement).
Both Roth accounts and traditional IRAs work like regular brokerage accounts where you can buy any single company stock or ETF you want. Instead of making investments in a brokerage account, take advantage of tax-advantaged accounts first, then return to a brokerage account.
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