Invest Money: Smart Ways To Build Wealth

You may be saving money for your life goals.

That could mean mindlessly throwing money into a low-interest bearing savings account.

That’s GREAT – if you’re building an emergency fund.

What about for long-term growth?

The main question today is – Are you optimizing your investments at the basic level?

I’ll provide insights on how to take full advantage of your workplace investments and end with commonly used strategies to invest money.

investing build wealth

Invest Money: Smart Ways To Build Wealth

Workplace Investments

1. Get the full employer match.

Does your employer match your investment contributions? 

If they contribute “X” percentage to your investment plan, the best course of action is to contribute AT LEAST that percentage to meet the match.

To make this change, simply access the plan administrator’s website, find “Contributions”, and edit the percentage.

It may take 1-2 pay cycles before your new contributions are reflected.

KEEP IN MIND: If you plan on maxing out your contributions early in the year (vs. throughout the year), your company may not match your contributions for the remainder of the year. You can confirm this with your Benefits department.

2. Review 401k contributions.

You may be stashing enough money away to meet your employer match – that’s GREAT.

It may be time to review how much you can contribute comfortably to fund your retirement.

A method I’ve used in the past: Determine how much cash flow is needed each month and work backwards.

Here’s an example:

Ben contributes pre-tax to his 401k at work. He currently needs $3,000/month to hit his bank account for bills, savings, and other investments. If his gross pay is $5,000/month and his combined taxes are ~18%, that means he can contribute ~25% – which is $1,250/month. For the year, his total 401k contribution would be $15,000. This doesn’t take into account any other deductions that might come out of his paycheck. 

You can use the same thought-process to optimize the amount of money being allocated to your retirement.

KEEP IN MIND: The max contribution limit is $19,500 for 2020 (unless you’re 50 and older, in which case you can use a catch-up contribution of $6,500).

3. Choose between Traditional (Pre-tax) 401k or Roth 401k…or choose both.

A Traditional (Pre-Tax) 401k is a tax-deferred account.

Contributing to this account will lower the amount of taxes that you have to pay.

Let’s say you make $100,000 and you max out your pre-tax 401k at $19,500 for 2020. The $19,500 contribution takes your taxable income down to $80,500.

At the time of withdrawal, the funds are taxed as ordinary income (same as a typical 9-5 job). This means taxes are paid according to the tax bracket you fall in at that time.

Then there’s the Roth 401k.

A Roth 401k works essentially the opposite.

After-tax dollars are used to fund this account, therefore there is no tax advantage on contributions.

At the time of qualified withdrawal, no taxes are due on earnings and (original) contributions.

There are income limitations, but if you qualify and have it available through your workplace, it’s a great option.

KEEP IN MIND: The max contribution limits for a Traditional and Roth 401k combined is capped at $19,500 for 2020 (unless you’re 50 and older, in which case you can use a catch-up contribution of $6,500).

Please note that this is merely an overview, therefore I’m not noting specific aspects to each plan at this time.

4. Invest bonuses.

If you get bonuses as part of your compensation plan, there may be an option to contribute some of those funds to your 401k.

This can be found in the same section where you change your contribution percentage on your plan administrator’s website.

KEEP IN MIND: Bonuses can get taxed at a higher Fed rate, depending on how the bonus is issued.

5. Be mindful of expense ratios.

Research the expense ratios within your funds. Over the long-run these fees will negatively impact your nest egg – if you let it.

You can find expense ratio information by clicking on the TICKER symbol of your holding and drilling down in the details.

Oftentimes, there will be a tab that’s labeled as “Fees & [Something else]”, “Expense Minimums”, or something very similar.

Generally, actively managed funds have higher expense ratios, whereas passively managed funds have lower expense ratios.

To give you a comparison, actively managed funds average between ~.5% – 1%, but can also go much higher. This equates to $5 to $10 per $1,000 each year.

With passively managed funds, the ratio is ~.2%, but can be lower. This equates to $2 per $1,000 each year.

If you want a simple solution for determining your fees, try I’ve used them since early-2017 and I found it useful for finding low fee alternatives for my investments.

Below is an example of insights you can receive once they analyze your investment fees. 

invest money

6. Fund an HSA, if you qualify.

If you’re seeking an additional tax-advantaged investment option – look no further than the Health Savings Account (HSA). 

In order to qualify, the use of a qualifying high-deductible health plan (HDHP) is necessary.

HSA, also known as a Health Care 401k or Stealth IRA. 

The HSA account offers a 3x tax advantage. 

  1. Contributions are pre-tax, which lowers your taxable income.
  2. Growth is tax free.
  3. Qualified withdrawals for health-related expenses are not taxable.

You can choose to use the account for your health needs, an additional retirement growth vehicle – or both!

There are a myriad of benefits, check them out here: Top 7 HSA Advantages

KEEP IN MIND: The max contribution limits for 2020 are $3,550 for individuals, $7,100 for families. Also, keep in mind that there are HSA administrators who will charge a small monthly fee or require a “cash” (vs. investment) balance when utilizing an HSA.

MY TAKE: At this time, I use my HSA primarily as an investment account, rather than for health reimbursement purposes. Since there is no deadline to get my qualified out-of-pocket expenses reimbursed, I save all my receipts to send in at a later time.

7. Review asset allocation.

What’s an asset allocation?

“It’s the process of dividing out a portfolio into different asset classes – stocks, bonds, real estate, cash” 

Goals and objectives vary, which is why this process is unique to each individual.

It’s important to review your asset allocation because it will ultimately determine investment growth.

Think about these types of questions:

  • What are my objectives/goals?
  • How much time do I have to get there?
  • How risky do I want to be with my money?

It’s these determinations that will help you decide your target allocation.

Here’s an example:

Sarah wants to retire at 55. Currently, at 25, she has a 30-year time horizon. Sarah is currently invested in a balanced fund (60% stocks, 40% bonds) within her workplace investment plan.

Sarah has been reading up on asset allocation and wants to reevaluate her portfolio to maximize her earnings. In doing so, she’s decided that at her age, she can be more risky with her investments. She increases her stock allocation from 60% to 85% for the time-being and will reallocate yearly.

Other Types of Investments

Next, let’s review some non-employer investment options.

Please note: The information listed below is the most commonly used. It’s not a comprehensive list of what’s available in the marketplace. 

1. Roth IRA.

The Roth IRA shares the same characteristics as a Roth 401k (described earlier).

Items to note: 

  • Contributions of after-tax income.
  • Does not reduce taxable income.
  • Contributions can be withdrawn at anytime without penalty.
  • There’s a 5-year rule for withdrawal of investment earnings.

IRA” stands for – Individual Retirement Arrangement.

KEEP IN MINDThe max 2020 contribution limit for a Roth IRA is $6,000.

There are income limitations and tax filing statuses (single, married, etc) to research in order to determine if you qualify. Also, if you don’t qualify for a Roth IRA, a Traditional IRA is available for use.

MY TAKE: In years past, I’ve maxed out my Roth IRA because I may have to utilize it in “early” retirement (prior to withdrawing from my 401k). This is why it made sense for me to max out my Roth IRA and not my 401k (I couldn’t do both). Please note, that there are ways to withdraw 401k balances prior to retirement age, but that’s not discussed within this article.

2. Taxable accounts.

Taxable accounts may be the next step if you’re seeking more options to invest your money (and don’t want to invest in real estate or a business).

These accounts allow you to access your money freely, without the added fees and complications.

With taxable accounts, you will need to make tax payments on investment income, so keep this in mind when making your choices. A mutual fund or ETF with low turnover (rate that stock gets purchased and sold) is preferable to minimize taxes.

MY TAKEOnce FI/RE became a goal, I focused on putting more money in taxable accounts to bridge the gap between “early” and full-age retirement. Generally, I use the same types of investments (index funds) as my IRA and 401k, though my highest percentage of bonds are placed in taxable accounts.

3. Dividend-growth stocks.

If you’re seeking to build additional cash flow, one option is dividend-growth investing.

The premise of dividend-growth investing is to accumulate stocks that have a strong record of rewarding their shareholders with dividend payments. Along with researching the company, past dividend payouts, quantitative research – it’s smart to buy only what you understand.

MY TAKE: My very first dividend stock buy was back in 2013. Since then, I’ve accumulated $12k+ in lifetime dividends from a portfolio that has fluctuated between 18-20 individual stocks. I built a dividend-paying stock portfolio to increase cash flow and provide for a hands-on approach to investing.

4. Robo-advisors.

If you’re new to investing or have limited funds, a robo-advisor provides a hands-off approach.

A Robo-advisor is an automated investment management service that’s handled by a computer algorithm.

Due to this, their fees are reasonable compared to other management services or financial advisors.

There’s a wide range of companies that offer this service, from the beginner level up to advanced.

Here are some of the popular options: SoFi, ElleVest, Betterment.

5. Real estate.

If you’re an individual that wants to put money in a tangible investment, real estate investing is a viable option.

Investing in real estate can come in many forms.

  • Flipping houses
  • Short-term rentals (AirBnb, HomeAway)
  • Long-term rentals
  • Real estate investing through an online platform/Crowdfunding

MY TAKE: In the future, a long-term rental property will have a place in my investment portfolio. I plan on transitioning my starter home to a rental property in 2020 or 2021.

Bottom Line

Investing to build wealth is a process that’s different for each person. Today, I reviewed some of the main aspects of investing to give you an understanding that there are a myriad of options to consider. Take a look at your personal situation and determine what the best investment methods are for your needs.

*As with all financial and investment decisions, consult a professional. Read disclaimer here.

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