Hopefully, the headline of this article caught your eye. Then again, you might be feeling that this is common sense, or just motherly advice. However, if you really want to understand how to be a millionaire by the time you are 65 years old, consider investing in stocks as early as possible in life. If you were to start by 25, all you would need to invest per year is around $4000 to retire a millionaire, 40 years later. The little amounts add up over time, combined with the power of compound interest.
There are several important points that you need to consider before investing your hard earned money into stocks, which I will discuss below:
Get rid of high interest debts before investing.
Did you know that the average annual return from stocks is around 11%?
One thing many people struggle with understanding is when to invest versus pay down debt. Generally, you shouldn’t start investing unless you have cleared off all your high interest debts. Many major credit cards charge an interest rate as high as 23% annually. In case of credit card debts, consolidation into a loan maybe the best option that you can choose. Paying off your debts by consolidating your loans or by negotiating your debts will not only give you peace of mind, but it will also arm you with a new zeal towards a debt free life. Moreover, it will give you confidence in knowing that you’re not investing money at a lower return than you’re paying out. Why invest and earn 11%, when you have debt at a higher rate? You would be losing money! On the other hand, if you wipe away that debt with a consolidation loan at a much lower rate, you would have confidence in knowing that your investments are a smart decision because they’re earning more than you’re paying out.
Save with a 401(k) type of retirement fund.
Saving with a company sponsored retirement plan is a great wealth building tool. Many employers now have a 401(k) type of retirement plan, where they match your investment up to a certain percentage in many cases; and the employee is responsible for contributing and investing their money. The money that you invest here can be made before or after tax.
Investing doesn’t require a huge sum of money.
Several discount brokerages have a minimum investment of $250 or less. Many of these companies waive off their regular minimum fees if you choose an automatic investment plan. In an automatic investment plan, the money is directly transferred into the mutual fund. There is a huge psychological boost for yourself because; you are paying yourself first, before you start your other expenses, after a while, you forget the money is gone and is being invested. This can help turn you into a disciplined investor.
Newspapers and television updates regarding the ups and downs of the market everyday causes many investors to micromanage their investments. Stay focused on your investment goals with a long term approach. Time is the key factor in investing. If you have patience with your investments, it will pay off in the long run. Understanding that ups and downs in the market are expected and sticking with your plan will yield you the best possible investment results.
Thanks to Sharon for this guess post! Edited by yours truly- FinanceDad