When I started this blog, the goal was paying off credit card and consumer debt. Now my focus has shifted. One of the many great things about paying off debt is that once it’s gone, you have extra money every month! Smart people don’t increase their lifestyle or go on shopping sprees. They invest that money for the future. Unless you are buying from a guy named Bernie who guarantees double digit returns with no risk, there really is no right or wrong way to invest. Just about anything you choose is better than nothing, but that doesn’t mean you shouldn’t try to choose the best investments for your future. This list is in no way all inclusive, but these are some wise ways to invest money.
Investing For Retirement With a 401(k)
If you have an employer plan, usually a 401(k) or 403(b), that’s usually the easiest and best way to invest for retirement. It’s easy because all you have to do is fill out the paperwork and best because money invested is tax deferred. That means you don’t have to pay income taxes now and your money can grow for years. When you do take disbursements from your 401(k), then money is subject to income tax, but hopefully, your tax bracket will be lower at that point.
Never Pass Up Free Money
If your employer offers a match, always take advantage! If someone handed you a hundred dollar bill every month, would you say no thanks? I would put employer matching contributions above just about any other investment because of the free retirement money.
One other important thing to remember about work 401(k)’s is that contributions often go into a money market account until you choose specific funds for your investments. While you are still saving tax dollars, money sitting in a no interest account doesn’t do much for your bottom line. Put that money to work by choosing stock or bond funds that fit your risk tolerance. If you have no clue, choose a target retirement date fund or put 50% in a total stock index fund, 25% into a bond index fund, and 25% into an international stock index fund. You can always change your allocations later, but make sure not to waste good rates of returns because of unfamiliarity with the stock market.
Self Employed Retirement Plans
For self employed people, there are a variety of options for retirement. Probably the most lucrative are solo 401(k) and SEP IRA plans. You can have a SEP IRA in addition to a 401(k) from a regular job, which makes that plan very appealing for people like bloggers who have normal salary income and self employed income from side hustles.
With a Simplified Employee Pension or SEP IRA, you can sock away 25% of your self employment income up to $53,000 for 2015. I’m no tax expert so please check with IRS guidelines or with a tax accountant to make sure how much you can contribute.
Since I no longer have access to an employer plan, I opened a solo 401(k) with Vanguard last year. There were some papers to fill out and I had to provide a copy of my articles or incorporation, but it was pretty simple.
The only potential issue with Vanguard is for high earners who already have a tax deferred IRA and want to do a backdoor Roth IRA. Vanguard will not let you roll an IRA into a solo 401(k) to avoid pro rata forms. I’m told that Fidelity does allow this. If that makes no sense to you, it probably doesn’t apply, but if you need that benefit, you might choose Fidelity.
With the solo 401(k), I’m able to contribute $18,0000 this year as the employee and an additional 25% of my income up to $53,000. I don’t make enough money to hit that full amount, but regardless, the solo 401(k) is a great way to defer income tax and build wealth.
Traditional or Roth IRA
You can contribute to a traditional or Roth IRA even if you have a 401(k) or SEP IRA. I won’t go into a huge discussion, but the traditional route might be a good idea if you can get a deduction on contributions. You can always roll it into a Roth down the road if laws remain the same.
The Roth does not offer any tax breaks up front, but then, you’ll never have to pay tax again on gains or withdrawals. If you suspect your tax bracket will be higher in retirement, a Roth is a good idea. I have both types of accounts and use Vanguard. They have been very helpful with converting from a traditional IRA to a Roth, and I love their low cost index funds.
Health Savings Account
I am so happy that we discovered HSA Administrators. By using them for our HSA plan , we can invest our account in stock funds. I would max out my HSA before any other account (with the possible exception of employer match 401(k) money) because of triple tax advantages. Since moving our HSA from a regular old savings account to Vanguard a year ago, we’ve earned hundreds of dollars in interest and dividends. All tax free forever if we use it for health care expenses!
Because we like diversity, we put some of our money in non-retirement investments. I really like Betterment because it’s easy. You can read my one year review here. The fees are reasonable, especially if you can contribute at least $100 a month. They rebalance for you and help with tax harvesting once you have a large enough account. We use Betterment for our index fund investing outside of tax deferred accounts.
My other new favorite is Motif Investing. If you want to invest in individual stocks without losing a chunk of your investment in trade fees, this is the place. You can choose up to 30 stocks for a one time commission of $9.95! Motif also makes it easy to get young investors or those ambivalent about the stock market into picking stocks. It’s almost as fun as filling out a NCAA tourney bracket!
The Best Time To Start Investing
The best time to start investing was years ago. The second best time is today. If you aren’t putting your money to work, get started! With technology, it’s so easy to save for retirement. No more visits to a stuffy office and no more filling out lots of forms. It only takes the initiative and willingness to commit money not spent on necessities toward the future instead of spending on things you probably don’t need and won’t want in a few years anyway.
What are your favorite ways to invest? Are you someone who takes advantage of investing opportunities or do you find ways to talk yourself out of it?