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Investing is widely recommended to improve your finances. Discover a few smart investing habits that will help you build wealth in 2024.
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We’re nearing the end of the year, which is a good time to think about financial changes you want to make. Most of us probably wouldn’t mind building more wealth in 2024. If that’s going to be a focus of yours, it’s largely going to depend on how you invest.
Over long periods, investing is a powerful way to build wealth. If you save $500 per month for 40 years, without getting any return on it, you’ll have $240,000. If you invest it in the stock market and get an 8% annual return, you’ll have $1.55 million.
Results like that are possible for any investor, but they don’t happen overnight. They take time and consistency. To get on the right track, make sure you follow these three investing habits next year and beyond.
1. Invest regularly
Consistency is key with investing. The best habit you can get into is investing regularly. Two popular options are investing every month or after every paycheck. For example, you could invest $500 on the 1st of every month. Or, you could invest $250 from every paycheck.
The schedule is up to you. What’s important is that you have a schedule, because this ensures you’re adding to your investments regularly. If you don’t have one, you’re more likely to forget, or decide you’d rather use your money for something else.
To make this easier, automate your investments. You’ve probably already done this if you have a 401(k) plan through your employer. Contributions to 401(k)s are automatically deducted from each paycheck. If you invest through brokerage accounts, including individual retirement accounts (IRAs), you can also set up automatic investments with your stock broker.
2. Maximize your tax savings
There are many types of accounts you can use to invest. Some of them help you save on taxes, so it usually makes sense to contribute to these first. Here are the most popular options:
401(k)sRoth 401(k)sIRAsRoth IRAs
401(k)s and Roth 401(k)s are employer-sponsored retirement plans. With a traditional 401(k), you contribute pre-tax income, and you’re taxed on withdrawals in retirement. It’s the opposite with a Roth 401(k); you pay income taxes on your contributions, but you can make tax-free withdrawals.
IRAs and Roth IRAs are accounts that individuals can open themselves. Taxes work the same way with these types of accounts. With traditional IRAs, you contribute pre-tax income. With Roth IRAs, you can make tax-free withdrawals.
All of those accounts have annual contribution limits. You also need to wait until you’re at least 59 1/2 to withdraw from them without an early withdrawal penalty.
3. Build a diversified portfolio
Risk is part of investing, but you can and should keep that risk to a minimum. The way to do that is by building and maintaining a diversified portfolio.
If all your investments are in the same industry, then any issues affecting that industry will have a huge impact on your portfolio. Having all your money in just a few companies is even worse. You never want your success to rest on a small number of investments.
A good rule of thumb is to have at least 25 companies, across a variety of industries, in your portfolio. You don’t need to do this yourself. Instead of picking stocks, you can put your money into investment funds. These invest in a large number of stocks for you.
For example, I invest most of my money in a total stock market mutual fund. It’s designed to provide exposure to the entire U.S. stock market. Like any investment, it goes through ups and downs. But because I’m investing in the whole stock market, which has historically produced an average return of about 10% per year, it’s one of the safer and simpler ways to invest.
Doing well as an investor is easier than many people realize. If you invest regularly, use tax-advantaged accounts, and have a diversified portfolio, you’ll set yourself up for success.
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