You work hard. You set a careful household budget. You spend less than you earn, and you save the difference in a bank account.
You work for years and years. Now: Are you ready to retire?
Probably not, experts say. If you follow the formula above, then you’ve left out a crucial part of the equation. The problem here is inflation: Over time, experts agree, we can expect the dollars that we earn to become less and less valuable.
Your grandparents bought candy for 5 cents, and you now spend a couple of bucks — yet, experts say, it’s not that the candy became significantly more valuable. It’s that our cash has become significantly less valuable.
Which means that, with each passing year, you’ll need more and more money to retire while your own savings will become less and less significant. That’s not a winning combination, and it’s rare that even the biggest earners overcome it with hard work and salary alone.
The real way to get to retirement is to get your money to work for you. You need to get your money to make more money for you. You need appreciating assets, big savings, passive income, and interest on investments. Let’s lay out your strategy.
Investing in stocks, bonds, and more
You’ll find no more powerful wealth-building tool available to the general population than investing. The stock market (and the bond market) can seem complex, but the math is pretty simple: Stocks tend to grow faster than inflation, and they also tend to grow at a better clip than the interest rate you’d get on a savings account.
That’s why you pretty much have to be investing to grow your net worth in a significant way. You should have an emergency fund somewhere quickly accessible (like a checking account), some cash in a savings account, and then virtually everything else in some form of investment.
Make full use of tax-advantaged retirement accounts like 401(k)s, and keep your retirement investing strategy safe and sensible. Beyond that, your decisions are up to you: Some investors prefer to be “passive investors,” while others trade actively. The latter means swapping the relative safety of slow-and-steady wealth growth for the high-risk, high-reward world of day trading.
If you’re interested in day trading, just be sure to do your research ahead of time. Check out the best day trading platforms and the best day trading strategies. Test your mettle on stock market simulators before risking real money, be very wary of trading on margin, and always keep an emergency fund and retirement savings outside of your high-risk day trading accounts.
Real estate and your net worth
A classic bit of wealth-building advice is this: Owning your home is best. Is it true?
Well, not in every situation— but quite often. Depending on your savings, income, and local rental or home-buying market, it may well make sense to buy your home instead of renting it. And if you can find a great home, get the cheapest home loan that you can with your credit, and keep up with your home’s maintenance and repair needs, then you’ll have a great chance of coming out on top.
Ideally, your home will grow in value; meanwhile, your monthly payments will go into your valuable asset (through your mortgage) rather than to some landlord who is just pocketing your cash.
Have a lot of extra cash? Then you may even want to invest in a second real estate property — or a third, or a fourth. Investment properties can grow in value, and they can also be “income properties” — assets that generate passive income in the form of rent.
That income can be reinvested into your real estate business or invested in stocks and bonds, further growing your wealth.
When it comes to making and saving money, money isn’t just the goal — it’s a powerful tool, too. Make your money work for you, and achieve your financial goals.