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You did it! You kicked debt to the curb and have three to six months of expenses socked away in your emergency fund. Now it’s time to build some wealth!
In Baby Step 4, Dave recommends investing 15% of your household income into Roth IRAs and tax-advantaged retirement plans like a 401(k). It’s easy to feel intimidated by this stage of your financial journey. There are so many ways to invest for retirement—and it can get really complicated. But it doesn’t have to be.
Here are a few of Dave’s favorite tips to keep it simple.
Stick With Good Growth Stock Mutual Funds
A growth stock mutual fund is a group of company stocks that analysts expect to increase in value. It’s called a “mutual fund” because many people invest their money in these groups at the same time.
Dave recommends mutual funds for retirement investing because they allow you to invest in stocks without the risk that comes with single-stock investing. Look at it this way: You’ll feel much less pain when a company stock drops in value if your nest egg is spread across 90–200 different companies instead of invested entirely on one.
So how do you choose a mutual fund? Start with one that’s been around for at least 10 years. A good fund consistently outperforms others in the same category, covers multiple business sectors, and has an experienced manager at the helm. Look at funds that fall into one of the four categories Dave recommends: growth, growth and income, aggressive growth and international.
Understand & Own Your Investing Future
Invest for the Long Haul
The most important thing to understand about your retirement fund is that it’s not a short-term investment. When you leave the workforce, that’s the only money you’ll have. So until you call it a day on your career, consider your nest egg off-limits. No early withdrawals or borrowing from your 401(k) to pay for a dream vacation or home improvement project. It’s not worth the cost of hefty fees or lost growth.
If you really want to be successful, you have to commit to riding the market through good days and bad. Rome wasn’t built in a day, and neither is wealth. The S&P 500, a standard measurement of stock market performance, has seen its share of ups and down over the past 30 years, and it’s averaged a 12% growth rate. Don’t let a temporary downturn scare you into a decision that will lose you money in the long term.
Talk With An Investing Professional
Do you know the most popular method for retirement planning? Guessing. Yep, you read that right: 45% of workers just play Pin the Tail on the 401(k) when deciding how much they should save for retirement.
Guessing may be great for winning carnival prizes, but it’s a lousy way to win with money. These decisions matter. A lot. So never invest in anything you don’t understand! You might as well throw your money to the wind and hope it blows back your way just in time for retirement.
So you’re not an investing pro—that’s okay! Sit down with someone who is. Even Dave—a seasoned investor—knows the value of an experienced pro when it comes to growing his investments.
Need help? Talk with an investing professional in your area.