What’s the most effective way to achieve financial security and build wealth?
Unless you’re a very successful entrepreneur, it’s to save a healthy percentage of your income and invest.
Even the best of entrepreneurs actively invest, too. Bill Gates parks — and grows — his money in stocks like Berkshire Hathaway, Caterpillar and Walmart.
The good news is you don’t need Gates-type money to start investing. You just have to follow these five simple steps.
1. Save Your Money (and Pay Off High-interest Debt)
Save a portion of your income and consistently pay your bills. This will position you best.
Depending on where you invest, you may need some money to open an account. For instance, Vanguard, a large investment management company, requires $1,000 to invest in its mutual funds. With as little as $20 (or less), you can buy individual stocks, though.
2. Practice Investing With Fake Money
Online simulators like the one from Investopedia give you the chance to do a dry run. Remember that practice makes perfect.
In addition to learning from this practice, compare your performance to averages for index funds. For example, from 1928 to 2016, the S&P 500 had an average annualized total return of 9.8 percent.
3. Gather Personal Information
You need your tax ID number or Social Security number, along with bank account information so you can send money to the account.
Additionally, most major investment management firms ask you to designate a beneficiary. Consider carefully who you’ll designate, and have their personal information on hand.
4. Decide How to Invest
From individual stocks to exchange-traded funds to mutual funds, you have lots of options. Perhaps it’s best to heed Warren Buffett’s advice: “If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”
So, unless you’re ready be an active investor, researching and buying stocks you think will win, it’s advisable to invest in something like an S&P 500 index fund, which tracks the performance of the world’s largest companies.
5. Choose Your Online Brokerage Firm
From Fidelity to Ally to Scottrade, you have plenty of choices. Consider the sites and content that you like, as well as the level of support you need.
Also, consider the costs. Some online brokers just give you the bare-bones, with inexpensive fees. Others are more expensive but provide you with ample content, advice and data to make better investments.
Stick to the Plan
Once you start investing, keep taking care of your personal finances and investment. Study along the way — and you’ll become a savvy investor with a growing portfolio.