Answer 1: Index Funds
tldr; Put your money in the Vanguard 500
Why index funds? Index funds are a great and easy way to grow your savings without having to really think about it. They are by definition diversified and arguably one of the lowest risk investments aside from bonds. The concept was first pioneered by John Bogle who founded the Vanguard 500 index fund. He is widely known by many investors and correctly theorized that investing in a fund that grows with the market will outperform most actively managed mutual funds with higher fees. So if you want an easy way to invest and grow your savings gradually, start with index funds.
Great, so how does this work? Index funds are funds that follow a “market index” like the S&P 500 or Dow Jones. A market index simply measures how well a sector of the market is doing at a particular time. For example, the S&P 500 is a total market index that measures the growth of 500 American companies that are representative of the total US Economy.
Essentially if you measure the growth of those 500 companies, their combined growth mirrors that of the US Economy. To understand the reason why that is, you can visit Investopedia.
So if the S&P 500 is a measure 500 US Companies, an index fund like Vanguard 500 simply invests in those same companies. This means:
- Investing in the fund is by definition diversified
- Lower management fees since it is passively managed not actively managed
- Your investment grows with the US Economy
At the time of writing this, the S&P grows by an average 7.62% annually for the past 15 years (which includes the 2008 recession)! And according to “The Motley Fool Investment Guide” most actively managed mutual funds (with higher fees) can’t consistently outperform the S&P 500.
So how does that make you rich slowly? Investments grow exponentially so 7.62% annually adds up. If you put $10,000 in the Vanguard 500 fund in Jan 2010, it would be worth roughly $22,500 in Jan 2018!!! That is a growth of 225% in 8 years without doing anything!
Answer 2: Save for Retirement Early
401k, Roth IRA, IRA…
In the example above, we can see how fast compounding interest can grow wealth. It only works best if you start early. If you are reading this in your 20s, heck, if you are in high school working, you should start saving for retirement now. Trust me, your future self will thank you and can also be used as a last-resort emergency fund.
Here are some investment vehicles to consider:
401k – Retirement Fund
The 401k is the most common type of retirement fund. This is usually made up of stocks or funds. Most employers offer a 401k plan for their employees. Investing here can lower your taxable income which means you pay lower taxes overall. It will also help you save without thinking. Some employers offer 401k matching which is basically free money. That being said, I firmly believe that everyone should at least have a 401k retirement fund. Otherwise, you are setting your financial hardship later on.
Traditional and Roth IRAs
Traditional and Roth IRAs are other forms of retirement accounts that offer even better tax incentives than a 401k. Simply put, Traditional IRAs offer tax deductions for the tax year in which the contributions were made. The earnings from Roth IRAs are not taxed when withdrawn after retirement and there is usually an annual limit to how much an individual can contribute. I recommend you should have both a Traditional and Roth IRA account in addition to a 401k to further reduce your taxes and maximize your overall growth in the long run.
The sooner you start, the richer you will become in the future. It can even be as easy as automatically deducting investments from your paycheck every pay period. It allows you to save without thinking and has the added bonus of limiting your spending. It was because of this that I saw my total assets grow to above $300k in 4 years!
Learn the basics of investing…
I would highly recommend reading our Simple Guide to Investing. Please also leave a comment below with any questions you may have and we will do our best to answer them. Remember that investing can be the best way to grow your assets with the least amount of effort, provided you know the basics.